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Finance Friday: Budgeting Expenses While Living on The Road with Renewable Energy Worker Clayton

Finance Friday: Budgeting Expenses While Living on The Road with Renewable Energy Worker Clayton

52 min read
The BiggerPockets Money Podcast

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A big piece of advice given by many wealthy people and real estate professionals is to simply “get started when you’re young”. This is exactly what our guest has done today. Clayton, a renewable energy worker, travels around the midwest for work, living out of an RV with his partner.

His company grants him a company car, a company phone, a food stipend, a handsome 401(k) match, and a comfortable salary. Clayton has taken advantage of these big perks by maxing out his Roth, buying a rental property, and using his primary home as a house hack. He’s checking all the boxes at just 26 years old, with a TON of potential to do more.

Clayton is close to having the big 3 things in life paid off: housing, transportation, and food. With extra income coming in every month, what can Clayton do to put himself in an even stronger position than before?

First, he’ll need to start budget and expense tracking. This is something many guests find challenging at first, but can really help alleviate any fears of where money is going. Next, he can start adding a bigger chunk of money to his rental property reserves, that way the mortgage is always being paid (even if someone misses rent). Last, he can start looking for another house hack and another rental property. Tune in to hear Scott’s ingenious way of looking for properties even if you’re on big sites like Zillow, Trulia, or even the MLS!

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Listen to the Podcast Here

Read the Transcript Here

Mindy:
Welcome to the BiggerPockets Money Podcast, show number 168, Finance Friday edition, where we interview Clayton, and talk about being intentional with your money, saving for retirement and investing in real estate.

Clayton:
I took a little bit of a different approach than what people generally say with that, I guess. So, I tied in our mortgage into our personal expenses, being that we are living there. So, that personal safety fund does include that mortgage, if I lost my job and had to pay that. So, that does tie into that six months. But all of the rent that we are getting from that, we are building a separate account and trying to build up that reserve fund for the property as well.

Mindy:
Hello. Hello. Hello. My name is Mindy Jensen. And with me as always is my doesn’t believe in breakfast burritos in the workplace co-host, Scott Trench.

Scott:
Mindy, I’m going to tackling over these… That was terrible.

Mindy:
Scott and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story, because we truly believe financial freedom is attainable for everyone, no matter where or when you’re starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, or start your own business, we’ll help you reach your financial goals and get money out of the way, so that you can launch yourself towards your dreams.

Mindy:
Scott, I’m so excited to have Clayton on the show today. It’s really exciting to talk to people who are doing it right. And first of all, I want to say, if you think that you’re not doing it right, send us your finances. We’ll talk to you too. This isn’t just, “Hey, let’s show everybody who’s doing it right.” But it’s really exciting to see somebody who’s 26 years old, wondering if what he’s doing is correct and he’s crushing it.

Scott:
Yeah. I think Clayton, is basically in incredibly similar position to where I was at 26 with his finances and these types of things. And I love revisiting that and thinking through it. And I’m like, I think he’s doing it way better than I was doing at that point in my life. I just think he’s got it all together and he’s got it all figured out. And I think he’s trying to optimize even further, which I think is fantastic. And I think the guy’s just setting himself up with a fantastic financial future. It was fun to have the discussion today. We did come up with a couple of things that he needs to improve on, but I think it’s just in the context of an overall, incredibly strong financial position.

Mindy:
Yeah. I’m super excited for his next few years. I think he’s really going to just absolutely soar. Scott, I want to remind you that our 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:
Right you’re Mindy. And now, let’s go tell Clayton what to do with his money.

Mindy:
Clinton, welcome to the BiggerPockets Money Podcast. I’m so excited to have you today.

Clayton:
Yeah. Thanks guys. I’m really excited to be here. I appreciate all your advice throughout all the podcast episodes. It’s awesome.

Mindy:
Well, thanks for listening. So, Clayton is a 26 year old renewable energy worker, living in the Midwest, and looking for some suggestions on financial planning in general, so that he can retire early and lead his best life. Clayton, why don’t you walk us through your income and debts?

Clayton:
Yeah, absolutely. So right now, actually our income just got cut by about 40%. Girlfriend travels with me for work. And she unbeknownst to us lost her position. So, lost 40% of our income. I’m sitting at a salary per diem and a trailer allowance, and then some rental income from a rental property that we have, totaling about seven grand a month.

Scott:
Can you give us some background on that? So, you say salary per diem and camper. Can you just give us enough background on your job to understand why you have per diem and a camper allowance?

Clayton:
Sure. Yeah. So, with the renewable energy side, we travel all over the country. So, been everywhere from North Dakota, Colorado, Oregon, Iowa, everywhere, now down in Texas. So, per diem gives me some food money and basically not sleeping in my own bed money. Right?
And then a trailer allowance, I live in a fifth wheel while on the road. So, kind of a unique living situation. And they did give me allowance for that too, because there’s obviously expenses that come with pulling a trailer, and the wear and tear on the tires, and all that kind of thing. So, companies generous enough to give us allowances for those kinds of things and, yeah.

Scott:
Okay, great. Any other sources of income besides the salary, camper allowance and per diem?

Clayton:
Yep. So, we do have a rental property that we’re house hacking while we are at home. So, it’s kind of one of those ideals to where we’re living on the road, but we have a home base and have a second that home base. So, that’s bringing in about 1500 a month for us right now. And it’s going to go up, hopefully in the next month or two, once we finish some slight remodels and get another room rented. So, it should go up to about $2,000.

Scott:
Fantastic.

Clayton:
Yeah. The expense side of things, fixed expenses, obviously we got the mortgage. We do have a car loan. And then, luckily enough again with the company I worked for their grade, and they cover a lot of expenses on the road. So, the living allowance, the lot rent, they cover my [inaudible 00:05:14], and for my camper, all that kind of stuff. So, it’s pretty limited to mainly just gym, internet, phone bills, and then food, things like that.

Scott:
All right. The picture I’m forming in my head is a really strong financial position. We just talked about a $7,000 in income. Let’s exclude the house hack. We’ve got about $5,500 a month in income. And are you abbreviating that to after tax dollars?

Clayton:
Yes. Yeah. That’s all after tax.

Scott:
Okay, great. So, we’ve got about 5,500 in after tax dollars. Plus we got income from your house hack. How much is your mortgage?

Clayton:
Mortgage is about $1,200 a month. Principal interest, I think is around 750. Our insurance is actually a little bit higher because the house situation is kind of odd. And then the taxes are actually relatively low, at about 1300 a year.

Scott:
Awesome. So, even with maintenance, you’re probably sitting at no more than $1,500 in total housing costs. What are your utilities, you think?

Clayton:
It’s hard to estimate right now just because we do live on the road, and it’s relatively low because we’re there once to twice a month. So, I don’t know, maybe a hundred dollars ish.

Scott:
Okay. So, your housing is free for all intents and purposes through the house hack. Is that right?

Clayton:
Correct. Yep.

Scott:
Awesome. Love it. How about transportation? Is that also largely free because of the allowance for the camper and that type of stuff?

Clayton:
Yeah. That’s another benefit is a, transportation is pretty much free. I got a company truck. And again, the company I work for, they’re so generous to let me use that on personal time too, which is awesome. We do have a vehicle for my girlfriend. And we do have a debt on that as well. And I believe we’re sitting at 8,500 or so.

Scott:
Oh, so you have a balance of 8,500 on that and it has a payment associated with it. Okay. What would you estimate your total expenses to be? Housing, we’ve got too close to zero. What would you say outside of housing, your monthly expenses are, unrelated to work?

Clayton:
Man, I’d say 2,500 ish maybe a month.

Scott:
And that’s going to be broken out between that car payment, and then gym, and entertainment, those types of things.

Clayton:
Yeah. On a normal year when it’s not 2020, we tended to spend a little bit more. So, now it’s a little bit less, but yeah.

Scott:
Okay, great. So, what I’m seeing here is an ability to accumulate at least $1500 to $2,000 a month in cashflow on an ongoing basis. Is that right?

Clayton:
Yes. I would agree with that.

Scott:
Awesome. And then when you look at your financial position, do you feel that the opportunities are going to be on the income side, on the expense side or on the capital allocation piece in terms of managing the money you’re accumulating?

Clayton:
I’d say right now we’re sitting pretty good, as far as the income. I feel pretty solid with the income side of things. Granted, like I said, we did lose some of that coming in. But I do believe there is work to do on our expense side of things because I don’t accurately track it. Everything I do is rough estimates. So, I know what my phone is monthly. I know what the car payment is monthly, but the food and all that stuff, who knows. I mean, sometimes we go out and have fun and go out to local Italian restaurant or whatever it is.

Scott:
Perfect. So, I think we’re going to have a fun with this because your expense, the way you’ve just described your situation, where you don’t have a housing expense. And I see a path forward here where if, for example, if you were to pay off that car loan over the next year or two, you don’t have to pay for housing and you don’t have to pay for a vehicle, at least in the short run. I mean, you get to that point and you have a thousand dollars per month is what I understand, and per diem, is that right?

Clayton:
Roughly, yeah. It’s 46 a day. So, depending on when I’m at work and when I’m at home, so about a thousand.

Scott:
You’d live in very close to free, effectively, you are able to accumulate most of that salary. Mindy, what are you seeing at a high level with this?

Mindy:
Yeah, I’m seeing a lot of opportunity. First of all, when Clayton applied to be on the show, one of the questions is, “Do you have a budget? And do you track your spending?” He said, “It’s a loose budget. Everything in our expense line was based on memory and not tracked spending. And I only track my spending in the form of tracking net worth.” So, this has actually come up several times in the past week, people have reached out to me and said, “I don’t track my spending. I just track what bills are due.”
So, I want to clarify, first of all, what tracking your spending is? This means you’re tracking, you’re writing down, you’re keeping track of every dollar that comes out of your wallet or out of your bank account and goes to somebody else, your mortgage, your utilities, your gas, the dollar that you spent on a stickers bar at the grocery store, whatever it is that you’re paying for out of your pocket, even the lot rent. Does that come out of your pocket or does that come from the company?

Clayton:
It’s reimbursed. So, originally me, but yeah.

Mindy:
So, you want to know how much money is going out, every single dollar. I say every single dime, you want to know what’s going out so that you know where it’s going. And the first time that you track your spending, you will be shocked. And I think this is universal. If you have tracked your spending and you’re not shocked, you’re a unicorn.
It is unbelievable how little bits add up quickly and where these little bits are going. You’re like, “Oh.” I tell this story all the time. I didn’t know I went to the grocery store literally every single day. Who remembers the trip to the grocery store? It’s not a monumental experience. But when you go, you spend money. And you don’t just always get exactly what’s on your list. Again, if you do, you’re better than me, I always get everything on the list plus. There’s a thing. There’s $5. There’s a $12 extra. And that adds up if you go every single day.
So, once you start tracking your spending, like two weeks in, you can see, especially if you do it like me, you’re old and you just use a notebook on the countertop, you start seeing, “Oh my goodness, I can’t believe what I’m doing. I can make changes almost instantly.” And it’s pretty powerful how easy it is to make changes once you pay attention to what you’re doing.
So, that is going to be, my first recommendation is start tracking your expenses or your spending in whatever way is easiest for you. The Waffles On Wednesday couple made an online spending tracker, that’s customizable to you because your expenses are going to be different than mine. I don’t live in an RV. My parents do, but I don’t. So, I don’t know what expenses come along with that, but I’m going to have expenses you don’t. So, they have this thing that’s customizable. It’s a Google Form that they step-by-step show you how to do. I’ll link to that in the show notes, and I’ll send it to you in the email. Or you could just get a piece of paper and put it by the door. You live in a fifth wheel, there’s one entrance and one exit. Put it by the door. And every time you come in, “Oh, I spent this money today.” Keep every receipt and write it all down and start tracking your spending because that is going to be eye opening to you. I can guarantee it.

Scott:
Yeah. And I just want to chime in here again, with the first reaction I have when I see your picture is that I’m not saying you’ll get there, but I just see a possibility, again, where you’re bringing home 4,000 after tax. You’ve got the allowance for your camper. You got the thousand dollars per diem. You live for free. And you have a path, I think, towards getting rid of some of these personal debts so that you literally don’t have to spend a dollar of your own money on the big three here, which are housing, transportation, and food. That’s two thirds of most people’s spending.
We have families of four who live on less than $800 a month in food, and in grocery bills. We just had, what was his name from Idaho, Mindy, who we just had recently?

Mindy:
We just had [Cort 00:12:29] on from Idaho.

Scott:
We just had Cort. He’s got a family of five. Was it five or six?

Mindy:
He has four kids. So, there’s six people total in the family.

Scott:
Is family of six. Yeah, it’s a family of six, $800 a month in food. So, not saying that you have to live like a hermit or whatever, but you can, if you’re smart about it, plan it out and track your spending. I think you can easily eat well for a month between the two of you for 600 bucks and have 400 of that per diem leftover for the splurging and fun, and all that kind of good stuff, which is a lot, I think still with that. And then all of a sudden, great, no housing, no transportation, no food expense. You’re able to just sock away 4,000 a month. And do you get an annual bonus?

Clayton:
Yes. That’s another one. We do get an annual bonus.

Mindy:
What do you do with that annual bonus?

Clayton:
I’m looking to buy another house with it. Actually, hopefully, invest that into some rental income.

Scott:
Great. So, we have 4,000 a month. That’s 48,000 a year in potential after tax accumulation. You could put some of that in retirement accounts pre-tax, but you get accumulated after tax. And then you’ve got whatever you get in your bonus on top of that. So, you have the potential, in my opinion, to easily accumulate north of $40,000, maybe North of $50,000 per year, and straight up cash that you can then invest in whatever it is you want to do.
You may be done in terms of your living expenses right now. I mean, obviously the job is covering 1600 of that, between the camper and the per diem. But I don’t know if that’s my excitement coming through. What’s your reaction to that statement? Do you feel like I’m in fantasy land given your situation or do you feel like that’s in the ballpark?

Clayton:
Yeah. No, not at all. I mean, I totally agree with that. It’s one of those things to where the big three, like you said, is covered and very strong situation there. So, excited to move forward with that and see where we can go, because I mean, like you’re saying that lump sum of cash every year is substantial. Right? And I mean, what you can do with that, you can compound it and even build further and further from there. So, I guess just small details, the guidance and things, because that’s what I’m looking for, right? I don’t know. I got the idea of the budget and that kind of thing, but the smaller details, if that makes sense.

Scott:
Here’s what I’d do. Mindy likes you to write down every dollar of spending. Right?

Clayton:
Right.

Scott:
And I think you shouldn’t do that. However, I don’t do that. So, I know that could be difficult. Instead, what I do is I use an app called Mint. So you can use Mint, Personal Capital, you need a budget or another one of those of softwares. But you just sign up literally for Mint, you sign up, you attach your bank account and your credit cards, and it’s literally just you type in your login for your credit card. And then you say connect to credit card. Type in the name of, mine is Chase, right? Chase Bank has my credit cards. So, I type my login for Chase. It imports everything over to Mint. And Mint is pretty smart. It knows what most things are when it comes to spending. So, it’ll be like, “Oh, you spend on Amazon, that’s shopping. Oh, you spend at Safeway, that’s groceries. You swipe at this store, that’s alcohol and bars.” That one gets out of hand sometimes for all of us.
But it’s so easy to do what we’re trying to tell you. So, I would just recommend that the first thing you do, maybe after this call is go download Mint, connect your accounts, and then just let that happen. And then sit back at the end of the month and look at what happens. In fact, if you do it right now, you’ll be able to look at November. If you use cash, obviously that’s not going to be tracked, but most of us aren’t using cash in the COVID era right now. Most people who are 26 haven’t even heard of cash. So, I think that would be a really good way to get a first tracker, first glimpse at your spending, so that you can begin taking control without having to do something crazy rigorous, that sounds really depressing. What’s your reaction to that?

Clayton:
Yeah, absolutely. That’s definitely more on pace for me. And going to the cash thing, I think cash is one of the best ways for me to save, because I put a 20 in my wallet and I forget about it for about a year. So, it’s always there. Yeah. The Mint App definitely seems more on par for me, because every time I try and sort through receipts or jot some notes down or whatever else it is, yeah, I get the initial I’m there. I’m doing it. I’m going. And then all of a sudden it kind of fizzles out, where it’s something, if you can automate it, I think that’d be the easiest best path.

Scott:
And you can link up your investment accounts. So, it sounds like you like tracking your net worth. So, the first thing that I can look at when I zoom into Mint is, “Oh, there’s my net worth right now. Boom, there’s my cash. There’s my credit card debt. Oh, and then by the way, here’s all of the transactions that have occurred for the last six years for me in there.” And then at the end of the month, I do have to go in and categorize some of them because Mint sometimes will pick up the gas station expense as a grocery bill or whatever. So, sometimes you have to recategorize a few. So, you do have to still look through it. But it’s a five or 10 minute exercise once a month. Very powerful. And it’ll give you that kind of control over your spending, I think. It’s not a planning thing, it’s retroactive. But there are planning tools in there.
Anyways, Personal Capital, you need a budget. Or probably just as good, I just don’t happen to use them.

Mindy:
Yeah. I’m going to suggest that you put this on your calendar as well to remind you, oh, on the first of the month or the 15th of the month, or whenever it is that you want to sit down and do it, put it on your calendar. If you have a Google Calendar, you can do this recurring forever, which is a really great way to just get in the habit. Because it’s super easy to be like, “Yeah, I’m going to do this.” And then the next day life happens, and the next day life happens, and then six months down the road and you still haven’t started. Scott says that he doesn’t check his spending. I have fallen off the spending tracker bandwagon as well, mostly because I wasn’t really spending a lot of money during COVID.

Scott:
I do track my spending in Mint. I just don’t write down every dollar I spend the way that you’re talking about, Mindy. I just have it automated in my Mint App, and then I can review it.

Mindy:
Okay.

Scott:
That’s all.

Mindy:
Yeah. There’s different ways to do it. I liked the way that I did it because it was so in my face. I couldn’t walk in the house without seeing the notebook there. And that made me write it down, “Oh, I just went to the grocery store again. Let me write that down.” Okay. You mentioned investment accounts. Let’s talk about what you’re investing in.

Scott:
One second, before we go onto investing, I just want to chime in, we would love to give you more specific advice about expenses that you can cut out. So, if you have any that you know of right now, without going through that exercise, we can do that. But I also want to point out that it’s a little harder to give you that advice because you don’t have those things tracked. Your huge advantage, the thing you’re doing really well is your fixed expenses are either completely offset or nonexistent. There’s a clear line of sight to do it in that. And you have an incredibly strong financial position.
It’s really hard in some cases to be like, “Oh, this person’s got a family. The kids are in school. They’ve got a house that they lived in for seven years.” That’s a really difficult position to change and make dramatic accelerations in your financial position. You don’t have that problem. You’re going to be able to massively accelerate your savings rate within a few months, if you just track your spending and do those types of things. But in order to give you more specific advice, we’ll need to know the specific things that you’re spending on to begin digging into ways to cut that back. Does that make sense?

Clayton:
Yeah, absolutely. And part of the reason, I guess I never really have tracked formally every dollar for dollar is just because I feel probably I’ve been spoiled, right? With the bigger expenses. So, I feel-

Scott:
Because you’ve made smart decisions with the bigger expenses. Let’s be real.

Clayton:
Yeah. It was a $1.99 for a monster.

Scott:
Yeah. I think there’s an aggregate 2000 a month to claw back there. That’s the thing I think about your financial position. So yeah, that 2.99 is not a big deal. The aggregation of that, something’s going on there, that Mindy and I are smelling. That I think if you take some time and track it, you’re going to do a lot of damage on your own before we even get to it. But then there might be a couple of things left that we could dive into there.

Mindy:
So, Clayton did share his expenses with us that he has tracked or his personal budget. I’m seeing $200 a week for food and dining out, that I think is a place that you can cut. How frequently are you guys dining out? If you’re foodies and this is something that really means a lot to you, that’s different. Personal finance is personal and you spend on things that matter, so you can cut on things that don’t. Food doesn’t really matter that much. To me, I’m not a foodie, but I too really like to eat. So, $200 a week seems a lot for two people. How frequently do you dine out?

Clayton:
Yeah. Truthfully, it’s not all that frequent, especially now this year. But with all these expense budget numbers that I put in there, I’m quite conservative with some of these things just, again, because it’s all estimates. Right? So, I wanted to have that conservative factor and be like, if I’m saving more than what I’m actually expecting, that’s awesome. But actual dine outs, I mean now maybe two, three times a month. I mean, that’s not too frequent anymore.

Mindy:
I see $235 for your phone. Is that provided by your company?

Clayton:
I do have a personal phone on top of the company phone.

Mindy:
Okay.

Clayton:
Yeah. They’re not a fan of Candy Crush and all that kind of fun stuff.

Mindy:
Okay. So, I’m going to suggest looking at that, looking at some of the lower cost phone providers like Mint Mobile. Scott is all into Mint. Let’s talk about Mint Mobile too. They’re a lower cost provider.

Scott:
They’re unrelated companies, as far as I’m concerned.

Mindy:
They are unrelated companies. They just have the same name.

Scott:
Yeah. Okay.

Mindy:
And your gym membership, do you have like a nationwide gym and are they open?

Scott:
Well, just on the phone one real quick. 235 bucks a month is a lot for a phone bill. And what you could consider is if you have a company phone and you need that for the GPS, while you’re driving to these locations in North Dakota or whatever, let them pay for all the data you’re going to churn through on that kind of stuff and consider, “Hey, if I’m going to play Candy Crush or want to talk to my friends on my personal phone, great. I’ll get a personal phone plan that has much less data for 10 bucks a month. And then just see if I can download that data on wifi or whatever it is when I’ve got that insurance through the big data needs and my work phone for the purposes I actually need it for.” So, just a framework. I don’t know enough specifics of your situation for that, but that could be an answer.

Clayton:
Okay.

Mindy:
And the last thing I see here is a travel budget of $800 a month, because living in an RV and traveling around the country, doing renewable energy, isn’t enough travel?

Clayton:
We do like our traveling. Yeah. No, it’s actually, we get to go either home or somewhere once a month. And lately, it’s been home because we’ve been doing a lot of remodeling. But we used to try and go, when we were out on the West Coast, we would go out to the coastline and see the sites and do all that kind of stuff, stay in a hotel. And that’s, I guess, going back to the dining, is kind of where that played into, it was more all in a week versus weekly, right? So, we would go out and have fun and do our thing while we’re networking. Because when we’re working, we’re going pretty hard for three weeks at a time. And then get five days off, and we want to go out and steam out hard or see Cannon Beach or go to Florida, and go to Disney, and do that kind of thing.

Mindy:
Okay. So, that makes a lot of sense. Then that’s one of the things that matters to you, that you put in your budget and you make plans to be able to afford that.
One last thing before we talk about investments, I want to know what your girlfriend’s plans are for getting a new job. And not like, “When is she going to start working again?” But she had a job that paid very well. She lost it. Does she have any prospects for another job? Is she taking time off just to decompress? Sometimes that’s really, really helpful. What’s going on with her?

Clayton:
Yeah. She did just go through an interview process for the same company, just a different position. Unfortunately, we did found out that she didn’t get the job just last week. So, I think just right now, it is going to be some decompression, just taking it in, figuring out where we’re at and our situation. And I’m encouraging her personally to do some side hustle stuff, because she loves painting. She’s a great artist. And I think she could do some work there. And she’s done it in the past too. Right? She’s done some mural work for GameRoom. She’s painted a big Arnold painting on the wall of our gym, which actually got us free gym membership for the entire time we were there. So, that was pretty awesome.

Scott:
Wow.

Clayton:
Yeah. But just things like that, that she can do. And she used to before she had the job that we’re talking about, she picked up part-time things. She was doing serving. And she was doing personal training at a local gym and things like that. So, she’s done that kind of thing. I think firstly, just more joy decompression side of things. She should look into painting and stuff like that. But that’s just my opinion as it right now.

Scott:
Yeah. Well I think she’ll figure something out here with her near future. It’s been a tough year for a lot of people. My wife lost her job earlier in the year. I just know how tough that is. You’re doing all of these interviews over and over, and over, and over again to get that next one. So, it’s a tough situation there. And I think you guys have a really good outlook on that. And I know it’s something a lot of people are dealing with this year.
Well, going back to the travel piece of your spending, I do want to point out that you have a real estate business and you have a thousand dollars a month in per diem from your company. And I think you just get that in cash, it’s after tax dollars. But I imagine that while you’re traveling, you’re going to naturally incur a lot of travel expenses. You’re going to have to stay in hotels sometimes, maybe not in the camper, some of those days. You’re going to have to do some flights. And those types of things. Something to consider is that travel rewards piece, and thinking about how you can offset that spending just by being smart about which credit cards you open up and use, and those types of things. You might be able to save two, three, 4,000 bucks annually, if you’re smart about that, depending on your spend. So Mindy, what are some good resources you have for travel rewards?

Mindy:
Oh, the Choose Five has a travel rewards. And I think travelmiles101.com, travelmiles101.com is a great place to start. The Points Guy is a good one to talk about which credit cards are coming out. Sometimes a credit card will have a super bonus at the beginning. I don’t know if you’re doing any flying right now, but there are cards for specific airlines. The Southwest has the Companion Pass. I’ve never been able to earn that. So I’m sad about that.

Scott:
I had that for two years. I saved $6,000, something like that, because I fly so much and I was able to just break my then fiance, now wife, along on a lot of different trips that buy one, get one. So, Southwest is what I definitely recommend looking into. The rules have changed since two years ago or three years ago. But if you can get that, the buy one get one is just immensely and powerful.

Clayton:
We actually did qualify for that last year. I heard about that in one of the Facebook groups and we got the credit card points and all that stuff for the Southwest Airline, Companion Pass. And COVID hit, I haven’t traveled with it.

Scott:
This isn’t the best year to have a Companion Pass.

Mindy:
There’s specific hotels. I have a Hyatt rewards credit card and I can’t stay in enough hotels. There’s specific hotel credit cards as well. You can stay in a chain of hotels. Look into Marriott and Hyatt, they have different levels of hotels. So, they’re super nice hotels. There’s more budget hotels. Some of them have kitchens inside the hotel rooms, which is really nice when you’re traveling. That helps cut down on that food budget as well. I have two small kids, so having a place to put milk and cereal, and snacks that they can reach into is really helpful too. But yeah, the travel credit cards are a great way to cut into your travel spending. Scott, should we look at investments?

Scott:
Any other expenses before we move on to investments? Or should we move on to investments?

Clayton:
I don’t think so. I mean the only other real expenses that we have, or just some subscription-based things, which back to the entertainment side.

Scott:
Yeah. I’m not giving up Netflix.

Clayton:
Nope.

Scott:
And guess what? You don’t need to, with your situation. If you track your expenses appropriately, you already are house hacking. You’re already on the road for work all the time. Reserve a good chunk of money for that fun stuff. And in my opinion, your situation, because you can accumulate tens and tens of thousands of dollars annually with your current financial position right now.

Mindy:
Yeah. So, let’s look at where you’re sticking that money that you’re saving. In the budget that you shared with us, you said you have saved money and invested money. So, what is the difference between saved money and invested money in your mind?

Clayton:
So, the way I broke that out is basically that I have fixed deposits to two different investment accounts monthly. I have one that I had started when I was a kid with an advisor that has been with my family for a while. After learning more about personal finance and things, I decided I wanted to open up another account on my own and see how I could do that and save against the advisor fees and things like that. So, I just have two fixed investment accounts, depositing X amount each month. And the overflow to that is just what I considered saved money. So, just trying to get that deposit going. And then that overflow, I have sticking into a bank account that I can either reinvest later on with a lump sum or ideally put towards other investments such as real estate.

Mindy:
Okay. Do you have access to a 401(k) or are all of these investments post-tax?

Clayton:
Yeah. I do have a 401(k) that I’m getting my company match on, doing the 6% company match and I don’t. So, I guess that’s one position that I’m not too familiar with, is where is the benefit to going over an employer match to have tax savings and things like that. So, I’ve just been doing the minimum to get their match.

Scott:
And then the rest of your investments, are they in a Roth IRA or just an after-tax brokerage accounts?

Clayton:
Okay. Yeah. I do have a Roth IRA as well that I contributed the max earlier in the year.

Scott:
Love it. So, I like what you’re doing with your tax advantage retirement accounts. I like the fact that you’re not maxing your 401(k) in your position because you’re not in a super high tax bracket. You’re young, and you’re doing a lot of right things that I think are lead indicators to a substantial amount of wealth and large passive income later in life.
So, for example, if you’re in a 30% tax bracket now, I’m making this up, I think there’s a good chance that you’re a multimillionaire by the time you hit retirement age and are in a higher tax bracket, even if the tax brackets don’t change. And I also believe that tax brackets are likely to increase over that 30 year period, not decrease for folks in those areas.
So for me, I was doing the same thing a few years ago and just take my company match and then maxing out a Roth IRA, and then looking at other ways to deploy my capital, your house hacking, love it. Real estate investing might be a good alternative. I don’t know. But that’s my personal opinion on that. I liked that asset allocation. What do you think, Mindy?

Mindy:
I have always been a big proponent in maxing out the 401(k). But also I had a high income earning husband, so we were looking for ways to reduce our taxable income. Like Scott said, you’re not a super high income earner right now, so reducing your taxable income may not be the best option for you. I love that you’re maxing out a Roth. I would recommend continuing to max out your Roth every year, as soon as you can, every year. Just save up towards the end of the year, and then, blam, the beginning of the year, throw it all in there.
I would also recommend opening, if she doesn’t already have one opening a Roth for your girlfriend. You have to have earned income in order to be able to contribute to a Roth IRA. So, this year she’ll be able to contribute any money she earns next year should be put into her Roth IRA as well.
Something I’m trying to do for my girls is to create a company and have them have earned income so they can put it into their Roth IRA as well. They’re not excited about that option, but I’m the boss. So, they’ll love me in 40 years, but right now they’re like, “I don’t want to put all my money in there.” But yeah, the Roth IRA at your age, you’re going to put money in there. And then when you’re 59, you’re going to have boatloads of money, all tax-free. It grows tax-free in the Roth IRA, which is the best excitement I have for you.

Scott:
So, we’ve got some money in a Roth. How much money do you have liquid and how much money do you have in after-tax brokerage accounts? Or what’s your relative position if you’re not comfortable sharing the specifics?

Clayton:
Yeah. So, right now I do have an emergency fund that’s just over six months. And then as far as the other cash, the overflow from the investments, like I said, that’s maybe another five or so months, I think somewhere around there. And that’s between both my girlfriend and I, we combined there. So, part of that is deploying that capital into something else. And I haven’t done anything with that as far as putting into mutual funds or anything, just because we do want to pursue the real estate side of things. And I want that cash to be more easily accessible than just putting into a fund like that.

Scott:
I just love everything about what I’m hearing with your financial position. You’ve got a strong savings rate already and the potential to increase that even more. But once you start tracking your spending, you go from six months of emergency fund to 12 months of emergency fund without changing your emergency fund level. I think you’ve got a great philosophy around that. And yeah, I think that if you want it, you’re in really good position to consider some sort of entrepreneurship right now and real estate investing on the side. I think this is a financial fortress that you’ve built or are in the process of constructing, from a financial standpoint, in a great position for that. Do you have any thoughts on that, Mindy?

Mindy:
I completely agree. I don’t see a lot of opportunities to completely turn around your financial position because it doesn’t need to be completely turned around. You’re doing really well with the income generation. You’re doing amazing with the expenses. You have the opportunity to do… What’s better than amazing? Triple amazing with expenses, once you start tracking the expenses. And I’m so excited for you to start tracking them, and watch your mind be blown at how many opportunities there are to cut little bits here and there that won’t make any difference.
You could cut everything out and just live a life of poverty and horribleness, but why? You don’t need to. You have the opportunity to cut out things that don’t really matter. Still spend on travel, all that you want to spend on travel. Do the credit card hacking and really crank it out. And I just see a lot of really good things. Just, I think you need to focus just a little bit on where the expenses are going, and you’re going to go crazy. You’re going to have a lot of opportunity.

Scott:
Well, let’s talk about real estate. That sounds like the next step here for you. That’s what you’re considering. Right? What are your thoughts there? What are you thinking about doing?

Clayton:
Well, since we already have the house hack, looking for something off market. I mean, we could find something in our market that we could be able to put that 20% down or whatever it is for an investment property, but maybe looking for different markets or kind of some sub-markets of our market for a lower down payments, because that was the idea of how the house hack, is that we put such a low down payment on it and locked in that low interest rate that we were just sold on it. Right?

Scott:
So, let me ask you about the house hacks here, because I think this is important in exploring your other options in real estate. How long have you lived in his house hack?

Clayton:
We closed on it in September, so it’s only been a couple of months.

Scott:
Okay. So, you moved into this house hack in September. And you’re remodeling it right now. Is what I’m understanding, is that correct?

Clayton:
Yep. Just the one unit though. We do have an upper unit, and an above garage apartment rented, and the garage space is also rented. So, it’s just the unit that we’re occupying.

Mindy:
Hold on a second. I was under the impression that you were renting out a room in your house. Describe this house hack again, it’s a duplex with an apartment over the garage, and you rent out the garage?

Clayton:
Correct. Yeah. It’s two structures. And it’s technically two addresses. So, the house is a duplex, an upper and lower. We’re occupying the lower. The upper is rented. And then the garage is a separate structure that has an apartment above it as well.

Scott:
Look at that. This is just smart. Yeah. You’d rather live in the upper unit. I ended up with this exact same thing, except we didn’t have the thing over the garage. But yeah, I lived in the lower unit. It was not as nice as the upper unit and all those types of things, but it enabled me to save a lot money. And then eventually I moved into the upper unit, when I wanted the better space, which is a huge upgrade after a few years, and felt like a huge luxury, but still have that house hack set up going on there. And then, yeah, I just love all of that. I think it’s fantastic. And what a find with a place that has those three units in that creative setup?

Clayton:
Yeah, absolutely. And then we are actually going to rent a room at our unit as well, somebody that we do know, just because we’re only there a handful of days out of the month, being that we’re traveling. So yeah.

Mindy:
That’s awesome. And you just bought that in September of ’20?

Clayton:
Yes. Yeah.

Mindy:
Okay. So, round about July of 2021, I would start looking wherever you’re at. I think you said you’re in Texas right now. How long are you in Texas?

Clayton:
We’ll be in Texas until about next September, I believe.

Mindy:
Okay. And then do you typically spend about a year in the location?

Clayton:
Yeah, it depends, some six months. And then I was in Iowa for almost two years, which was miserable and negative 30 degree weather in an RV. Yeah.

Mindy:
Because I’m looking at an opportunity to spread around your rental properties. So, you’ve got one in, is it in Wisconsin right now?

Clayton:
Yep. Yep. Southeast Wisconsin.

Mindy:
Okay. So, you’ve got one in Wisconsin. You lived in Iowa for two years. You could have purchased a house there. You could have purchased a house in Texas except you just bought the one in September in Wisconsin. Do you have any ideas towards having an empire around the Midwest or do you really want to concentrate in one area? There’s pros and cons for both. I’m not judging.

Clayton:
Yeah. I did consider everywhere we go, we look at houses. We actually were looking in Des Moines, Iowa for a little while there. But the long distance thing, I feel more comfortable being that this, even though it is back home, it is kind of long distance for us, that it is back home. Because honestly, my dad and our support group back home has been a huge help. And I find comfort in that. So, I’d like to build our initial stage back home and then maybe venture out from there, once we have two, three properties or whatever that might look like.

Mindy:
Okay.

Scott:
You have a great job that has a set of advantages. You’ve got a house hack going. And you’re in a position where you just complete that house hack, still have a lot of liquidity, still have a higher savings rate. And your challenge is needing to do more faster, right? And I think it’s a hundred percent right in your situation. You’re not being too aggressive in this situation because you’ve got a six month emergency fund, and this other liquidity, and these other investments. And this, I think it’s very reasonable to say that real estate investing is a better move for you right now than the 401(k). It may not be, but it seems like a reasonable better bet. Who knows how the cards will fall and all those types of things over a 30 year period. But I think it’s right.
And I think you do have this problem of being like, “Huh, everything’s going well. And now I have more money to deploy. And the best way to do that is probably in real estate investing in my hometown.” Sorry, I branched over with that.
Now, let’s talk about strategy. How much do these properties costs in your market? Or how much do you think that in the areas you’re looking, they’re going to cost and how much you’re going to need for down payment?

Clayton:
The one we closed on was just over 200,000. I’d say that’s close to average for a home there. So, we’re just looking at up to four units. Ours was abnormal and in-between cities. So, it’s not like country, but it’s a 10 minute drive to downtown. So, it’s not in town. Right? So, our cost is a little bit lower for that house. And we’re probably looking at 300 ish for that unit if it was in town. So, I’d say down payment, we’re looking at 40 to 50, if it’s just an investment property.

Scott:
And you have that?

Clayton:
Yes, right now we could make another down payment.

Scott:
Great. Okay. So, this is more real estate investing, specific advice, which I love to do. We don’t want to talk about as much as the money show. So, here’s what I would do. I would go out in your market and I’d say, “Do I know what a good deal is in my market?” Do you have the answer to that?

Clayton:
Yeah. More or less. I mean, that didn’t sound like a very confident, yeah.

Scott:
So, here’s how I think about it. I say, look, I’m looking for a two to four unit property in Denver, Colorado. I like two bed, one bath units or three bed, two bath units, but typically two bed. One bath is the easiest one to rent on a regular basis for one bed, one bath. I like the 1950s build. My other properties are all at that build. I know the problems and how to deal with those things, and have some replaceable parts in those. I like them in these certain areas of town because I like the appreciation prospects over here, better than over here. And I know that in the last six months, 10 properties have sold that would have met my criteria.
But when you have that level of specificity around what a good deal looks like, you can talk to your broker and just be like, “Hey, send me every property that meets these criteria.” And then you can offer on it one by one. And that’s, I think a really passive way to go about setting up a system like that is, “Hey, there are 10 properties I would have bought.” That means that one’s going to come on the market every 18 days, if it’s a 10 properties and last 180 days. I know they’re good deals because I just determined that with my backwards look. And then I can just sit back and react when that next deal happens to flow through my pipes. Or I can mark it off market to find that next deal that meets that criteria, if I feel like I want to get even narrower. And be like, “I only want the top two or three deals in the market over the next 180 days.” Any reaction to that?

Clayton:
Yeah. I guess part of my thoughts with my girlfriend too, was being that she does have some free time is that we could market off market properties. We do have an agent that we’ve been working with, that we closed on this last house with. And setting that criteria for, now, I guess looking at that we do have a property, honing in closer to that local market. Because before I think what also slowed us down was that we were kind of, “Well, how about here? How about there? How about…” We’d just basically say not Milwaukee, and that was about it. So, we were like Southeast Wisconsin, not Milwaukee, kind of broad. Right? Now, we’re hyper-focused like you were saying, get down into the market. No, we want two to four unit for two beds, one bath each. And send us that criteria. And I think that’s a great idea.

Scott:
Yeah. I think, look, you should make a realistic assessment there. Well, one of the traps that a newer investors or even first-time home buyers fall into, is they’ll look at the market and they’ll be like, all the active listings are bad deals, right? Well, of course they’re bad deals. The good deals do not last two weeks and allow you to sit in the market. So, a bad deal is going to sit in the market for three, six months. And whenever you look at the market, you’re going to see all the deals that have been up for the three months, two months. And then there might be one deal and it’s going to be gone the next day, if it is really that good deal, which is why I love starting the search with sold properties.
So, you’re not looking at the bad deals, the deals that are listed at higher prices than what they’re worth. You’re looking at the sold ones, so you know what they’re actually worth? And then from there, off-market deal finding can certainly be a legitimate approach in some areas. But I think sometimes people overestimate that because the deals that are actually being sold are not necessarily that much better than the off market deals in some cases.
So, I’m not saying don’t do off market. I’m just saying, make sure that you have a system where if that deal comes on and it truly is a good deal in your market, you have a situation where you’re ready to pounce immediately. You’re not making an instantaneous decision on that deal, because you’ve made that decision cool, calm and collected right now with your research ahead of time. You’re just reacting instantaneously and submitting the offer when it hits the market. And then you can certainly layer in the off-market stuff on top of that, but both are valid approaches, I think for finding the deal. And just sometimes that off-market stuff you wonder if there’s really a spread between an on-market instantaneous reaction to an MLS deal versus an off-market deal in some markets. In the Midwest is probably a little different than Denver. And there might be more opportunity in that off-market space than for example, here in Denver.

Mindy:
Yep. And I could not agree with Scott more because he’s right. This is his approach to investing in real estate. And when he first shared this with me, I’m like, “That’s really brilliant.” I never thought to look at what has been selling in the past to see what’s coming on the market. I just look at what’s coming on the market. I don’t do a lot of off market or any off market deals because I’m a real estate agent. I have the MLS access. I go in and I look at all of these things. But I also go back in and I look for things that have been sitting on the market for a long time. Like Scott said, especially in this market where everything is so red hot and it’s selling like instantly, when it’s been sitting on the market, it looks like something’s wrong with it.
I just saw a house the other day, I reached out to the agent, “Why has this house been under contract twice? What’s wrong with it?” He said, “The first person got it under contract, and then discovered they’re pregnant with another baby. This doesn’t have enough space. So, they canceled the contract. The second person lost their job right before closing.” That’s not the fault of the house in either case, but now the house looks like there’s a problem. And the agent just had to reduce the price because it’s been sitting there. The agent is also the owner. So, because it’s been sitting there, it looks like there’s a problem. You go in, you have an inspection, there’s no problem. It just looks like a problem. So, some people are very leery of that. So, another way to look for properties to is to look for things with large days on market time.

Scott:
Yeah. Another reason to start your search with the sold listings, because well I’ve made that generalization about the current deals in the market, generally, being worse than the sold deals because of the dynamics I just described. The fact of the matter is that, yeah, there could be some gems on the market for four months that people are wary of because of whatever is going on with that. But you can know that if you are really crystal clear on what a good deal looks like and informed by recent comps, again, 90 to 180 days sales history rather than active listings first, then you go to the active listings. And you feel very much more confident about what’s a good deal.

Clayton:
I like that a lot. I mean, I’ve looked at solds for just comparing what I was looking at on the market, but kind of flipping that mindset and doing that side of things first for research. I liked that. I’m definitely going to try that.

Scott:
Yeah. And the key though is to be patient and then aggressive, right? It’s like fishing, you just sitting in the water for a few hours, and then you get a nibble, and then you just immediately react or whatever it is. Right? So, that’s the key, is if you go and you’re like, “I want a top five deal at my market.” You know that if you look at the top five deals or last 180 days, now we’re compressed our timeline from 18 to 36 days. You’re only getting one deal a month. Maybe that’s going to come on the market. So, you have to be ready saying, “How good of a deal do I want? And how fast am I willing to pounce once that deal comes on the market, if that’s the case?” So, I like 10 deals in last 180 days, because I think it’s more time in the game, more length in the field, more opportunity. It’s less frustrating with that. But I think if you really want to do that, you can be more patient or less patient depending on the type of deal you want to get.

Clayton:
Yeah. I guess thinking about it too, with off market versus on market, maybe the more or less leads comparing the two is that in our financial position, I mean, realistically, we only try to tackle probably one deal using our own money before we look at that second house hack next year, come July, August when we start looking before that September one year mark. So yeah, I think just getting on a realtor drip like that would be probably really a benefit.

Scott:
Yeah. I see a position over the next year where you buy one more property probably between now and that next house hack. And you’re sitting next year in a position where you’ve got three properties, this house hack that you’re currently in as a rental, the second house hack continuing, and an third rental property that you buy between then and now, and you’re off to the races.
And then you’re going to have another problem, where you’re going to be having a strong financial position. And you got probably an opportunity to go and attack things more on the income front, depending on how much you love your job, because I don’t know what your job scalability is like, but you’re going to run into that problem, which is a really healthy problem to have at 27. Maybe this doesn’t pay me enough, given my skillset and my ability to accumulate wealth in real estate and other things. It may not be next year, it maybe two years out, but it’s coming.

Mindy:
I would like to clarify for those who are listening, who may not understand the one-year waiting period that Clayton is doing. When you buy a house with an owner occupied mortgage, you have the opportunity to get a much lower interest rate and a lower down payment amount. So Clayton, when he filled out his documents said, “I promise I will live in this house.” Now, just because his job makes him travel, doesn’t make this not his primary residence. It’s still his primary residence in that, that’s the only house he owns right now. So, he is fulfilling the one-year occupancy requirements of the mortgage. And then we’ll move on to another owner occupied the low down payment, lower interest rate loan. He can go out and buy a house tomorrow as an investor with an investor loan. And what he won’t be doing is saying he’s going to live in it as an owner occupant without actually intending to live in it as an owner occupant, because that’s mortgage fraud. And Clayton knows that mortgage fraud is a felony with up to five years in prison as the sentence.

Scott:
Yeah. You’re not imprisoning yourself in the house for a year when you buy a house hack, because there are exceptions where like your parents get sick or something happens in your family, or you get a new job or whatever, you can leave the property and move out. But we get a lot of investors who harmlessly, because they don’t know are like, “Well, how do I get out of this thing?” No, no, it’s mortgage fraud. And that’s not the right way to go about it. Clayton, we didn’t even bring that up with you because you obviously know what that’s about. Those types of things. And didn’t even cross your mind for a second to do anything outside of the law there or whatever. But thank you for bringing that up in a deep, because that’s like one of the first thought that pops into somebody’s head before like, “Oh yeah, you can’t do that because it’s mortgage fraud.”

Mindy:
It popped into my head, “Oh, what does it matter? I’m just lying to the bank, who cares?” The federal government cares. And I do not want to be a felon and I don’t want to go to prison. So, I don’t commit mortgage fraud. But when you don’t know, then you just think to yourself, “Oh, well who cares? I’m just lying to a bank. What does it matter?” It really does matter. So, I just wanted to point that out. I know Clayton would never. And it’s always so hard to say that without being like, “Oh, I’m accusing you of being fraudulent.” It’s just people ask mostly because they have no idea that it’s such a serious offense.
Clayton, we haven’t discussed your family situation yet. You keep saying girlfriend, girlfriend, girlfriend. You also keep saying that you have combined finances. This is an interesting scenario because I don’t normally recommend combining finances with somebody that you’re not married to. How long have you and your girlfriend been together?

Clayton:
We’ve been together for six years now. So, quite some time. And then living together for four now, ever since we worked on the road and moved out, and have been traveling with me ever since.

Mindy:
So, it’s serious. It’s that, you didn’t just meet her last week?

Clayton:
No, Not last week.

Mindy:
Okay. And what are your plans for the future, family-wise?

Clayton:
Yeah, absolutely. I mean, right now we have for babies, got a couple pets, but we are looking at having a family, getting married, settling down. And semi near future, I’d say at least one kid, maybe two, but probably within the next couple of years here, looking at it probably three years old.

Mindy:
Okay.

Scott:
What position do you want to be in by the time you hit that? What’s the target state?

Clayton:
My ideal situation would be to be in a position to where she doesn’t have to have a job to where she’s tied up with that. She can have all the time she needs for the family time and taking care of what has to be done. And ideally, I could be too, right? But I think that’s possible, but a more realistic timeframe for me to have the time home with her to help with the family would be 35. But if it happens and we’re able to be financially independent before that, absolutely, that’d be awesome.

Scott:
Based on your situation, it seems like you’re already in a situation where you can accumulate a substantial amount of household cash on just one income, your income. Right? And I think that’s impressive because of the choices you’re making. And do you want to be in the house hack in that future state, both you and your girlfriend? Or do you want to be at a different living situation?

Clayton:
Ideally, different living situation. We joke kind of, but not at the same time, house hacking a condo in Hawaii. But I don’t know if that’s going to happen quite yet at 30, but we’ll see.

Mindy:
You can do that.

Scott:
One of the things to note is that this is a geometric curve and you’re doing a lot of things to give yourself options with liquidity. So, you’re not in a situation where like you’re accumulating a thousand dollars a month, mostly in a 401(k) and home equity. And it’s really hard to accumulate that next dollar outside of that. You’re accumulating a massive amount of liquidity right now that you can deploy creatively. And I think the elephants in the room in your financial position are going to be the current job you have, which requires you to travel all around, God’s green earth here with Iowa and Texas, and renewable energy farms, which I have to imagine are not in the populated places in the country. So, I think that’s an elephant in the room for you that you’re going to have to address between now and that target state. Don’t overthink it.
You’re very wealthy relative to your age and income bracket, as far as I can see. And over the next two years, I see no reason why you’re not going to be at least a hundred to 150, maybe $200,000 richer. So, within two years for my speed, I think you’re going to have lots of good options around this, a couple of rental properties and those types of things. I just continue to be conservative with your financial position and make sure that you’re never backing out of the freedom that you’re creating for yourself with your current financial position. That’s all.

Mindy:
I think that this is all 100% correct. We haven’t really discussed reserved funds for your rental properties, Clayton. You do have six plus months of emergency fund for personal use, if I understand that correctly, which is awesome. Do you have any reserve fund specific to your rental property that’s outside of your six month emergency fund?

Clayton:
Kind of yes and no. I took a little bit of a different approach than what people generally say with that, I guess. So, I tied in our mortgage into our personal expenses being that we are living there. So, that personal safety fund does include that mortgage, if I lost my job and had to pay that. So, that does tie into that six months, but all of the rent that we are getting from that we are building a separate account, and trying to build up that reserve fund for the property as well.

Mindy:
I love that. I love that. Okay. So, back in March, when COVID hit, there were so many people coming in to the BiggerPockets forums, “Oh my goodness, how am I going to pay my April mortgage payment?” And my thought was, “What do you mean? It’s March 20th, you should have already had April’s mortgage payment in the bank, along with May and June, and probably into July.” I like a six month buffer personally.
So, I love that you are able to pay the mortgage and really that’s all that matters. If you’re not there, you can turn off all the utilities, if everybody leaves. And you’re just stuck with this mortgage payment and no income coming in, you can still pay it. You’re not going to lose your property, but also that you’re generating this reserve fund. What is your goal for the reserve fund?

Clayton:
I would say the goal for the reserves would be about another six months of payment. The tenants do pay for all of the utilities and all that stuff. So, I feel like it’s pretty safe to go a little bit leaner on that, just as long as the monthly payment would be covered to the bank.

Mindy:
Yeah. I don’t even think that’s lean because you’ve already got your six months of mortgage payments in your personal emergency fund. And you’ll have six months of mortgage payments in your rental property reserve fund. And if nobody is living upstairs, it doesn’t need utilities turned on for it. If nobody’s living over the garage, you don’t need utilities. I’m assuming the garage is just electricity that’s tied into something else. So, I just think that’s a really, really powerful position to be in. And good job.
And then when you get the next property, I want you to have another six months of reserves on that other property too, because you don’t want to lose your investment, especially in the middle of COVID. Who knows when COVID is going to end? We’ve got this vaccine coming out, but whenever that’s going to go away. I just think it’s a better position to be in, to have yourself covered. And there’s a lot of people who don’t agree with me, but those are also the same people who are wondering where they’re going to pay their April mortgage payment.

Scott:
I think your capitalizing your life and your business really intelligently. I like everything about this. Here’s another nuance. When we say we, you got to have that big reserve for your rental property fund. People are like, “Oh, I’ve got to have that before I invest. I got to have the down payment, 20 grand. And then another 15 grand, before I go into the investment.” Yeah, we like that. But your situation, you bought it and you have a six month emergency reserve for your personal life, which incorporates that, which I think is that right intelligent blend of practicality in buying that property. And now your first priority before spending the money or reinvesting it is building up the emergency reserve.
I can’t praise that everything you’re doing enough here. And I think a lot of people should learn from you. I think your challenge around your getting ready for family planning is a mental one. You’ve got a rock solid financial position. We talked to very few people, I think who are a stronger overall financial position than you at your point in life. If you went ahead and did some of that budgeting and got a little discipline around spending and really take controls there, worst case scenario, if we have a child and move out of the house hack in two years, I’m still accumulating more than I am today in my strong position, just because I have these tighter budgeting controls around that. So, I think you’re in position right now, if you chose to, but nothing about your financial position, I think holding you back from starting a family, when you guys are ready. Unless Mindy, you think anything else?

Mindy:
No, I think those are great ideas. And I was a stay at home mom. It was wonderful to be able to stay home with my kids. But the reason that I was able to stay home with my kids is because we planned ahead. Not everybody wants to stay home with their kids. Not everybody who doesn’t stay home, doesn’t want to stay home with their kids. So, putting yourself in the position to be able to make these decisions at the right time is the best course of action. And you’re right on target for all of that.

Scott:
Don’t take on any personal debt as well. Don’t take on any debt for the ring or the wedding, or another car, or whatever, but just keep your freedom. You are free right now in a lot of ways. You have a tremendous amount of options. Just don’t break that. And keep doing what you’re doing, continue to make some tweaks to accelerate it. And then you’re going to have to think about this job in a year or two, because it’s a lot of travel. And I think when you value your time at the end of that and the opportunities in your personal life, you’re going to find that they’re going to have to pay you more to keep you over a longer period of time, I think. We haven’t talked about that much, but I just think that’s going to be on the horizon for you.

Clayton:
Yeah, absolutely. I appreciate all your guys’ compliments and comments, and everything like that, just makes me feel great, and just even more confident going into the next step. Right? So yeah. I don’t know what else to say. I appreciate that.

Scott:
Cool.

Mindy:
Good, good. Clayton, thank you so much today for coming on the show and sharing your financial position, and sharing the ins and outs of all of your finances. This is going to be hugely helpful to people who are listening.
And those of you who are listening, do you have a kid who’s like 14, 15, 16 years old? Share this episode with them. They need to be just like Clayton. Don’t take on a lot of consumer debt and ridiculous spending for no reason. Get a job that pays you to live someplace else. Get a job that pays you for a fifth wheel. And max out your Roth IRA, contribute enough to get the company match, but not in this case with all of the outside things that you’re doing right now, that the 401(k) may not be your best option. Although I would definitely do it to get the company match. And then continue maxing out the Roth IRA, I love that, for both you and your girlfriend. But this was hugely helpful. And I really appreciate your time today, Clayton.

Clayton:
Yeah. Thank you, guys. I appreciate all your time and advice, and everything. Thank you.

Mindy:
You’re welcome. I hope you have a good day. We’ll talk to you soon.

Clayton:
That is you. Bye.

Scott:
Bye, bye.

Mindy:
Okay, Scott, that was Clayton from the Midwest. Scott, I’m super excited for him and all the potential that he has for making some pretty significant changes that aren’t really going to affect his day to day life, but will have huge implications down the road.

Scott:
The guy is smart, conservative, clearly a hustler, clearly informed. He’s off to the races. He’s got the financial fortress built. And it’s time for him to just continue to chug along. It’s just a matter of when it becomes a millionaire in five years or 10 years at this point. So, I think he’s in a wonderful, wonderful position. I think he’s going to have a lifetime of options and freedom with that as long as he remains consistent.

Mindy:
I would like to be there when he first looks at his spending after he’s tracked it, and just watch his eyes light up and, “Oh, I can cut this. I can cut this. I can cut this. I’m not even going to notice.” I’m super excited for that part for him. I want him to connect with an agent and start getting an MLS listing set up, so that he can start learning what’s coming on the market and see that what he’s looking for is actually an option, or it’s not, and tweak what he’s looking for, so he can be ready to pounce just like you suggested. I love that he’s maxing out his Roth IRA. And that his age in his position, I think that’s one of the best retirement options he’s got. But I do also want to see him continuing to contribute to the 401(k), to get the match.

Scott:
I think what’s going to happen here is over the next couple of years, he’s going to see his income grow. He’s going to see his wealth grow. He’s going to see a budding real estate empire began growing. And he’s going to have more cash than he knows what to do with. And so, very shortly is going to make a ton of sense for him to just dump that all into the 401(k) and take the tax break, rather than have it sit in an after-tax brokerage account or whatever, or deploy it somewhere else. That’s a really good set of options to do that. I think will make sense. I think in the very immediate future that he’s making all the right calls. And I think personally, I’d be betting on the real estate portfolio in this context, over the additional, after the match contributions to the 401(k), that could be. That’s not a certainty. That’s just, I think the better bet if it were me.

Mindy:
Given his position, yes. And this is really difficult for me to say, because I am always max out your 401(k), max out your retirement accounts. But in his position at his age, that might not be the best use of his current money. Down the road, I absolutely agree. Once his income has reached a point where he needs to start reducing his taxable income, absolutely max out that 401(k).

Scott:
A hundred percent agree. All right, before we get out of here, we have a request from you the listener. If you enjoy the show, we’d love two things from me. We’d love for one, if you could subscribe to us wherever you listen to podcasts, whether that’s iTunes, Spotify, or anywhere else. And second, we’d love a review from you. And we’d love if you could share that review with other people in our Facebook group. Those reviews are something that we always enjoy and are proud of. And so, we’d love to have that if you’re enjoying the content here.

Mindy:
Yeah. And the more times that we get reviews and ratings, the more our show is shared with other people and suggested to others who are looking for similar content. So, that really helps us grow. And we appreciate it. Thank you so much. From episode 168 of the BiggerPockets Money Podcast, he is Scott Trench. And I am Mindy Jensen, saying, catch you later, future dudes.

 

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In This Episode We Cover

  • Why everyone should house hack when possible to do so
  • Frontloading your Roth and making sure you max it out every year
  • Bill tracking vs. expense tracking (and how one works better than the other)
  • How to use automatic budgeting apps to fine tune your spending
  • How to define your specific criteria when looking for rentals 
  • Why landlords need a 6 month reserve for their rental properties
  • And So Much More!

Links from the Show