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BiggerPockets Money Podcast 198: Finance Friday: Are You Spending Too Much Time on Low-Pay Jobs?

BiggerPockets Money Podcast 198: Finance Friday: Are You Spending Too Much Time on Low-Pay Jobs?

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Many of you know that Mindy loves live-in-flips, and although she can definitely swing a hammer, she doesn’t have the skills of a finish carpenter, but today’s guests, Serafina & Darrin, do! Serafina and Darrin were both working at non-profits, but over the last year have transitioned to running their own business named Carlucci Woodworking. Serafina takes care of the bookkeeping while Darrin takes care of the carpentry. They’re a dynamic duo!

All this is happening while they are trying to build their dream home out in the country. If you’ve ever custom-built a house you’ll know how time-intensive and (often) expensive it can be.  Serafina & Darrin want to know whether or not Darrin’s high hourly rate would be better served doing jobs, as opposed to working on their own home.

With dreams of sailing around the world with their children, hitting a not too far away FI number, and living in their countryside getaway, they’ll need to focus on optimizing their business, getting connections, and keeping up with their investing! 

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Mindy:
Welcome to the BiggerPockets Money Podcast, show number 198, Finance Friday Edition, where we interview Serafina and Darrin and talk about building a business and spending your time on endeavors that have the highest ROI.

Darrin:
Yeah. At some point when you’re DIYing things, and I ended up thinking, “Oh, I can do that, watch a YouTube. Right? Of course, and then rent the machine.” But at some level, it’s like, what’s that balance between efficiency and being able to say that you poured all the concrete here.

Mindy:
Hello, hello. My name is Mindy Jensen. And with me as always is my intrepid co-host, Scott Trench.

Scott:
I love how you’re always exploring new ways to describe me, Mindy. Thank you.

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 that financial freedom is attainable for everyone, no matter when or where 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 simply sail around the world for a year or two, we’ll help you get money problems out of the way. So, you can live the life of your dreams.

Mindy:
I love it, Scott. I am super excited for today’s episode. Because yet, again, we have a very different set of circumstances. But I don’t really consider them unique circumstances. We just haven’t interviewed these people before or people in these circumstances.
Serafina and Darrin are self-employed. They have two kids. They’re about a third of the way to their financial independence goal. And they’re looking for a little bit of advice, and we give them some suggestions to follow. Definitely not advice. But definitely some suggestions to look into things like an HSA, things like the Roth IRA, the over 50 catch up in just a year for Darrin. And I’m super excited for all the things that their future holds, which I think is vast.

Scott:
Yeah, I think, that they’ve done a remarkable job with what seems like not a lot of income over the past couple of years, and put themselves in a really good position.
And so, today, it wasn’t about capital allocation. It wasn’t about expense reduction. It wasn’t about these other types of things that we kind of normally get into in the fundamental side of things. Their fundamentals are really strong. It’s about income generation.
And so, I think, it’s about income generation, and perhaps a new way for us in running a business as a contractor. And I think that that was a really fun discussion and a new look at solving this problem of personal finance.

Mindy:
Yeah. And I like how you and I approached it in a different way. I have a very different set of experiences than you do. And I love your big picture overview of what they should do. I think that everything you said was spot on.

Scott:
Yeah, and I think everything you said was spot on. And I love the great detail and additions and tactics that we can move to move things forward, in addition to your excellent big picture skills as well, Mindy.

Mindy:
Oh, thanks, Scott. Okay. Before we bring them in, let’s make sure that our attorney is satisfied when I say the contents of this podcast are informational in nature, and are not legal or tax advice. And that 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. Okay, let’s bring in Serafina and Darrin, and give them a couple of financial decisions to contemplate.
Serafina and Darrin are debt free. Hooray. They’ve got two young kids and are about one-third of the way to their financial independence goal of $750,000. They’re self-employed and have dreams of sailing around the world with their children post financial independence, but they’re not quite sure where to invest and how to prioritize spending.
Serafina and Darrin, welcome to the BiggerPockets Money Podcast. I’m super excited to talk to you today.

Serafina:
Thanks. We’re excited to talk to you too.

Darrin:
Thank you so much.

Mindy:
So, Serafina, let’s start with your income.

Serafina:
Okay. We are currently self-employed and right now, I have us having an owner paid combined of $3,500 a month.

Scott:
Awesome. And what do you do?

Serafina:
We have a carpentry, custom woodworking, boat building business. So, Darrin’s the boat builder and the woodworker, and I do the bookkeeping, and the paperwork, and the invoicing, things like that.

Scott:
Awesome. And is that income fluctuate or is it reasonably steady there?

Serafina:
It definitely fluctuates. But I’ve been trying to … I recently got the book, Profit First, that suggested that you set it up, so that you have a steady income as best you can. So, I think, we can maintain that. So, that’s kind of how we came up with that for the moment.

Darrin:
This is also our first year …

Serafina:
Oh, yeah.

Darrin:
… in this paradigm. We both worked at a nonprofit woodworking school for, I don’t know, like 17 years, so.

Serafina:
Yes. We just started this last year.

Darrin:
Yeah.

Scott:
And has this changed your income significantly lowered it or increased it?

Serafina:
I think it’s a little bit lower just because I don’t also have a job. I work part time for the nonprofit. So, I mean, we’re both working, but it feels like we have one income.

Scott:
Okay. In your first year, are you seeing a slope of growth in your company, in revenue, and those types of things? Or do you kind of feel like this is going to be pretty steady at its current level of $3,500?

Serafina:
I think, it could be steady. I think it just depends maybe on how much, how many jobs we get. So, if we were able to have time to take on more jobs, then we could probably increase that. I think we get stuck with feeling like we have to put time on building the house and put time on making money on the jobs.

Darrin:
Yeah.

Scott:
Okay. Great. So, you’re also undertaking a large additional profit or a bit of work that’s going to add value with the house construction?

Serafina:
Mm-hmm (affirmative).

Darrin:
Correct.

Scott:
Love it. Let’s go to expenses, how much are you spending and how much of that $3,500 are you able to keep each month?

Serafina:
All right. We have a pretty great rent situation right now. Our rent is really low at just $200. So, that’s pretty nominal. We do pay property taxes on our property. Where we’re building our house, that’s about $1,000 a year. Electricity where we’re living ranges from maybe $80 to $100, eating is $200 on average, groceries, we spend about $800 a month, gas, maybe $50 to $100, depending.
We have car insurance, which is about $550 a year. We do library dues and the kid’s violin lessons, and things like that. The average maybe about $160 a month. What we call our family fun, which is like sometimes we go out to eat or we do movie rentals. We used to do more adventures out in the world, but not right now.
So, that’s about maybe $100 a month that we put aside for that. We each have our own personal fun my money category, which is about $100 or $200 a month. And right now, I’ve got a set it maybe about $300 a month to put towards retirement.

Scott:
Awesome.

Darrin:
And there’s also liability insurance that we put to that.

Serafina:
That’s on our business …

Darrin:
Oh, okay.

Serafina:
… side, I think, yeah.

Scott:
There’s a lot in there. You’re putting $300 towards retirement, how much you’re able to save on after all that spending every month? Is that accounting for every dollar, or is there any leftover that goes into savings?

Serafina:
Yeah, I have various savings buckets. Like, we’ve put aside money for gifts and car maintenance, medical and dental kind of things that come up, like an annual visiting family for Christmas trip with four people. Kids, what they need for school, that’s maybe $50 a month, I set aside for that.
And then, house building, we usually put in extra money towards the house building. But I will say like at the end of the month, usually it depends seasonally where the money goes, like usually around January, we start to think, “Oh, we got to start saving up for the house.” So, all the extra money goes towards the house, or yeah.
Then, at the end of the summer, we think, “Oh, we better save for retirement now.” So, we haven’t been doing that for a while. So, it kind of fluctuates or plane tickets are really expensive. We didn’t quite make that, so it kind of skim off the top of the other categories that are doing well.

Scott:
Makes sense to me in terms of how you’re thinking about it. How are you able to get the rent so low?

Serafina:
The house is owned by our mother-in-law. And when we were transitioning out of where we were living and working before, we were looking at different options. One was, because we don’t make a ton of money, we weren’t quite sure what we’re going to do, was to buy a trailer and put it on our property, so we could be closer to our house to work. But they ended up letting us rent the house here for basically expenses. But, yeah, for nominal rent. So, we’re here …

Scott:
Perfect. So, you’re able to live there while you build your future home?

Serafina:
Yeah.

Scott:
And when do you expect that future home to be completed by?

Serafina:
I don’t know. We’ve been working on it for a while. We’ve been building it ourselves like Darrin and I have been actually building it. And in the midst of that time period, we had kids. So, that kind of knocked me out of the game a little bit, because I’m taking care of the kids.
So, it’s been going a while. I think we would like to get the house done sooner than later. But it might still take us another year. But it’s also, we run into the position where we’re coming up against things that we need a little bit more money for, like putting in power or …

Darrin:
Yeah.

Serafina:
I don’t know, bigger, bigger, expensive, like putting in the drainage system. Whereas, before, we were getting wood off our property. And the material expenses were pretty low. But, yeah, we’re just running up against, I guess, both time and money constraints.

Mindy:
And then, will you have a mortgage on this house once you’re finished with it?

Serafina:
No. Right now, we don’t have any debt.

Darrin:
It’s paying as we go.

Serafina:
Yeah, we pay.

Mindy:
Okay.

Serafina:
We did have a loan for the property, but we’ve paid that off. And then, the materials for the house, we’ve been paying as we go.

Mindy:
Okay.

Serafina:
Part of the reason it takes a while too.

Darrin:
Yeah.

Mindy:
God’s never built the house from scratch. I’ve never built a house from scratch personally. But I went to school with a girl named Cara, whose parents were you. They did live in a trailer on the property. I knew her for probably seven years, and they were building the whole time because you start, and then you’ve got to do other things. And it’s a big undertaking just by yourself.

Scott:
Yup.

Mindy:
Okay. I love it when you have …

Scott:
I mean, I’m saying yep like, I know. I have no idea. But, there you go.

Mindy:
It’s super easy, Scott, just like kids.

Scott:
Just like kids. It just happens. That’s right.

Mindy:
So, I like that you have a … What did you call this in another episode, Scott, a personal CapEx fund, for your personal expenses? “Hey, I’ve got some expenses and I’m not sure how much they’re going to be. So, I’m just going to throw money into these buckets, like the gifts and the car maintenance.” I love that, because unless you could do the work yourself.
And even if you can parts still cost something, might always break the expensive parts too. But they’re also super old. But medical and dental, there’s always something weird that comes up. I just broke a tooth last week eating a salad, which is so stupid. And it’s going to be like $1,700. It’s my portion with good insurance. So, yeah, you don’t plan on breaking a tooth, it just happens. And on and on and on. So, I love that you’ve got the … What are we going to call that, Scott, the personal CapEx? Do we like that idea?

Scott:
Yeah. Well, it sounds like, yeah, I think that personal CapEx, I don’t really … We need a term for that. Maybe, that’s something we can crowdsource to Facebook group or something with that, whatever you call it. But I love that you’re doing that, and I think that makes a lot of sense. And it’s something that I think is really important, given the way when you’ve got those types of expenses, and you’re trying to build a house with everything leftover and save for retirement at the same time. And obviously, it’s not a ton of income for the family on that.
So, this is going to be an interesting discussion here. The good news is, you have lots of different levers you can pull. You own a business that you work on. I’m sure there’s flexibility and freedom that comes along with that, to some extent. You’re creating a massive asset, I presume, in the form of the house once it is complete.
So, there’s a couple of really cool levers that we’re already starting to see. But there are definitely some challenges here and cash would solve a bunch of those, as I’m sure you’re aware, it seems especially in the house component.
So, let’s get into the assets and liabilities as well and say, what do we have in terms of retirement accounts? What do we have in terms of cash on hand debts, those types of things?

Serafina:
Okay. So, for me, personally, I have a Roth IRA with $18,000 and a traditional IRA with $9,000. And Darrin has a Roth IRA of $19,000, and a traditional IRA with $9,000. Oh, and then, from our previous job, we each got a pension annuity. And that, for me, is $59,000, and for Darren, is $74,000. And then, together, we have a joint investment account, and that has $136,000 in it.

Scott:
Okay. Great. And that joint investment account, that is after tax in a brokerage fund?

Serafina:
Yes.

Scott:
So, you could sell that without having to pay penalty. You have to pay gains on anything, any tax any gains, but …

Serafina:
Yes. Yup.

Scott:
Okay.

Serafina:
Yeah.

Scott:
Great. How much cash on hand do you have?

Serafina:
I mean, we have about $10,000 set aside for the house building. And then …

Darrin:
For the summer.

Serafina:
Yeah, for the summer.

Scott:
Okay.

Serafina:
I mean, I guess, yeah, that’s about it, besides just our operating kind of expenses.

Scott:
Okay. Great.

Serafina:
That’s most where we spent money. Yeah.

Scott:
And that’s it? It’s just assets and cash and there’s no debt. There’s nothing else complicating the balance sheet here?

Serafina:
Yeah. No debt. Nope.

Mindy:
I said they were debt free at the beginning.

Serafina:
Yehey.

Scott:
Well, I know, I know. I’m just admiring. I’m admiring the cleanliness …

Darrin:
He’s double checking. Double checking.

Scott:
… and those types of things, so.

Mindy:
Yehey. They’re debt free.

Scott:
Yeah.

Mindy:
Okay. So, let’s talk a little bit about the pension/annuity from the former employer. That’s a lump sum. That’s not a $59,000 a year, $74,000 a year?

Serafina:
Oh, no. Right. That’s how much is in the account.

Darrin:
Yeah.

Mindy:
Okay.

Serafina:
That the employer put in the account.

Mindy:
And how can you access that? Do you have to wait until you’re 55 or 65?

Serafina:
Yeah. You just hold on that.

Darrin:
Fifty-nine. Fifty-nine?

Mindy:
Fifty-nine. Okay.

Darrin:
Yeah.

Mindy:
And then, that’s just a monthly … I’m not sure how pensions work. I don’t get one.

Serafina:
I have to say, I’m not totally sure how they work either.

Mindy:
Market research. Okay. So, my first bit of homework for you, or suggestion for you is, to look more into how you can access that? How you can best utilize that information or that money because neither Scott nor I have pensions? I do think BiggerPockets should start when, so that we could do research for the podcast.

Scott:
Oh, great, perfect.

Mindy:
But I would reach out to the plan or ask for the documentation and read through it and see at what age can you start accessing it? If it’s 59, is it like social security where you wait a little bit longer, you get more? Or if not, then, maybe, you start taking it as soon as you can.

Darrin:
Right.

Mindy:
I’m not sure really what to say about the pension. And is it a pension or an annuity? Does that matter? Scott, do you know anything about pensions?

Scott:
I’m really weak in this area, actually. Because again, we don’t have them. We’ve now had a few folks with pensions on there. But either it’s been, hey, we’re receiving the pension, an income that’s meaningful right now, or we’re not. And that’s typically how we’ve simplistically viewed it.
So, without having more information, I don’t know how to give you advice on the pension thing. But it seems like that’s a good thing to figure out, like, how much income is that going to produce for you? And when or when you’re going to be able to access the lump sum amount?

Serafina:
Yeah, and I guess one question we had around it also is like, should we combine that with something? Should we move it over to something else? Because partly because we don’t know what to do with it, it seems kind of an outlier.

Darrin:
Yeah, we can’t get simply to it, so.

Scott:
My belief is that when you don’t understand it very well, or have some of these questions, that there’s an opportunity to make an improvement there.

Darrin:
Yeah.

Scott:
But in the absence of knowing what’s in there, I think for our purposes today, we’ll just kind of ignore it as a potential asset until further information comes to light.

Serafina:
Okay.

Mindy:
Yeah. And I am going to say right now, I will post a question in the Facebook group. Do you know about pensions? Do you have any advice about these pensions or pensions/annuity? Are you in our Facebook group?

Darrin:
Yes.

Serafina:
Yes.

Mindy:
Okay. Oh, good, then, we will give you this homework to do any more research that you …

Darrin:
Awesome.

Mindy:
… can on this, and maybe share more information. I’m sure somebody who is listening has some information and suggestions about the pension.

Serafina:
Sounds great.

Mindy:
So, I’ll make a note to post that in the Facebook group, which can be found at Facebook.com/groups/BPmoney. Okay. So …

Scott:
I mean, we stated this earlier, but could you kind of reiterate what is your goal here? You’ve got about a two quarter million dollar net worth here. You’ve got a business that you started, you’re building a house, what’s the end state that we’re looking to achieve and timeline that you guys have?

Serafina:
I mean, we definitely would like to retire. That seems pretty big. We’d like to finish the house, because we’ve been working on that for so long. We’re ready for that to be done, and kind of start living in it. So, we can use all that work that we put in there.
We would like to go sailing. This is more of a long-term goal. Take the kids sailing around the world in our sailboat for a year or two maybe, while they’re still kind of little. And then, in the meantime, like on a shorter term thing, I feel like we haven’t been doing many trips for just our family like even smaller trips. Once a year we go to the obligatory family gatherings, but it’d be nice to have some adventures in the meantime, even if they’re little ones. Take advantage with the kids while they’re young.

Scott:
Let me ask a couple of questions to follow up on this. And starting with the short-term goal, are you guys feeling like it’s pretty stressful right now? Like, it’s a lot of work all the time, and it’s not a lot of time to get out on these adventures? Is that right?

Serafina:
Yeah, I feel like the way that we’re either saving or spending our time is pretty haphazard. I’m not sure how to prioritize everything and make it all happen. I feel like, “Well, we should be doing this. Well, we have got to do this. But we should probably be putting it over here.”

Darrin:
Yeah. And I, just even this past couple of weeks, I dedicated myself to working on the house for, I don’t know, a month, month and a half. And basically, until the money runs out, but then a job comes, like somebody says, “Oh, could you do this for me?” And I was like, “Oh, this seems like a pretty straightforward job, I could do this.” And so, I pull myself away from the house. And so, now, I’m not working on the house because of this project, but.

Scott:
Okay. And when you say that the money is running out, I hear you have a $10,000 emergency reserve, does that dwindle and rise? Or is that kind of your floor? And when you feel like you get to 10,000, that’s when you feel like running out of money?

Serafina:
No, that’s how much we’ve saved or been able to put in there over the year.

Darrin:
Just for the house.

Serafina:
Just for the house.

Darrin:
Yeah.

Scott:
What’s your personal emergency reserve?

Serafina:
That’s ferried over the past. I used to have probably like three or four months budgeted out ahead of time. And then, when we moved over here and left our jobs, it all kind of reset. So, right now, I think I’ve budget like a month ahead, basically, in our personal account, but on our business side, because you just finished this big job. I think we have, coming from the business to us, we have probably about seven months of salary. And the business can do that for about seven months, right now.

Darrin:
Right.

Scott:
You have a seven months of business operating cash in the business?

Serafina:
Yeah. Yeah.

Scott:
But you’ve got less than one month for your personal use. So, you have cash in several locations, I’m hearing. You have cash in the business. You have a $10,000 set aside for another business, what you’re calling the house project, that’s in your mind just for the house.

Darrin:
Right.

Serafina:
Right.

Scott:
And then, you have very little for your personal life set aside, is that what I’m hearing?

Serafina:
That sounds varying.

Scott:
Yeah.

Darrin:
Yeah.

Scott:
Well, I think that’s a good place to start, right? I mean, if we go back to, Dave Ramsey, who I think has a really good strategy for the first couple of things here. You guys have a good net worth. You’re doing a lot of things really well. You have retirement accounts and brokerage funds. But I would start and stockpile, six months at least in the emergency reserve for you, for the simple reason that you guys are one income, and it’s self-employment income. You could get away with I think a lower, a less emergency reserve.
I think, that’s what’s contributing to stress. That’s a factor that I think could be contributing to stress for you right now, is the fact that you don’t have that because of your self-employment income, the nature of you having a business and those types of things with that. And that could be you just shift cash out of the house or out of the business to create that, or you go and make that a primary savings goal for the short run.
That’s not the big piece of the strategy to move you towards the retirement goal. But that’s one lever that will have a very modest impact on the timeline for that. But I think that could make a big difference in your life right now.

Darrin:
Okay.

Scott:
Mindy, what do you think?

Mindy:
Yeah, I think, an emergency fund, oh, my goodness, what am I going to do will be removed when you have the emergency fund, and it’s just sitting there, and it’s doing nothing. And if you’ve got a great big job that you know you’re going to finish next month, you can dip into the emergency fund to put to the house because there’s something you need to purchase. And then, when the big job is done, you replenish the emergency fund. But having a cushion there could be something that you’re unconsciously really concerned about.

Darrin:
Okay.

Mindy:
So, I like that suggestion a lot. You had mentioned custom woodworking and carpentry along with boatbuilding. The building market right now is going crazy. So, is there any opportunity to pick up an extra side job that can help you fund your building fund while you are waiting for the time to build? Can you take Friday’s off to work on the house and everything that I can accomplish on one Friday, will be able to be done. Or is it more financially advantageous to take advantage of this crazy market we have right now with building going on everywhere and just kind of stockpile jobs?
And could you barter, you said that you needed to get power, can you barter woodworking services with an electrician?

Darrin:
Yeah, maybe.

Mindy:
Or everybody’s looking for people to do work for them and nobody has any skilled labor.

Serafina:
Right.

Mindy:
So, I’m trying to think, and I’m hoping that this is sparking ideas for you instead of just going off of my very stumbling words, but I think that there’s a lot of opportunity for a little bit of thinking outside the box with regards to your skills, and getting somebody to come in and help you with skills that you don’t have.

Darrin:
Right.

Scott:
How much is your house going to be worth once you finished construction?

Serafina:
Oh, my …

Mindy:
I saw that face.

Serafina:
I mean, it’s a nontraditional house.

Darrin:
Yeah.

Serafina:
We’re building a straw bale house.

Darrin:
Yeah.

Serafina:
It’s a timber frame. It’s lovely.

Darrin:
Yeah.

Serafina:
But it’s definitely not usual.

Darrin:
Yeah.

Serafina:
I think that property tax assessment is at maybe, at 98 right now. And it’s halfway done. I mean, it’s not done yet. It mostly looks like a barn right now.

Darrin:
Yup.

Serafina:
So, I don’t really know.

Scott:
Okay. That’s, I think, another piece of homework is, you need to know what we call in real estate investing the after repair value of your property.

Darrin:
Okay.

Scott:
And so, that’s what your property will sell for, even if it is unusual. You need some sort of guess as to what the finished product, once it’s complete to your vision and specifications will look like, and a timeline on that.

Darrin:
Okay.

Scott:
And that will give you some inclination. And let me just post this, your annual income is somewhere in the ballpark of $40,000 right now?

Serafina:
Mm-hmm (affirmative).

Scott:
And if the house is worth $100,000 and it’s going to take you several years to complete, it says to me that your job, the woodworking business, may be the more valuable asset to focus on in terms of those types of things. And money generated from that can be used to help fund construction rather than the other way around.
If you said, “Once the house is complete, it will be worth $500,000.” I have a completely different thought process on that. But that’s kind of where my mind jumps to. I don’t think we’ve actually asked this on the show so far, where are you guys located?

Serafina:
We’re in Maine.

Darrin:
Rural Maine.

Scott:
Maine.

Darrin:
Yeah.

Scott:
Rural Maine. Okay.

Mindy:
Ah, okay. Then it is probably going to be closer to 150, or maybe 200 at the high side, depending on how big it is. But rural Maine doesn’t have really high prices.

Darrin:
Well, I mean, with the pandemic, it stings. Everybody’s building everywhere here.

Serafina:
Yeah, interesting.

Darrin:
It’s crazy. Yeah.

Scott:
Yup. Well, again, that will tell you something as if you can get some sort of reasonable guests. And you might even just ask an agent, a local agent, or if you’re not sure where to start, and they might be able to give you some inclination of it. But I think if you can have a band, even if it’s $30,000 wide, a 120 to 150, or whatever it is, that will give you some inclination about whether this is a good strategic area for you to be spending countless hours on, or whether that time is better invested in your business.
And from what you just said, my assumption is that, the business is going to be the biggest leverage point in your finances right now that I see. Do you guys agree with that? Generally, does that feel right?

Serafina:
So, you’re, if the house isn’t going to be worth mega million dollars, we’re going to … Working for the business will generate more money, so we should use that money to pay somebody else to build it? Or?

Scott:
Right now, financially speaking, you’re in a great position with your housing. Completing the home, it’s going to actually cost you more, I think, after you move out, than what you’re currently paying to live right now with your housing, right?

Darrin:
Mm-hmm (affirmative).

Scott:
So, once you complete the project, your finances are going to get worse, not better, because your property tax assessment is probably going to spike, the property taxes on the property. There’s going to be the bills and utilities to pay just that there is, and more maintenance that you’re not going to share.
So, there may be good reasons to complete the project and do that because that’s the lifestyle that you want. That’s great. But that, to me, if it’s less, and I don’t want to like … there’s a lot of nuance here. So, I could be completely wrong on some of this. But if we’re directionally getting there, then it just says that, “Hey, time spent on the business is going to be higher ROI for you guys than time spent on the house.”
It doesn’t mean don’t work on the house. It just means that all else equal, you’re going to be moving towards your financial goal much faster by working on the business, if that’s correct.

Darrin:
Right.

Serafina:
Okay.

Mindy:
Yeah. Another thing I would just look at, if you are going to start working in the business more, look for jobs you can do, quick jobs you can do. I mean, right now, you can kind of just write your own quote, “Oh, that’ll be $25,000.” Because nobody else will be able to answer their phone. And I’m not trying to diss the building industry. If I had work so much that I couldn’t even keep up with it, I probably wouldn’t answer my phone either.

Darrin:
Yeah.

Serafina:
Yeah.

Mindy:
But it is making connections in the carpentry world could be really, really beneficial for the house project. So, I like the idea of looking into leveraging that. How long can you rent your current house from your mother-in-law? Is she putting any sort of pressure on you to leave?

Serafina:
Not yet.

Darrin:
Not currently, yeah. But, I mean, I would be surprised that she would … You mean, I think, she purchased this as an investment. She’d probably want some return on it.

Serafina:
Eventually.

Darrin:
Yeah.

Mindy:
Fair enough.

Darrin:
Yeah.

Mindy:
Right.

Scott:
So, if that happens …

Serafina:
When we’re leaving, it will be a regular rental property.

Darrin:
Yes.

Serafina:
Yeah.

Scott:
So, that pressure begins to mount and that impacts your timeline, that changes the dynamic I discussed earlier with it.

Darrin:
Right.

Scott:
Let’s go into the business for a second here. How does your business work? How do you get orders? How do you decide on your pricing? What’s an order like? And how much profit do you make on that order? How many hours do you invest? How much materials cost do you have for that?

Darrin:
Yeah, unfortunately, I don’t have anything regular. And it’s like I said, it’s only really been since last June, no, maybe August that I got a really big custom order from a nature museum. And so, I built these giant eggs and some other things. And we just kind of played that out. But to answer your question, it has been word of mouth, for the most part …

Serafina:
Yeah.

Darrin:
… has been how I’ve gotten the jobs. And when that slowed up, I’ve worked with friends of mine who do house repair, just to kind of keep my hand in and learn some new skills. Or as Mindy was talking about, make connections, so.

Scott:
How would you rate your skill set as a carpenter?

Darrin:
Well, I mean, I think I would …

Scott:
You’re a master, or?

Darrin:
Yeah. I mean, I would be called a finished carpenter in the house building trade. And then, I build wooden boats. So, I feel comfortable charging you like $70 an hour, typically, for much of what I do. And if I’m working on somebody’s house, depending on the job, I don’t typically charge that, maybe, I charge like 50 bucks an hour. That’s kind of the average, I think, in this area.

Serafina:
We don’t have a lot of overhead …

Darrin:
Right.

Serafina:
… which is, that’s nice. And Darrin has tools really already, so.

Scott:
So, right there. That’s perfect, right? So, we have $50 an hour to $75 an hour?

Darrin:
Yeah.

Scott:
That is $100 to $150,000 a year in an annualized income.

Darrin:
Right.

Scott:
And so, to me, that’s where it smells like opportunity for me in this, is if you can operationalize. And look, you’re going to have to invest in some systems and figure out how do I get these jobs scheduled so that I’m not driving all over creation all day, I don’t know your business, maybe that’s not even a problem for you. But I have one job I go to. I work a 10-hour a day on that project, and I’m bringing home $500 to $700 that day for that work in labor, and my billing structure reflects that so that all that kind of stuff.
If you can get that set up, that’ll make everything else that much easier for you on the housing construction, on the home construction side. Then, you can figure out, say math, hey, this is costing me $50 an hour because I could be billing that out this weekend, when I’m actually working that on the house.
That’s not an overnight project. That’ll take you at least six months to a year maybe longer to get to a point where you’re consistent with that kind of stuff. But if you could approach that, I bet you, you could double your annual revenue reasonably quickly, even while making lots of mistakes and not having all the systems in place, in the next couple of months. I’ll leave that there. What’s your reaction to that?

Serafina:
I mean, that’s …

Darrin:
Yeah. I mean, that sounds like the smarter way to go, honestly. Yeah, I mean, I would probably have to do some work getting my name out there, advertising et cetera, et cetera, which is I haven’t done, which is not something I am keen on that. I’m not like a self-promoter. So, I struggle with that, but.

Mindy:
Okay. I have a …

Scott:
We got a podcast here.

Darrin:
Right.

Scott:
What’s the name of your business?

Darrin:
Carlucci Woodworking, which is our last name, basically. But a buddy of mine had suggested, Carlucci … No, what did he Carlucci Custom Creations or something like that, so.

Scott:
Carlucci Custom Creations are Carlucci what … So, first, you got to settle on a name, it doesn’t matter what the name is.

Darrin:
That’s right.

Scott:
But don’t spend six weeks on the name, that’s perhaps a lot of people fall into.

Darrin:
Right.

Scott:
So, of course, here we are sitting. I don’t know how long Josh spent on BiggerPockets.

Darrin:
Right.

Scott:
It’s perfect for a company name. But, yeah.

Mindy:
Okay. I have some thoughts on this.

Serafina:
Okay.

Mindy:
Carlucci Woodworking, Carlucci Customs Creations. Carlucci whatever.

Darrin:
Yeah.

Mindy:
Does Carlucci have a website? Does Carlucci have an Instagram account? Does Carlucci have an Etsy shop? You’re shaking your head, so I’m going to say there is, I’m sure, because I have a cousin. You have a lot of extra little bits of wood right?

Darrin:
Oh, yeah.

Mindy:
They’re just everywhere.

Darrin:
Yeah.

Mindy:
Okay. What can you do with those?

Darrin:
I burn [inaudible 00:36:29].

Mindy:
You what?

Darrin:
We heat woods.

Mindy:
Did you say you burn that?

Scott:
You’re burning dollars at this point. Gold is [crosstalk 00:36:38].

Darrin:
That’s not heating oil. You know, it’s not heating oil, so.

Mindy:
Okay.

Darrin:
Got to burn something.

Mindy:
Okay. Here’s an assignment. Go to etsy.com.

Darrin:
Okay.

Mindy:
E-T-S-Y.com.

Darrin:
Oh yeah.

Mindy:
And search woodworking or wood.

Darrin:
Okay.

Mindy:
And see what’s there. See what you can easily replicate with your little bits of leftover stuff. My cousin used to work for a door company that made very, very high end front doors like 20. I think they’re high end, $20,000 for the front door, that’s not what I’m buying and up. And he was able to take home any bits of wood that he wanted. And he turned them into gorgeous cutting boards and butcher blocks that I have a huge butcher block. It’s like two feet by three feet. It’s enormous. And it’s this thick. And it’s mahogany and cherry. I mean, it’s a, I don’t know, $50,000 cutting board, let’s say. Nobody’s going to give you that, so don’t make a $50,000 cutting board.
He made beautiful trivets that are just routed in the middle and they’re gorgeous. And I would pay $20 for that. But he gave it to me for free because he’s my cousin.

Darrin:
Nice.

Mindy:
And there’s a lot of things that are very easy to do for you. Not for me, but we’re not talking about me. They’re very easy for you to do. It’s all the scraps that you were just going to burn anyway. So look and see what you can do with what you’ve got leftover. That’s a really easy way to generate some income. And there’s a lot of competition on Etsy. I’m not going to say you’re going to list it and then just have a billion orders.
But, Instagram is a great way. Take pictures of everything you do, promote it on Instagram. “Hey, here’s the latest set of bowls I made or wooden spoons,” or whatever it is you’re going to make up. Rolling pins, I couldn’t think of the word. I want a little rolling pin. It’s like this big and I placed an order with somebody and they never made it. Do you have a lathe?

Darrin:
I don’t have a lathe right now. I’d like a lathe.

Mindy:
Okay. So, maybe when you get one, you will send me a rolling pin because now your rolling pin business is cranking out 10,000 a week and …

Darrin:
I’d be rolling in the dough. Smashing it.

Mindy:
I love the big rode. I love the big rode.

Darrin:
Me too.

Mindy:
But there’s all sorts of things that you can do that it might not come to your mind. Oh, well, that’s too easy. I don’t care if it’s too easy. I want it to be too easy. I am assuming that you throw a block of wood on the lathe, you take your little chisel or whatever, and you just kind of smooth it out. And wow, now you’ve got a rolling pin.

Darrin:
That’s …

Mindy:
Take those out with whatever you’ve got. I mean I’m looking for like a six inch rolling pin. I’ve got a great big one.

Darrin:
Yeah.

Mindy:
I don’t need a great big one.

Darrin:
Okay.

Mindy:
To make dumplings I need a little one to make dumplings. So here’s a dumpling rolling pin. There you go. Now, that’s your first project.

Darrin:
Thank you. Wow.

Scott:
Yeah, so I like that approach that Mindy has. But I also think that just getting paid by the hour with this and $50 to $70 an hour that is a proven business model. You don’t even have to get creative and see if people buy your rolling pins with that as well. You should do both, I think.
But I think that the little scraps of wood there, while you’re waiting for that, if you can operationalize this business, I think you’ve easily got $100,000 a year income. I think you’ve got executable $100,000 a year income, it won’t be easy, but it will be something that is repeatable and lots of other people are out there. And like some ways to get started on this, look up some business systems. Decide on a name. Incorporate if you need to. Make sure all your licensing isn’t … I mean, all the I’s are dotted T’s are crossed. All of that kind of stuff is set up. Insurance, those types of things.
Put your company on Google Maps. Put it on Yelp. Put it on wherever folks are going there. Maybe look at like going on, like home advisor, Angie’s List or those types of places. And just fill in all of the boxes, set up a phone number that actually goes to a device that one of you guys is monitoring, on a constant basis, and get those basics right, so that you can get lucky with inbound business and begin building that back catalog of work with that kind of stuff.
So it’s not just through word of mouth. Get some testimonials on the page. Put up a website. Just like take a weekend and knock out a bunch of this stuff. And perfect is the enemy of good when you’re getting set up with this kind of stuff. But that would be how I would start doing that. And if you can get to a place where you’ve got jobs every day of the week. I mean, that’s going to explode your income here and make a huge difference in a lot of these types of things. And it’s not that much more work. It’ll take you a grind for the next quarter to get set that set up.
But you’ll probably be working 40, 50 hour weeks with this and rolling in the dough. Can I use that twice? No.

Scott:
Right.

Mindy:
Another thing to tag on to what Scott is saying is if you can get $50 or $75 an hour as a finished carpenter, maybe if you’ve got a great big project for your company, of course do that. But reach out to general contractors. Hey, I’m a finished carpenter. I have 17 years of woodworking experience. I’m a master boat builder, all of the things. I’m looking for work if you ever have a project that your current finished carpenter can’t handle. Because what I’m hearing over and over again in the building industry is that general contractors can’t find subs, subs can’t find helpers. Nobody can find anybody. So throw yourself out there. I’m available call me. I want to do the work.

Scott:
Yeah. And it sounds like you guys would really benefit from having a friend who’s a general contractor, with the housing project as well.

Darrin:
Yeah.

Scott:
Right. Because if you can do some work for that person, even if it’s paid work, and also barter at the same time to be like how the heck do we finish this thing in less than a year? Maybe it’s as simple as great, a general contractor is working on several of these projects. They need you to do a job for one day and in exchange they will get one of their subs to come in and work on your project for that.
I think that that way you’re not … I imagine, I don’t know. But I imagine because I never build a house that when you’re building a house, you’ve got to figure out how to use the little thing that pours the foundation. You got to run the electricity. These are not your skill set. Your skill set is the woodworking and I’m sure you can figure it all out. But you have at most $5 an hour skill, I’m making this up, in electrical wiring. But you’ve got a $50 an hour skill in the carpentry stuff, right. And so somebody else has a $50, $70 an hour electricity skill.
So that’s where it can be inefficient. Inefficient if you’re using those types of things.

Darrin:
Yeah.

Serafina:
It’s interesting way to look at.

Darrin:
Yeah, that’s very true. Yeah. I mean, yeah, at some point when you’re DIYing things, and I end up thinking, “Oh, I can do that. Watch a YouTube video, right, of course. And then rent the machine.” And yeah.
But at some level, it’s like, what’s that balance between efficiency and being able to say that you poured all the concrete for your foundation?

Scott:
Yeah. If you’re not generating income, then of course, it’s better to figure out that skill and those types of things. But if you’re generating $100,000 a year, if you believe that if that back of the napkin math sounds anywhere in the ballpark and approachable to you guys, then that makes no sense at that point downstream.
It makes perfect sense for what you’re doing right now. It may not if you can change the business model and begin generating more meaningful income.

Darrin:
Right.

Scott:
From the business, not that you’re not generating meaningful income, but moving into that $100,000.

Mindy:
Moving to a greater range.

Scott:
Right. Flesh it out.

Mindy:
Okay. Some other questions I have about your numbers. I didn’t hear anything about health insurance and that is the number one question that we get is how do I pay for health insurance once I no longer have a job? So what are you doing for health insurance right now?

Serafina:
Right now, we’re on a state health insurance.

Mindy:
Okay.

Serafina:
Yeah.

Mindy:
Is that a regular plan or is it a high deductible plan?

Serafina:
It’s just like the main care plan.

Mindy:
Okay. Do they have a high deductible option? Because with a high deductible health care plan, you get access to contributing to an HSA, which is …

Serafina:
Okay.

Mindy:
… according to the Mad Fientist, it is, what is it the best retirement plan ever or something, secret retirement plan. I should have looked that up before I announced it. But he has an article and I will send you the article. And I will include it in the show notes on this episode, which can be found at biggerpockets.com/moneyshow198. He has an article about the HSA plan, in a nutshell, and there’s more to it.
But in a nutshell, you contribute up to 7,000 or 7,200 this year for a family into a pre-tax account. And then you can use that account to pay for medical bills, or you can cash flow your medical bills and keep that account. I think once you have over $1,000 or $2,000 in the account, you can start investing it almost however you choose.
I invest mine through Fidelity and I can literally choose anything that Fidelity offers. And then I do cash flow for my expenses. So now, I have something like $25,000 in my HSA. But I’m just going to keep on letting it grow. Because we are generally healthy, we don’t see the doctor frequently. And that’s one of the drawbacks of an HSA is that you’re coming out of pocket for a lot of things.
So, if you are generally healthy, a high deductible plan is better. If you visit the doctor frequently, you should probably look into which option is going to be better for you.

Darrin:
Got you.

Mindy:
So, that’s something to think about. And generally, you can’t change until the next time your interest is up for renewal, which is typically at the end of the year, but not always.
So, something to think about and I’ll send you that article. Read through it and see if you identify with that. But yeah, you can just put extra money in there. And then what I’m doing ever since I have the HSA is saving all of my receipts. I take a picture of them. I upload them to the cloud, so I don’t lose the receipt because I will. And then when I separate from service, I will be able to take as much of those receipts as I want and get reimbursed. It’s tax free. It’s penalty free, because it … I don’t know why it’s penalty free. There’s no penalty. It’s tax free.
So, if I have $25,000 worth of income or worth of receipts, I can pull $25,000 out of that account. I would rather let it grow right now, because I have little ones and twos doctor’s visits. I don’t have anything really big like I said. So, that’s something to look into. And you probably have probably six months to do some research before you have to make a decision.

Serafina:
Okay.

Mindy:
But that’s something that I really, really like as well.

Serafina:
That sounds interesting.

Scott:
And that comes right back to the business, right? Your business is going to have to generate more income to cover that cost as things move on. And I think that’s where … Yeah.
Another thing, as you kind of look at this business, you’ve got a theoretical large amount of income to come in. I keep coming back to this because I think that this is the leverage point to me. I don’t think it’s finishing your house based on what I heard, is going to fundamentally change your financial situation. I think that moving your business to a better place is going to be the lever.
You guys seem like you’re doing a really good job managing household expenses. It doesn’t seem like a lot of a leaky bucket there at all with that. You sound like you have a good investment approach and a number of assets there, which I think is really impressive for you guys to have built.
So, I keep coming back to that. In addition to the things I said earlier, I have a book recommendation for you called the E-myth, which I think would be … It’s a pretty simple short read. It was written in like 1988. I think there’s a new updated version on it that you can come back. But I think that would be a good start to think about your business with this as well.

Serafina:
Okay.

Darrin:
Nice.

Mindy:
For the first year of a brand new company, making $50,000 is huge. I’m not trying to talk smack about Maine. It’s a beautiful state but you’re in the middle of nowhere you made $50,000 that year, last year. I really do like what Scott said about the business is only going to continue.
Custom woodworking, start advertising on Craigslist, in Facebook. And there are some very inexpensive levers you can pull to generate more income. But I know that I could keep you busy for 80 hours a week here.

Scott:
Yeah. That’s another thing. Is the house keeping you there? Or do you want to be in Maine or is that like … I don’t know. How’s that?

Mindy:
I’ve also never been the Maine.

Serafina:
It’s gorgeous.

Scott:
Yeah. It’s pretty gorgeous.

Serafina:
I mean, it’s pretty nice. We’re not on the water, but we are coastal. So that’s pretty nice and sailors at heart. And I think it’s all we’ve always thought about it as like a place like if we went traveling, that we would always have this property to fall back on. This is paid off and just a place that we could end up in, if anything went wrong.

Scott:
Great.

Mindy:
Yeah.

Scott:
Okay.

Mindy:
Yeah, I do like what Scott is suggesting about concentrating on growing the business. Shockingly, like what I’m suggesting with growing site income. I mean, that’s like, basically free supplies for your woodworking for your Etsy woodworking shop. And there are some really interesting and cool things that I would never think of, but maybe something will spark something else that you come up with that’s very unique, and sells really well. Send it to Martha Stewart Living because she always shows Etsy stuff on the back page.

Scott:
I completely agree with Mindy. And here’s the nuance that I’m trying to point out is it’s completely aligned with what Mindy is saying. But if the Etsy work is only generating $15 an hour, because you got to make the thing, ship it, sell it and all that kind of stuff. And your contract work is making $70 an hour, that’s inefficient arbitrage. If the Etsy work is making $150 an hour, and the contract work is making $70 an hour, then that’s really efficient arbitrage. That makes more sense as a side hustle.
That’s the nuance that I’m trying to point out with that is sometimes you can make money by doing work and selling it. It may just be far less than what you could make with the business and the skill carpentry work, those types of jobs.

Darrin:
Right.

Mindy:
Yeah, that makes sense.

Scott:
You guys were asking about Phi in general and the number you need to get there with this. So, the question then is like, what do we do with all this cash once we start generating it from the business? I think that’s where you pile up an emergency reserve that makes you feel a little bit more comfortable. I would start with that.
And then, I don’t think you have a bad approach in a general sense. I think, it seems like you pile money into the Roths and the traditional IRAs. As you build your business, you’re going to have even more fun options for those types of things like self directed IRAs, and those types of things. So I think there’ll be a homework, a lot of homework, which these are good problems, you’re going to spend 100 hours going down the rabbit hole of this stuff over the course of a few years to set up like a self directed plan. If you have any employees in the future, you got a whole bunch of other cool stuff that you can do with the retirement, you can really dump a lot of money into these things in a tax efficient way, as things get going.
But I think for now, you’ve got a really simple approach that makes a lot of sense, max out the Roth with those types of things. And I think the real estate is another good alternative. So, you’ve got a reasonably diversified portfolio and the property you’re constructing alongside the investments.
So I like the investment approach, at a high level from here, and I don’t have too many deviations from it, other than build up some cash, in my opinion, for your personal lives, because that’ll give you flexibility. So you don’t have to go and take that next job. You can spend the next two weeks focusing on dotting the I’s and crossing the T’s for your business and reading a business book. That might have a huge ROI for you relative to just taking whatever job happens to come in from a friend that week.

Darrin:
Got you.

Mindy:
One last thing I will say is once you do start reaching out to people and saying, “Hey, I’m available,” keep a calendar.

Darrin:
Okay.

Mindy:
And this week, this job should take a week and a half. I could start on Thursday.

Scott:
Right.

Mindy:
And just keep pushing people out. One of the things that I see in the trades from personal experience is that they’re really great at what they do, but they don’t know how to run their business. So they just focus on the job at hand. And then towards the end of the job, there’s this mad scramble oh, I got to get another job as opposed to answering the phone every time it rings. “Oh, you know what, we’re available to start July 17th.” “I can’t wait till July 17th.” “Well, you’re going to call me back in like an hour and tell me that either nobody else answered the phone. Or they can’t start until August 20th.”
Keeping a calendar, like a big desk calendar and in one spot where you can both reach it and say, even if he’s working, you can still answer the phone and say, “Oh, that sounds like a three week job. We’ve got three weeks here.” Or, “I’ll have him call you back, but I know our soonest is this opening.”
As a consumer who needs people to work on my house, I can’t ever find anybody who will even answer the phone. But when they do, they’re booked out for a month. And you get frustrated, but they’re the only ones that are answering their phones, everybody else is super busy, so.

Scott:
Yeah. It’s too fun to get into the business stuff. Mindy and I love this. The key is your time, Darrin. Your time, if every minute you’re not working and applying your skill set in a billable fashion is a loss of 70 bucks.

Darrin:
Yeah.

Scott:
So, I imagine you’re going to have to go to the site and bid it out, and know how much it’s going to cost, and how long it’s going to take, right?

Darrin:
Yeah.

Scott:
If you could teach Serafina here how to do that, that would save you some time. I don’t know how much skill, like if you have to be a master carpenter to be able to actually estimate some of those types of things. But if you guys could divide the labor in some way, that allows you to spend as much time as possible actually doing the work, that’s going to maximize your income.
And that’s where I imagine a lot of contractors get hung up. It’s like, “Hey, driving out to that site, bidding out the project, coming back, that’s two hours that you’re not billing,” right? And picking up the phone in the middle of a job, that’s minutes you’re not billing or delaying your project there. If the project is too far away, the hours you’re not billing.
If you have five jobs in a week, and three of them are in one day, and they’re all over creation, you’re not doing the ones next to each other, that’s money wasted. So those are all opportunities for efficiency that maybe could be helped in many of those areas by you, Serafina.

Serafina:
Okay. Yeah, that would be interesting to see how we could better make that more efficient somehow.

Mindy:
Yeah, I mean, I’m not sure what goes into bidding out a job. But if there’s main things that Serafina can do, she can go and take a video of the whole thing and measure the room and whatever. I’m trying to think, I do my own finish carpentry, and I’m sure yours looks better. I use a lot of [crosstalk 00:57:44].

Scott:
It has to be Reddit or like a forum where this is talked about too. I would Google this and figure out. Everybody has the same problems in this industry, I imagine, right?

Serafina:
Right.

Scott:
You’re not reinventing the wheel. You’re not inventing the wheel.

Darrin:
Right. No, I mean, the high-end woodworkers, that’s what they say. It’s like, everybody goes to woodworking school and comes out, and they can make whatever. But the biggest problem is none of them know how to keep track of their own hours. And that they get shelled trying to start their own business that way. So, they don’t make the money that they need.

Scott:
And it shouldn’t be that much more work, you’d imagine. It’s just applying those organization. It’s work that’s not going to generate any income for a few months waste up these systems, but then, it will explode.
Okay, well, I think we’ve gone up to this point in great detail. But I don’t think there’s other big levers in your financial position right now. If you come back with $500,000 to complete the house. Okay. Now, that year of labor is got to produce $300,000 in net worth. That makes more sense to focus that time there. But in the absence of that, I think, it’s going to be this job and crushing it with the carpentry business.

Serafina:
Okay.

Darrin:
Yeah, that’s helpful.

Mindy:
Yeah. Did you have any other questions that we maybe didn’t answer or discuss at all yet?

Serafina:
So, I know you said you like our investment strategy. I feel like what I’ve been doing … So, I think now, I know I should be maxing out the Roth IRAs first. Previously, I was hesitant to put anything into anything that was like date specific. So, that’s why there’s so much in that investment account.
So, yeah. So, I guess one question I have is for the traditional IRA that I have, should I turn that into a Roth at all? Or also, on the other side, should I be putting some of that money in the investment cap into the Roth?

Scott:
Go ahead, Mindy.

Mindy:
I like a Roth because it grows tax free. So, you pay your taxes now and then it grows for … You are 38, 39?

Serafina:
39.

Mindy:
39. So, you’ve got 25 years before you can access. Is it that 59 and a half or 65? Let’s call it 65.

Scott:
59 and a half for the Roth, I think.

Mindy:
Yeah. Okay. So that’s 20 years then. You’ve 20 years until you can access that. That’s 20 years of tax-free growth. The order that we recommend is, first invest in your 401K to get the company match, which is moot here, because you don’t have one yet.

Serafina:
Right.

Mindy:
Then I would suggest maxing out your Roth IRA. And then, if there’s money left over, continue contributing to the 401K until you hit that limit. You are self-employed with no other full-time employees besides your spouse?

Serafina:
No.

Mindy:
Okay, so you have access to this lovely thing called the self-directed solo 401K. You have the opportunity, with the help of your company, to contribute your 19,000 or 19,500 individual contribution, plus Darrin’s individual contribution of 19,500. And then the company can match up to 25% of your salary, up to a total contribution, yours and this company combined, of $54,000 every single year, free tax. So, I would also …

Scott:
Yeah. So, let’s get to a surplus where you have $54,000 excess to dump into this, right? That’s that.

Serafina:
Yeah. Yeah.

Mindy:
I’m sorry. That’s 54,000 each. Now, we’re not there today. But I can see if you call up a couple of general contractors, and they’re like, “Yes, I can have you work 20 hours a week or 20 hours a day.” I can see you getting there very quickly.

Serafina:
Okay.

Mindy:
So, I will find an article about the self-directed solo 401K and send that to you and you can see all the wonderful amazingness that you have at your fingertips because you are self-employed. If you do not have self-employment income or you have more than your spouse as your full-time employee, it’s not financially advantageous to do.

Darrin:
Got you.

Serafina:
Okay.

Mindy:
But then, there’s other options like the SD, the self-directed IRA.

Serafina:
So, maybe don’t worry about where anything is right now but just going forward, put things in their proper place.

Mindy:
Yeah, I would not touch what’s there. We’ve said it and forget it. But going forward, if you have not yet filed your 2020 taxes, you can open … You’ve already got the Roth IRA open, you can contribute to your Roth IRA up until the time you file your taxes or the tax deadline, which is May 17th for last year. And then, you can contribute for this year as well.

Serafina:
Okay.

Mindy:
Up until the tax deadline of the next year.

Serafina:
Okay.

Mindy:
Which is a nice little loophole.

Scott:
Yeah, I like the Roth, and then as your income grows, beginning to layer more of that into the tax deferred plan, the self-directed IRA. The 401K equivalent is self-directed IRA for self-employed business owners. So, I like that approach.
And then, it’s an art, right? There’s no right answer to the question of how much to put into that. The Roth, maybe you max out. But then, there’s no right answer to how much to put in tax deferred or not. You got a goal of wanting to sail the world. If you want to do that in a few years, then you need to plan for that and build up a cash reserve for that at the expense of putting that into your tax deferred plan.
But, again, all those problems, all those questions are easier when your income is much higher. Which is why we spend all the time on the business front there. If you can generate more income, you can make really good choices there because you have a surplus of cash to allocate to these buckets and get your goal sooner. I’m just stating the obvious, but yeah.

Mindy:
I have two more things to think about before we wrap up. One is, Darrin is older than Serafina.

Serafina:
True.

Mindy:
Darrin, once you hit, I heard a rumor. Once you hit 50, you can contribute an extra $1,000 a year to your Roth IRA and an extra $5,000 a year to your 401K. It’s called the catch up plan. So, when you are contributing to the Roth IRA after Darrin turns 50, make sure to max his out first. Get that extra $1,000 and then put it towards Serafina’s, and hopefully you can max them both out. But Darrin gets an extra 1000, so let’s get him first.

Serafina:
Okay.

Mindy:
The question of should we convert the traditional IRA to the Roth? This is, again, a Mad Fientist article about the Roth conversion ladder. You need to have it seasoned in your Roth IRA for five years before you can withdraw it after you are no longer working. There is a cap, and this is where my information gets a bit hazy. I think it’s 78,000 or 80,000, where the income you’re paying no capital gains on. So, I believe you can convert your traditional IRA, between the top of your salary and the cap, convert it to a Roth IRA. Oh, you’re still paying taxes on it, though. You know what?

Scott:
I don’t like this approach for them. Yeah, I don’t like the conversion ladder.

Mindy:
You know as I was talking it out, I decided I didn’t like it. So never mind.

Darrin:
No worries.

Mindy:
Ignore all of that. But we’ll keep it in the show so people can hear how I thought about it. But I’m still going to send you the article about the conversion letter. Because when you are no longer working and you have zero income, you can take some of the traditional, turn it into Roth, and start your conversion ladder.

Serafina:
Okay. Thank you. That’s for later.

Mindy:
And I will put a link to that in the show notes as well. Scott, is there anything else you wanted to add before we let them get on with their busy building and planning and business ideas?

Scott:
No, look, I think this is about organization of your business activities. Whatever rigor, you clearly apply some rigor to your household budget. Is that right?

Serafina:
Yeah, I mean, I definitely put time in it.

Darrin:
That’s her.

Serafina:
That’s my job and my household’s job.

Scott:
Something’s going on there that looks like it’s going right. You got a very clean set of spending. You know exactly what you’re saving for. You know where every dollar is going. If you apply that same intensity to your time and your business activities, I believe you will see huge returns on that investment that will generate a tremendous amount more income for you.
I think, read a couple of books, track your time, get disciplined with those types of things, focus on those types of skills, and be concerned if your workday is not being spent doing labor, like something’s wrong with that, for the construction, the carpentry stuff, in the short run. And if you can get there, I think, you’ll be seeing from a really, really good spot.
I would start with that E-Myth book. There’s a million, just go down the rabbit hole of Google and Reddit nd those types of things. Meet a couple of folks who are actually running a good shop, not just good at what they do from the skill set perspective. But that’s going to make all the difference, I think, for you guys. And everything is going to be easier on the other side of that for your financial journey, I think.

Darrin:
Awesome.

Serafina:
Yeah, it sounds like it.

Darrin:
Yeah. Yep. That’s why we hit you all up.

Serafina:
I know.

Darrin:
Thank you.

Scott:
Well, it’s fun. There’s always a different challenge. We haven’t had somebody in your set of circumstances. So, I hope this was helpful. I think this is.

Darrin:
Oh, yeah.

Scott:
It seems like the right approach. There’re always different levers to pull, but I think that’s why we were excited to talk to you guys because of the difference in your circumstance relative to other guests we’ve had so far.

Darrin:
Nice.

Serafina:
Yeah. Thanks so much for …

Mindy:
Yeah. I think this is going to be helpful to other people who are in similar situations or, “Oh, I’m thinking about starting a business.” Well, here’s a thing to think about before you start, or here are some things to think about and ramp up as you go.
Well, Serafina and Darrin, thank you so much for your time today. This was a lot of fun and it was a delight to meet you.

Serafina:
Yeah. Thank you so much for your time and talking things through with us.

Darrin:
Thank you.

Mindy:
Okay. That was Serafina and Darrin and that was a lot of fun. Scott, what did you think?

Scott:
I thought it was great. In full credit to Mindy, Mindy selects the guests for these podcasts. What an incredible range of discussions we’ve had on this Finance Friday.
We’ve had folks who are tackling student loan debt. We’ve had folks who are starting contracting businesses like today. We’ve had folks who are millionaires, but create compounding cash flow problems, because they keep buying properties with HELOC, and these types of things.
We’ve had folks come in with families from Idaho who we have basically no advice for because it seems pretty optimized. It’s just like a fun, awesome array of real problems facing folks that I think is really interesting. And thank you for bringing in such great guests, especially Darrin and Serafina today.

Mindy:
Well, you’re welcome, Scott. But thank you to all of my amazing guests who are applying. And if you have a story you haven’t heard before, maybe you should be the one to tell it. We would love to review your finances or interview you and hear your money story. Please apply if you’d like to chat with us. The URL is www.biggerpockets.com/guest to be a guest on the Monday episode, which is the money story episode and biggerpockets.com/financereview to be a guest with our finance review, which releases on Friday.
Scott, we had a lot of fun today but we did run a little bit long so we should keep this outro short. I would like to thank everybody for listening. Thank you so much. We’ve really enjoyed you coming and sharing your Friday with us. Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
From Episode 198 of the BiggerPockets money podcast, he is Scott Trench, I am Mindy Jensen saying, got to go. The power of the shower compels me.

 

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In This Episode We Cover

  • The pros and cons of leaving your job for self-employment
  • How to optimize your business so you’re working billable hours whenever possible
  • Roth IRAs, traditional IRAs, and pensions 
  • Setting up your emergency reserve so you always feel financially secure
  • Using your business in creative ways (to make more money!)
  • Knowing the ARV of a new construction (even if it’s custom)
  • And So Much More!

Links from the Show

Book Mentioned in the Show