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Finance Friday: Laying a Strong Financial Foundation in Only a Few Years

The BiggerPockets Money Podcast
42 min read
Finance Friday: Laying a Strong Financial Foundation in Only a Few Years

Everyone knows that tech salaries tend to be on the higher end. In tech, you could be working as an engineer, programmer, or statistician, like today’s guest Matthew. But, Matthew never planned to go to school for this type of work. Half a decade ago, Matthew was wearing a chef’s apron, working forty to sixty-hour weeks, making slightly above minimum wage. He loved the work (and the food) but realized he couldn’t keep living with the long hours, low wages, and high stress.

Mathew went back to school to study statistics and landed a job in tech, which he’s just recently moved on from, and accepted a far higher salary. This all sounds like good news, so what exactly is Matthew having trouble with?

After maxing out many of his retirement accounts, Matthew is wondering where else he should be putting his money. He’s already saving a significant amount every month, thanks to his frugal lifestyle, but wants to be sure he’s standing on a strong financial foundation. Should he look into rental properties, taxable brokerage accounts, or higher-risk assets like tech stocks and crypto? If you’re lucky enough to have a little extra change left over at the end of every month, you may be in Matthew’s position too!

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Mindy:
Welcome to the BiggerPockets Money Podcast show number 250, where we talk to Matthew about pulling a 180 and switching careers to generate more income and reaching a point where you are at Coast FI plus.

Matthew:
Since then, it’s obviously compounded. So being in five years in analytics. I’ve nearly doubled since then. So looking back and hitting my 10 year mark, looking back and saying, “10 years ago, working in a restaurant making $10 an hour. I’m now making 100 times that.” Well, 100 maybe exaggerative but, yeah.

Mindy:
Hello. Hello. Hello. My name is Mindy Jensen. And with me today is my switch flipping co-host, Scott Trench.

Scott:
You are always generating current introductions, Mindy. Thank you so much.

Mindy:
Oh, God. 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 when or where you are 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, start your own business, or just figure out what you want to do with a flexible financial position. We’ll help you reach your financial goals and get money out of the way. So you can launch yourself towards those dreams.

Mindy:
Scott, I am really excited about our guests today because Matthew used to be a chef. And while he is very passionate about food, he is also very passionate about not being poor. And when he was a chef, his hourly wage was slightly above minimum wage. And when he transitioned to IT, what do you know? His income went up. And now he is in a financial position that is quite enviable for his young age.

Scott:
Yeah, I mean, this is a guy who’s made a number of really good, I think financial decisions over the course of his late teens and early ’20s with this and is in a really, really good position with all this kind of stuff. And I think having made that career pivot, it’s kind of like, “What do I want to do next with this?” I’m kind of crushing it with a lot of these things. And that can be the hardest question of all but it’s a much better problem. I think to have that than to know you want to do, but not be able to do it because you’ve got a large amount of debt or are in a weak financial position. So kudos to him for having built a strong position. And I’m really interested to see what he decides to do next.

Mindy:
Before we bring in Matthew, I have to tell you that 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. Well, 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. Matthew, welcome to the BiggerPockets Money Podcast. This is going to be a hybrid money story and finance Friday, all wrapped in one. I’m excited to hear your story and jump into your number. So let’s get to it. Where does your journey with money begin?

Matthew:
My journey with money begins probably at an early age when I realized that we honestly didn’t have a lot of it. And so I’d always been chasing this dream of working hard, you’ll be successful and right around my ’20s, I realized that it wasn’t necessarily the case. And so I had to flip the script, which is where I think I have an interesting story to tell.

Scott:
Awesome. So how’d you flip the script?

Matthew:
I come from a family who’s entrenched in hospitality, food service. And I thought that was the easiest path to start earning money. So working at pizza restaurants, coffee shops, hotels, and the next step of post high school was going to culinary school. And for me, at least making the most of what I had invested in culinary school was go big or go home. And my mentality was well I’m going to go work at some of the best restaurants that I can get into and did that for a few years. And when I realized that working 40 to 60 hours a week, wasn’t sustainable and the hourly rate that I was getting wasn’t necessarily worth what I had into it.

Matthew:
I thought, well, I was always good at math and science, let’s go revisit school and see where I can kind of apply the same level of ambition I had towards something different. And so went back and studied statistics and graduated top of my class. And I’m now working the tech space. So I’m in my late ’20s now spent five years as a chef and now five years as an analyst. So I can say that my 10 years of professional working experience, I’ve been divvied up into extremes.

Mindy:
I like that. I like the extremes. I have also had a varied career. I find it interesting that you went to culinary school, worked there for a little bit and then decided, “Oh, this dollar per hour is not very much.” I have worked in a lot of restaurants and the chefs are always there. They’re never not there. If the restaurant’s open, if the restaurants are not open, because somebody’s got to cut the carrots and all the other stuff. So it just seemed like they didn’t have a life. They were always working. And I mean, of course they were closed on Mondays. Well, who cares? You have one day off a week and the other days off you’re working. I mean, when you said 40 hours, I was like, that’s it were you guys close three days a week? Were you only open for dinner, like 40 hours a week as a chef in a high level chef, seems really low, doesn’t it?

Matthew:
And maybe I was being optimistic in that, not wanting to admit that I was working 70 hours a week, but I was working while I was going to school, going to culinary school. So had to juggle to at a certain point and then took the time that I had from school once I graduated and then reinvested that back and working more restaurants. So at a certain point on the lows, maybe it was 40, but after working one job Monday through, or let’s say stay through Saturday. And then the odd restaurant that was open Sunday and Monday, I was working close to 60 or 70 hours a week. And I think it gets a bad rap for the hours that we had worked. But I thoroughly enjoyed it while I was doing it. And so looking back on it, maybe the time invested, I don’t see that in my pocket now, but definitely the experience that I went through is well worth it.

Scott:
So what was that from a financial perspective, did you incur debt while going to culinary school or how’d that work?

Matthew:
I’m very fortunate to have a supportive family. And so I was staying at home with my parents and I was also very lucky enough to have a scholarship to go to culinary school. So there’s a couple top tier culinary schools across the country that’ll charge you anywhere from 30 to $40,000 for an equivalent of an associate’s degree. And then you would have to go around and then work at a restaurant that pays close to minimum wage. I was on the other end of the spectrum where I went to a community college and got a scholarship. So not only was the out of pocket cost, very minimal. I also got subsidies through the scholarship. So, yeah.

Scott:
Okay. And when you say hourly rate wasn’t very high, what is the hourly rate? What can one expect to earn in this industry?

Matthew:
Close to minimum wage if not a few dollars on top, so where I’m living. I think the minimum wage is 7.15, 645 ish, and a chef can expect to make $10 an hour. So when you’re working 60 hours a week, one restaurant may offer to pay you overtime. So you’re making 15 bucks an hour at that, but in comparison to other professions, as a starting salary or starting hour hourly, that’s relatively low, I think.

Scott:
Yep. Makes sense. So walk us back through that catalyst for the change and how you financed the getting started in the new career.

Matthew:
Sure. Yeah. Going into it, working or being a part of a family, who’s always been in hospitality. I realized that this is probably my easiest bare area entry to some professional life and looking back at it, looking at my parents and realizing that we had a relatively modest upbringing, but I knew that maybe possibly there were other opportunities for me. So I said, I’ve got a scholarship to go to culinary school. I’ve got these ambitions to work some really awesome restaurants to get that experience underneath my belt, whether it be professional or personal experience. I thought maybe there’s something else.

Matthew:
And so I told myself, let’s go big or go home. Because the last thing I want to do is leave regrets on the table and worked at some of these restaurants that I had aspired to work at, at a young age, checked those off my list and then said, “Okay, let’s go explore other life paths.” And so I guess one of the things that I had told myself at least was, well, I guess the phrase is do what you love and you’ll never work a day in your life. I re-engineered that in saying that do what allows you to do what you love? And so for me, I may not want to work in analytics 60 hours a week. I enjoy the work, and it’s intellectually stimulating and I love the people that I work with.

Matthew:
And then another benefit is that I also get to have my hobbies and free time with family and weekends to myself, more or less. And so going into that catalyst, I realize that, much like culinary school I’d have to invest heavy up front, go to college, get my bachelor’s and then segue into a master’s and then really carve out or not carve out, but catch up on the experience that I had lacked being in my mid ’20s at that point.

Mindy:
So this is something that I think is very interesting. We expect our 18 year olds who are graduating high school to automatically know what they want to do for the rest of their life. And I didn’t, I chose something that was frivolous and stupid. And I worked there for maybe a year after going to college for four years to try and become a fashion designer. And I was a secretary for a fashion passion designer. It wasn’t my passion, but it was also really low paying too. So that was a bonus. But I’d look at my husband and first he chose pharmacy technician and then decided that he did not want to work in the pharmacy going forward. So he switched careers or he switched majors right at the end of his college. Or maybe he went to pharmacy school, I should really learn his actual story.

Mindy:
He went to pharmacy school one year and then decided that wasn’t for him. And he went to an IT certificate get course, got it. It was three or $6,000 to do this course. And then now he’s making almost what he would’ve made in… And it was a six week program or a 12 week program or something. But he’s making almost what he would’ve made if he had gone to pharmacy school for two more years. And then because he is in IT, and this was in the late ’90s, the Y2K bug, you don’t even know what this is, Scott, the Y2K bug came. And that was this big problem. And then all of a sudden that was gone away, but tech salaries have just gone up and up and up and he was able to make so much more money that allowed him to retire early and do what he wants.

Mindy:
So if you’re sitting here 18 years old and you’re like, “Hmm, I think I might want to be a chef, but I’m not sure.” Go work in a restaurant and a high end restaurant. And watch those chefs work hard. I can’t remember what his name was. We called [Shefo 00:13:07] then he was there all the time, every single day, lunch rush, dinner rush. We didn’t breakfast. He was there from open to close every day. And my husband worked 40 hours a week and made a boatload of money. And now he’s retired. If you don’t know what you want to do, go into IT, go into tech, study business to you. These general… You like math, great math is awesome for some people, if you like math, there’s a lot of opportunities for you just by getting a degree in math or statistics or all these different things. I think it’s really unfair that we expect 18 year olds to know what they’re going to do.

Mindy:
And if you don’t have this burning passion to be whatever it is, study something more general and go where the money is so that you can… I love the way you said that. Do what allows you to do what you love.

Scott:
Yeah. I completely agree. And I think that if you have a burning passion, you’re going to climb to the top of your field in history or language arts or whatever. All right, fair enough. You got to take your shot with that. But if you’re not 1005 convinced and like it and you just like it better than your next thing. I think that’s pretty seriously consider, hey, maybe I’d like working 30, 40 hours a week as a chef at this restaurant, but this to statistics is going to pay me nearly double within a year or two on an hourly basis when I’m earning here. I can always come back to that later with that. So I think it’s a great point here. And so what was that outcome for you? How much of an increase or quality of life improvement were you able to achieve once you finished your degree and started?

Matthew:
I think more generally people who would know me would describe me as a masochist, and like a full-time hobbyist. So I wouldn’t say that I necessarily traded the quality of life with things that people assume are free time, time with family, movies, games, whatever it might be. I actually picked up other interests, other hobbies, other side gigs. And so that’s what more translated to was like, I was able to take that free time that I would’ve normally been in the kitchen or in school, and translated that to either learning a new thing, starting a new, small side hustle business, which we can delve into, but that’s where I’ve always put my curiosity, my energy, my yeah, interest I guess. Is just how can I more bluntly, how can I make more money for myself? And how can I keep this momentum going? And that’s where I’ve kind of transferred it to.

Scott:
What’s the end goal?

Matthew:
What is the end goal? That is a good question. I would say probably build a foundation for myself so that I can not feel the need to be chasing something. Who knows what that number will be or when that will come? But I think I enjoy how I pick up things and give it my all when I discover them. And I don’t know how long I’ll keep this up, but I enjoy it now. And so I’m assuming, and when I have kids or when I have too much to juggle, I’ll probably start to realize that my priorities in life.

Scott:
What I’m trying to learn is what was the change that happened from the, I transition to the IT degree, how did your income change on an annualized basis or dollar per hour?

Matthew:
Oh, yeah, sure.

Scott:
And then, how did you come in building assets and net worth in that context as well?

Matthew:
Yeah, sure. I think income immediately upon graduation, I think I was offered a job. We get more into the financials around $65,000. And so coming, working as a chef, I was like, “This is amazing.” I never imagined making 40 plus dollars an hour. And I get to wear fancy clothes. I don’t have to wear a chef get up and your hours are somewhat reasonable. And since then it’s obviously compounded. So I’ve been being in five years in analytics, I’ve nearly doubled since then. So looking back and hitting my 10 year mark. Looking back and saying 10 years ago, working in a restaurant, making $10 an hour, I’m now making 100 times that. Well 100 maybe exaggerative but yeah.

Scott:
Awesome. And how are you building wealth as this has transpired?

Matthew:
Sure. Yeah. So stuck to my spending habits from being a chef. So as Mindy likes to do is buy used, source Craigslist, Facebook marketplace, and a thrift more or less. While I can very much afford buying something full price or new part of me likes a good deal. So I stick to that. And then as far as building wealth, obviously keeping that savings rate really high, but then saving really heavily into like my 401(k), IRA, HSA. And then more recently after surpassing this emergency fund investing in taxable accounts because I’m going through and I’m maxing all of my tax-deferred accounts. And so trying to optimize from that perspective now where I’m on the fence is am I saving too heavily in tax advantage to accounts and should I be investing more so in things that are more liquid? Maybe investing or real estate.

Scott:
Awesome. And how has this accelerated? Were you able to max out those retirement accounts when you first started or has that been kind of a recent development as you’ve doubled your income over the last couple of years?

Matthew:
I would say that the ease at which I was able to save exponentiated, but I’ve always tried to live as frugally, as modest as possible. I’ll give you an example. I would say my third car was a little Honda CR-V I think I bought it for like $2,300. And I drove that for five years up until three years ago. And at any point I could have afforded a newer car. I think at that point it was 15 years old and I told myself, “Okay, when this car hits 330,000 miles, I’ll retire it, it’ll probably die anyways.” And you know what? It didn’t die. And so I sold it for 500 bucks or something and upgraded to a five year old car. So still not new off the lot, but I’ve stuck with that mentality in that I’ve tried to keep my savings rate relatively high and yeah. Just live as fruity as possible. And so with the bump and salary, it’s just exponentiated that.

Mindy:
Well, let’s dive into your numbers then. And before we do that, let’s talk about what part of the world you live in. Would you classify your current location as a low cost of living area medium or high?

Matthew:
We’re currently living in a low cost of living area, but planning to relocate, we actually just bought a home in a medium to cost of living area. So we’re going from a rent rate to a fixed mortgage. So while we may be suspect to, or subject to a 5% year increase in our rent, we’re kind of locking in that rent as we’re moving to a medium cost of living area at the same rate. So as far as expenses goes, it’s a wash except now we are building equity.

Mindy:
Okay. And what is your salary?

Matthew:
Sure. Yeah. Prior to booking the podcast, I was working at a financial services’ company, making 97, including bonus. And I actually just accepted a position for a larger tech company making 130 base plus equity.

Mindy:
Oh, so that’s a little bit more.

Matthew:
Yeah, a significant increase. Yeah, exactly. And so running through the numbers prior to the podcast, I was like, “I can save a lot more and I can essentially live off of what I was living on beforehand.” Except a lot more of it’s going towards after tax 401(k) contributions, which is an option my employer provides.

Mindy:
The 130 based and then you said equity options. Are you accounting? Let’s see. I think since we don’t know what those numbers are, let’s just not include those for right now. Do you have any additional income you alluded to a side job?

Matthew:
So I do have some side hustles and I try my best to account them for tax purposes, but a few of them are essentially, I am trying to seize I guess, some U.S. Mint coin drops and determine whether or not there’s a market for them given that they’re a limited release. And so I think over the last eight months or six months, I’ve made 5,000 doing that. So that’s been interesting. I do a good amount of manufactured spending. So if anyone’s familiar with that, there are buying groups out there that will pay you for product that you ship to their warehouse. And then essentially you just net either cashback portal or credit card rewards. I mean, there was another one where I was essentially hedging on moneyline odds bets. So if you’re familiar with sports betting, which I wasn’t eight months ago-

Mindy:
I’m sorry.

Matthew:
… essentially hedging.

Mindy:
I’m laughing because there’s a guy in the office who does this too.

Matthew:
So there was arbitrage that could be done between Twitter news being announced for a player out and being able to seize the opportunity between when money line odds change. And then essentially using, I guess, my skills and data analytics and plugging into well, the sources for these odds in most cases and hedging bets before they change so that you can create a gap and lock in a certain percentage profit. But since then, I’ve been banned from doing that. So I can’t do that anymore. I mean, going back to what you had asked Scott, I was like, what am I doing with this time? What am I doing with this change in life? And this is where I’ve been focusing on is not necessarily making more money, but both of it’s been interests as well as flexing into how can I take the skills that I have and do something applicable with it. In some situations it benefits me and some others it’s a learning lesson.

Scott:
Awesome. And so what are your expenses?

Matthew:
Total expenses let’s see. And so I’m splitting most expenses, 50/50 with my significant other. They may net roughly 2,500 a month. So living in low cost of living area, where we’re about 900 split even for our rent, 60 for car, utilities are probably our second biggest expense at 420, actually a little lower than that, 160. So utilities split. For internet and utilities, yeah, is about 160.

Scott:
Awesome. So how much are you pocketing every month after tax? Or how much do you think you’re going to be saving after tax each month with the new $130,000 base?

Matthew:
Yeah, that’s what I was tweaking. I was trying to get a sense of knowing that there’s a 401(k) limit that includes both your pre-tax, after tax and employer contributions. I was trying to determine whether or not I could attempt to max the total IRS, 401(k) limit of 58,000. And so what I was trying to do was between jobs. Can I push that so that I am essentially pocketing the same amount of money from one job to the next? And right now that looks to be about $5,000 on a month monthly basis. I’ve got a seller 130, but I only expect to actually need $5,000 a month.

Scott:
Awesome. A ton of cash going in here. And where are you placing that? You’ve alluded to that, but could we get some specifics around what you have from an investments and debt standpoint?

Matthew:
Mm yeah. We just bought a house. That’s my only debt to date for the most part. I think I’ve paid off most debt immediately, but savings is going to 401(k). So attempt to max that out IRA as well. Traditional IRA, because I think I’m now beyond the allow bracket for Roth contribution. Do I have those is mixed up.

Mindy:
I want to talk about that, but continue on. I don’t want to interrupt. I mean, I just did, but…

Matthew:
You’re good HSA contributions, attempting to optimize into that after tax contribution, based off of the salary going to, and then any excess that I don’t spend is in a taxable in doubt.

Mindy:
Okay. You have used the word partner and I am assuming that that means that you’re not married filing jointly for tax purposes.

Matthew:
Correct.

Mindy:
Okay. So for tax purposes, your limit is, “I want to say $139,000, but that’s yours salary minus your pretax contributions to your 401(k) and HSA. So your salary’s 130, you’re getting real close. You have that $5,000 in that coin thing you were talking about, and then the sports betting and all of that, you might be hitting really close to that 139 limit. But remember, you’ve got your 195 contributions. If you max out your 401(k). I can’t remember what the single person HSA limit is. It’s like $3,000 or something. So you’re at another 22,000. So depending on where your total income is, you should be able to still contribute to a Roth. I’m not a tax professional, please consult one.

Mindy:
Don’t just listen to me. But there’s some hard numbers there that are saying that I think you can contribute to your Roth IRA, which at your age I would do for two reasons. One, it grows tax free. Did you say 28? You’re in your late ’20s?

Matthew:
Yeah.

Mindy:
So you’ve got a lot of time for that to grow tax free. And number two, I keep saying this on episode 200, we had, Kyle Mast, how do I draw a blank on Kyle’s name? We had Kyle Mast on he’s a CFP. And he said, based on all this money that the government has been handing out, handing out’s not the right word. You know what I mean? For stimulus checks and all of that, they may get rid of the Roth option.

Mindy:
And I think something just happened where the mega backdoor Roth that they were going to get rid of is now not being gotten rid of. But that doesn’t mean that in the future, the Roth may not go away. I mean, Scott’s a big Roth proponent, but I like contributing to a Roth IRA while you’re still able to plus Mr. I make more money every year. You’re going to soon max out of that. So if you don’t have a Roth open right now, I would suggest doing that, max it out for this year, maybe next year, don’t max it out in the beginning of the year. Because if you do, and then you make too much money, you have to go back and do some well, you like math, you have to do go back and do some funky math to figure out how much you put in how much it grew. And then you withdraw all of that. You pay taxes on the growth, I did that last year.

Matthew:
Yeah. One of the things that has me interested about the after tax contributions is I’m looking at a waterfall, I’m contributing to my traditional 401(k) and I can get into detail why I chose that. But part of it stems back to the mad scientist, mad pianist, however you pronounce it, kind of doing analysis on the contributions to a traditional, even after having to pay penalties, if your goal is early, retirement is more beneficial than a Roth. And so don’t quote me directly, but I think that’s what I took away from what I read. So I’ve always kind of opted for traditional contributions given that I’m in a state without income tax, Roth contributions. If I plan to move out of state are definitely beneficial, because I’m not paying those taxes now. And I move to a state with a high income tax, then I can lock in that return so to speak.

Matthew:
But it’s not that I’ve never contributed to a Roth IRA. At a certain point I think I made that flip. And so as far as my IRA contributions go, I’ve got one third in a Roth and two thirds into traditional.

Mindy:
Do you want to of talk about your balances in your 401(k)?

Matthew:
Sure. Yeah. I’ve got those broken out here. So HSA and I’m bewildered by this, but having worked professionally for close to six, seven years now, I guess I’ve got 6,500 in my HSA or 65,000 in my HSA. And so most of those have been in high growth, total stock, index funds and I’ve got 126 in my traditional 401(k) that I’ll be rolling over to my traditional IRA once a certain amount of time is lapsed. And then I can feel confident that no additional contributions will have been made given that I just left my employer.

Matthew:
And then after that I’ve got 176 in my traditional IRA, A, in my Roth IRA and then just spill 109 in a taxable Robinhood account. So at a certain point I realized that I had a significant cash reserve that was just only getting two to 3% interest on the savings account had sitting in and I realized I was missing out on some of the well, market crash flash. And then the recent bull run. And so I hopped in and thought, I would try my hand at investing in a few tech stocks, crypto rather than having it depreciate while it was sitting on my checking or saving account.

Mindy:
You mentioned earlier that you had some questions about whether you’re maybe contributing too much to the 401(k) and the Roth and those types of things. What are you struggling with or is there anything that we can do to help you?

Matthew:
Yeah, I guess from my perspective, I’m always trying to optimize. And there’s a couple different mindsets towards you have enough in your tax deferred retirement accounts, especially if your goal is to retire even a few years prior to the retirement age of like 62 and a half is it, or 65, once you’ve got a significant nest stake there, you can cost and not have to save as heavily as you did because you know getting at 65 that you’re going to have what need to live off of and any excess can be invested into a taxable account or real estate. And so I think that’s kind of what I’m battling with.

Scott:
Okay. So yeah, I mean, one of the ways to do that is to think that the money will double every seven and a half to eight years. Right? So actually Mindy is currently filling in a bunch of these numbers right now using an eight year doubling role. So a little bit more conservative than the rule of 72 with that. And that says, okay, you’ve got $375,000 give or take a few 1,000 in your retirement accounts right now. And they’re going to double every eighth year-

Mindy:
I can…

Matthew:
Go ahead.

Mindy:
… 500, sorry Scott. So 401(k) is 126. Traditional is 176. I’m calling that 300. Roth is 80, HSA six and taxable Robinhood is 109. These are all-

Scott:
I was excluding the taxable Robinhood. Yeah.

Mindy:
Oh, okay. So, well then my numbers aren’t quite the same. So this would be.

Matthew:
450 is what the number you should come to I think.

Mindy:
Okay.

Scott:
450 including the taxable Robinhood.

Matthew:
No, no. I’ve got just to run through it again real quick. HSA at 65K.

Scott:
65. Okay. I thought we had 6,000.

Matthew:
Yeah, I think I misspoke when I said 6,500.

Mindy:
65,000? Wait, what did you put your HSA in? Hold on. We glossed over that. Where is that?

Matthew:
Yeah…

Mindy:
I’m sorry. I put $6,000 in there. Yeah, you’re doing okay.

Matthew:
Yeah. I’m not quite sure why it grew so fast, but I think given my HSA is a relatively small balance relative to my 401(k) or IRA. I thought let’s diversify and not just do a target retirement or total stock or total foreign stock index fund. Let’s do a high growth. And so I think that’s why it’s played out so well, but again, contributing as much as I can to it every year and not withdrawing on it.

Mindy:
Okay. So with 450-

Matthew:
I just kind of back to like…

Mindy:
The rule of 72 says that your nest egg is going to double approximately every seven and a half to eight years. I’m going with eight years and I’ve got in eight years, you will have 900,000. This is if you don’t put more money in which I’m assuming you will continue to do. 16 years, you’ll have 1.8 million, 24 years you’ll have 3.6 million. And in 32 years, you’ll have 7.2 million. So I think Coast FI is a pretty good way to describe your financial situation right now. And I said, oh, I’m assuming you’ll put more in. Maybe you don’t want to. I mean, it’s reducing your taxable income. I think now the way that I look at this just on the surface now is like the game. Okay. I can still contribute to my Roth IRA. So I’m going to put in enough so I can do that, enough into my 401(k), but then I don’t know, Scott let’s hear your thoughts instead of mine.

Scott:
Well, it comes down to what you want. You said you want to build a foundation is what I heard, which says to me that you want to become quite wealthy. Is that the way of articulating this?

Matthew:
I think in my mind, yes, that’s what I want. But when the dog catches the rabbit, what are they going to do kind of situation. I don’t know if I would actually live any different than I do now. I guess that security blanket more or less. So yeah, I guess the trade up that I’m trying to battle for myself is I think I live the life that I want to live now. I go out to eat. I have the hobbies that I find interesting. Yeah, I mean, I don’t think I could have any fuller life than I do now. And so I guess what I’m trying to evaluate is what will any more money do for me that I don’t already have I guess?

Scott:
Well, I think this is where it gets hard and I don’t mind to say this bad way, but if you’re perfectly content with your current situation, you should keep doing exactly what you’re currently doing with that. If you want a specific outcome, then we can begin backing into that. So if you were to say, “I want to become financially free so that I can stop working or make work optional in a short time period as possible.” That’s something that we can begin playing around with these numbers in this approach and begin working with. If you’re saying, “I want to build the largest possible pile over a long-term horizon.” That’s another thing that we can begin working with. If you say, “I want something balanced between the two that gets me a solid pile downstream, but also more flexibility over the next three to five years.” That’s another thing we can work with.

Scott:
So I think we just need to know how you would like to proceed with that because you’re crushing it right now. You’re not doing anything wrong. It’s going to lead to a very large passive pile, long-term for you, pile of money. I mean, with this.

Matthew:
Yeah, I guess if I had to choose one or the other, I think given that I’m relatively career driven, money driven, let’s go with the biggest nest egg possible. Doing some riskier investments, knowing that there’s a potential loss of that investment. I mean, crypto as an example, why would I be investing it if I didn’t think there was an upside? But on the other end of this spectrum, I realized that I could lose everything. So that’s where I’m somewhat interested in real estate or diversifying my investments kind of allocating a specific percentage of my portfolio towards different risk tolerances.

Scott:
Okay, great. And then next question. How active do you want to be in your side businesses? I’ve got a taste of that with the fact that you are running several side businesses at once, but love to hear it.

Matthew:
Yeah. I think let’s call it part-time. Because I think that with the career trajectory I’ve seen, I’ve definitely got the better bank for my buck working W-9 job or W-9, W-2. And so my side hustles are nice, they’re supplementary income for me to buy things that are definitely once and not needs. And so…

Scott:
Okay. Given that you went the largest possible pile and over the long-term, you’re willing to be pretty active and you don’t need to touch the money in the near term with that. I actually wonder in this case, Mindy, if the 401(k) is better than the Roth as a starting point in this discussion, because you’re deferring the tax, and if you plan to donate it or put it into a foundation for example, it might be more money in there and more tax sheltering that you can do with something like that. So that’s something to consider, that’s a vote for the 401(k) instead of the Roth, since you may not intend to spend some of that money on that, there’s a long-term foundation with that. In terms of ROI, you’re going to have to make a decision about whether you think the stock market, crypto or one of these combinations or funds is going to do better than real estate over the long run.

Scott:
And here’s a framework to think about from real estate investing versus stocks. It’s foundational question that lots of able ask themselves. I would expect long-term appreciation in real estate to be anywhere from three to 4% per year for price and rent growth. We’re going through a period that is much, much higher than that right now. And who knows how long that will last? A lot of signs to point that it will last several more years. I could [take 00:42:55] tomorrow with that.

Scott:
But when I think about it from a 30 or 50 year time horizon, which is the same time horizon, you just stated with that, I think it’s going to be three to 4% annualized. Now leverage, if I have 20% equity on that multiplies that so 3% times five is 15% plus cash flow. So you can get a stronger return on real estate than you can in stocks. Assuming that you’re one of the many people who’s much more comfortable using long-term debt to finance real estate investing than you would be to invest in stocks, for example, with that.

Matthew:
Yeah.

Scott:
So that’s… Go ahead.

Matthew:
Sorry, not to interrupt, but yeah, I think I feel like that’s well up until we just bought our first house. That was definitely limiting me in that perspective being comfortable with debt. Because growing up most of my life, we tried to avoid debt as much as possible. And then coming into my own financial senses, realizing that I’m comfortable with that. I’m in a place financially where I can incur that risk and am willing to commit to if you are a landlord or property manager, or going through the process of finding and buying a home, being okay with the level of, or the amount of time that you had to commit to that property or process. And so when I was in school working two jobs, it was much harder, now I think I’m more comfortable to that idea.

Scott:
Awesome. Yeah. Debt is a bet, right? And over the last 30, 40 years, interest rates have come down bit by bit by bit by bit by bit over that entire period. Where I’m going with this is when interest rates are falling… The interest rates are in all time low right now, they could go low, but I think it’s a bad bet for me personally, to think that interest rates are going to continue falling for the next several decades with that, it’s a much safer bet that they’re going to plateau or begin rising, which means that borrowing that money is I think a better long-term use case and it’s been for the last 30, 40, 50 years to a large extent with that. And borrowing and using that to purchase an inflation resistant asset, like real estate seems like a reasonably attractive move over the long-term with that.

Scott:
So yes, I have that three to 4% appreciation or inflation rate on real estate prices and rents that I use as my yardstick when I’m looking at a 30 year time horizon, but that begins to get multiplied. Like I said, with that the leverage portion that I’m comfortable with. So yes, I mean, look, we’re at BiggerPockets. Of course we think real estate’s a great option with this, but I think at the end of the day, that’s the decision.

Scott:
Now with real estate, you’ll have to put in several 100 hours, 100 to 500 hours learning about all the ins and outs of that, or meeting people or networking or thinking about how to DIY it. But if you’re willing to keep that leverage on that portfolio for an extended period of time, I think you can, a reasonable person can think that they’ll have a good shot at arbitraging, some sort of spread between what they can get on that real estate portfolio and what they might get in a total stock market index fund, for example, over a reasonable period of time. How’s that for using the word reasonable 16 times, but attempting to articulate that point.

Matthew:
Yeah. I think it’s just picking the investment that best suits your personality more generally, and knowing what you’re signing up for when you’re, when you’re going through the process. And so I think with our first term home purchase at least, I’ll learn that. I’ve learned the front end and we’ll be going through a rehab. So sourcing contractors and dealing with timelines and getting a sense of the return on investment for the renovations we’ll be doing. And once I’ve got my feet wet, then going out and saying, “Do I want to do this again?” If not, I can stick to taxable investing and attempting to max out my tax deferred investment accounts. But yeah, I’m definitely interested in that only because I think the aspect that has me most interested is, I guess, all of the real estate writeoffs, or the tax writeoffs. I’m relatively high income. And so it’d be nice to be able to write off as much as possible. And so that’s what has my interest peaked as well.

Scott:
On that note, that’s a common, I don’t know, I want to say miss-

Matthew:
Misconception.

Scott:
… misconception though, with that, where if you are high income, then you usually can’t use the income from the losses from your real estate portfolio to offset that income, unless you are a real estate professional with that, instead these losses will offset future income from your rental property portfolio with that. And then second, I think that most years in my portfolio, at least I make money. So I owe tax on the income that I’m doing from that even after the depreciation benefits and those types of things be because that’s what should happen if you’re not doing a big rehab or having a big expense related to your portfolio.

Scott:
So just note that it is much more a tax advantaged, I think, to invest in real estate with your after tax dollars than in your 401(k) or Roth IRA, there’s a whole bunch of reasons why I think that’s the case. But I don’t think you’ll experience tax benefits that will reduce your income, especially if you continue to increase your earnings over the next one to three years, I think you’re going to go past that limit. That’s something to think about.

Matthew:
Yeah. That’s good to know. Thank you.

Mindy:
Do you like your job? Do you get up in the morning and, “Yeah, I’m excited to go to work” or do you get up in the morning? You’re like, “Oh, another day another dollar?”

Matthew:
Given I just started my job, I think I’ve always enjoyed it. Because I think there’s a certain level of satisfaction I get from answering questions that people can’t answer for themselves. And maybe I might get that same level of satisfaction from bringing those questions to myself, it was like sourcing contractors or figuring how to lay vinyl or how to solve a specific problem with a property, I think. Yeah. I mean, more holistic strictly I like the challenge and I like servicing the people that I work with, servicing, I say servicing working with. And yeah. Does that answer your question?

Mindy:
Well, yes and let’s go a little bit further. If you had 10 billion just sitting around, you could literally do anything you want. How would you spend your days? Would you continue to work? Would you enjoy your job then? Would you prefer to go travel the world? I like to travel a little bit. I am not one of these people who wants to get on a plane and just continue going forever. I want to go someplace and then come back to my life, because I like my life. I want to go someplace else in a few months and then come back to my life. But some people want to travel all the time and never want to have back to their life.

Matthew:
Yeah. I think a part of me likes routine consistency. And if I had to choose, I would probably be a life learner. So the various side hustles that I’ve picked up. I may realize at a certain point that, hey, this isn’t sustainable or I don’t enjoy this anymore. Or I learned the thing that I wanted to learn and I’m not interested anymore and then move on to the next thing. And so if I had $10 billion, it maybe go back to school, get a PhD, apprentice somewhere, learn something that I think would maybe benefit me personally, learn a new language, just examples. And so let’s say if I wasn’t necessarily striving to make that 10 billion, 20 billion. I don’t think at that point I would need to or feel a need to, I think maybe part of me is in the position I am now striving for that, but then also balancing the life that I want to live in the moment rather than just chasing the money.

Mindy:
Yeah. I think you’ve set yourself up really well to be able to do that. Things to think about that I don’t don’t need an answer for, but for you to think about for when you’re making your life choices is, do you want to have children? Maybe you want to have kids and then stay home with them when they’re little, I did that and I’m not saying that my way is the best way, but it was the best way for me. We made plans for me to stay home with the kids because I wanted to. And then when they were back in school, I went and got a job. And now I work when they’re in school.

Mindy:
So it’s a great trade off. I can still do this and get fulfillment out of the job, but if not a 60 hour a week job where I don’t get to spend any time with my kids. We already talked about travel. What about philanthropy? Do you have any? You could be an angel investor in somebody’s new restaurant that you really believe in, which is something you are uniquely qualified to both run the data analysis and also taste their food and be like, “Ooh, nobody’s going to want mushroom ice cream, at least of all me.” So teach people how to cook.

Matthew:
That’s a good thought. Yeah.

Mindy:
There’s all sorts of ways to get fulfillment.

Matthew:
Yeah. Yeah, exactly. I think I try to volunteer as much as possible and I mean, I used to tutor as well. And so there’s a certain level of satisfaction you get from directly impacting someone with your own hands or your own ideas and seeing the benefit either short-term or long-term. And so I hadn’t thought about it from a monetary perspective, but just definitely giving back to the community and nurturing the relationships that you have and making an impact.

Scott:
When I’m hearing you talk here with this, you’ve got well over half million dollars in net worth just got a huge raise, moving into a new place with all this kind of stuff. Saving $5,000 a month, and accumulating wealth like crazy with this. But I think you’re still in this exploration phase. You’re like, okay. “I like my life. I like all these things. I could go in 40 different directions and be happy with all of them,” is kind of what I’m hearing, which I think makes it really hard to plan in a good way. You have this increasingly flexible and strong position that is expanding every month bit by bit in terms of its ability to give you options.

Scott:
You’re exploring those options, reasonably methodically with that and happily. And I think maybe more so than specifically what to do with this is just like that theme of okay, great, you know you’re going to have a pretty large pile down the road with this, if you just keep this up. So maybe just think about bringing a little bit more flexibility into your position over the next couple of years, since you do seem to enjoy exploring these different tales and options that come into your life. But I mean, how you do that, I mean, that could be real estate. It could be increasing your emergency reserve. It could be having one of these side hustles take off. But if you just maybe more so think in terms of themes rather than specifics, because you’re fundamentals are so strong, maybe that’ll be more helpful to a certain extent.

Matthew:
Yeah. When you say fundamentals, you mean focusing in on one aspect or the other?

Scott:
I mean the fundamentals you hear a financial position are just really strong. You have a great job, you spend very little, you soak away a lot of money. You know what you’re doing when it comes to these retirement accounts, you’ve got [inaudible 00:55:27] approach. You’re debating an unanswerable question with the Roth versus the traditional with this kind of stuff with that. And your position’s only going to accelerate over the next year with this, with even more cash going in there. So if you just think in terms of, “Okay, I’m going to continue to just build flexibility into my position and see where that takes me over the next couple of years,” that might be more helpful because I don’t think you know yet exactly where you want it to take yet. Is that right?

Matthew:
I think that’s pretty spot on. I think it takes talking to you all at least to have that perspective thrown back at me, to really frame it.

Scott:
Yeah. I maybe at some point, I don’t think it’s going to be the next year, but in the next three to five years, I think you’re going to be like, “Okay, I’m clear. Now this is where I want to go and how I want to go about doing that.” And I bet you, at that time, you’re not going to be like, you shouldn’t change much, but I think you’d be like, “I’m a little glad I had more money that was accessible outside of those retirement accounts than having the extra 50 grand inside those retirement accounts with that.” Would be my guess.

Scott:
I don’t know what the answer is. You’re going to have to answer that for yourself, but that be my guess, is that having a little bit more flexibility and liquidity and access to it in a couple years is going to be something you’d prefer rather than having to play all those games to get it out of the retirement accounts. But that would be my hunch and as specific as I can get really with this, because you’re doing all the right things with it from what I see.

Matthew:
Yeah. I appreciate that.

Mindy:
Yeah. I agree with Scott. I think you’ve done all the right things and now it’s like, “Hmm, which one of these 27 amazing options do I want to pursue?” And you don’t have to have an answer right now. You’re in your late ’20s. It’s okay to just coast for a while at a job you find interesting. And that pays you really well and allow yourself to really pursue all the options, go through your rehab and see how much fun you have with it. If you want to learn how to do a kitchen, come on over this weekend, we’re ripping out all the cabinets and the countertops and the floors and replacing it all. So great shoulder workout. Scott, you’re welcome too. Anyone who want to learn how to hang cabinets, come on over.

Matthew:
Sounds great.

Mindy:
Yeah. Super fun. My favorite, but if you’re hiring contractors, be slow to hire them because it can be tricky, go to biggerpockets.com and learn about hiring contractors, ask in the forums.

Matthew:
Well, yeah. Yeah. I don’t know how much detail you want to get into about our plan, but I mean, our goal is to move in settle ourselves into a new city. And then slowly start getting quotes. And then going with what we think is within our price range. So we have like a budget set up for ourselves. We want to say, okay, what are we going to prioritize? And then also in contrast, what’s going to give us the best ROI on our investment? Balanced with the fact that we also want to live in a house that we enjoy. And so, yeah, I think right now we’re in a phase where we’re trying to plan that all out. And I’ll definitely reference the BiggerPockets forum to get a sense of how to weigh all that.

Mindy:
Yeah. From a live-in flipper perspective, live in the house for a while, three or six months before you start really changing things up. You can replace a toilet if you know the toilet’s going to stay in the same place. But if you don’t want to do a whole big rehab and then you’re in it for a couple more months. You’re like, “Ooh, this would’ve worked out a lot better if I would’ve done it this way.” That comes from experience. Every single rehab I’ve ever done, I jump in with both feet and then I’m like, “Ooh, you know what? This wasn’t the best choice.”

Matthew:
That’s you learned though, right?

Mindy:
This one we’re really planning out, we’ve got our master bedroom, our master bathroom is just kind of this big disaster from 1970s. And we’re like, oh, the toilet works, the sink works, the shower doesn’t. So we take a someplace else. And we’re like really thinking through all of our options. How does this work? How does that work? Because we want it to be a wow master bathroom. We’ve never had one of those before. So that’s exciting.

Matthew:
It’s good to hear that you’re still learning-

Mindy:
Oh, for sure.

Matthew:
… and it seems like it’s a lifelong learning lesson. You always have new problems to confront and face and figure out what the new creative solution. So, yeah, that’s cool.

Mindy:
I would love to know everything, but unfortunately I do not. Okay. Well, Matthew, I think this is a lot of fun and I think we’ve covered a lot of things. Have we given you what you were looking for?

Matthew:
I think so. I think what this conversation has helped me do is shed an outsider’s perspective on my situation, which I think didn’t directly influence me, but is going to help me make the next decision, thoroughly thought through. So, yeah.

Mindy:
Okay. Great. Well, I’m excited for that. Matthew, we still have our famous four. Are you ready?

Matthew:
Yeah, let’s do it.

Mindy:
Okay. What is your favorite finance book?

Matthew:
My favorite finance book would probably have to be The Millionaire Next Door. I’m kind of the aspect of, or part of my story has been living as frugally as possible, living a modest income, knowing that you have a relatively big mistake sitting on and yeah. Just living the life that you want to live.

Scott:
All right. Well, I think that you are a prestigious accumulator of wealth. Isn’t that what he describes him as at this point? With the age to income ratio. You’re doing great. So what was your biggest money mistake?

Matthew:
Hindsight, probably spending too much money on a hiatus to some culinary capital. So spending when I was in my early ’20s, significant amount of money on food and airfare to do so. And so yeah. Possibly finding some balance in that, but then it was only $10,000, is that experience worth it kind of conflicting perspectives in that, I probably could have spent that money on something else and got in a better return or different life experience. So yeah,

Mindy:
You can always spend that money on something else. You can always spend that money on something worse. Did you enjoy yourself while you were there?

Matthew:
Definitely. Yeah, not something I would ever take back, but hindsight late ’20s, Matthew would probably think differently about that spending.

Mindy:
Okay. Well then it’s good thing that late ’20s, Matthew wasn’t there with you telling you no. Okay. What is your best piece of advice for people who are just starting out?

Matthew:
Professionally? I would say give everything 100%, but don’t be willing to try new things financially, read as much as you can. And rather than taking something one says at face value, doing your due diligence and double, triple checking, all that you know, with a healthy sense of skepticism.

Scott:
All right. That’s awesome advice. What your favorite joke to tell at parties?

Matthew:
Why did the bike fall down?

Scott:
I don’t know why.

Matthew:
Because it was too tired.

Scott:
Oh, it’s awesome.

Mindy:
I have a chef one. What did the chef say when she ran out of seafood? Oh, it’s a calamity.

Scott:
Oh my gosh. I’m going to be selfish and not share any jokes today.

Mindy:
Okay, Matthew, thank you so much for sharing your numbers today and for sharing your story with us, this was really, really a great episode and I’m so glad you had time for us today.

Scott:
Yeah. Thank you.

Matthew:
Yeah. And I mean, thank you for all the advice as well. I really appreciate the conversation. Thanks for having me on the show.

Mindy:
Thank you. Okay. We’ll talk to you soon. Okay. Scott, that was Matthew and his amazing story. And we joke a little bit about it at the end. Oh, which one of these amazing options do you want to do? But that’s true. He’s got so many great options. He really can take a step back, look around and take time to determine what it is that he really wants to do with the rest of his life.

Scott:
Yeah. I hope that a lot of 28 year olds have Matthew’s problem here where they’ve got a lot of good options, a financial position and can go in a lot of different directions and it’s about defining and figuring out what you want to do next.

Mindy:
Yeah. I’m really excited for his trajectory because I don’t see a bad option in the whole thing. I mean, he could continue to work at a job that he like. He could stop and go back and be a chef at a job that he likes. Where now it doesn’t matter if he’s making $10 an hour and he can also pair back his hours in general. And just say, “I only want to work three days a week, or I only want to work 20 hours a week.” Or whatever it works out for him is that’s your cat.

Scott:
That was Fred. Yes. So Fred’s first appearance on the podcast is today.

Mindy:
I would like to point out that if you want to go to our YouTube channel, you can see Scott’s cat walk across the screen. And also I would like to point out that Scott’s cat’s name is Fred, which is not a traditional cat name.

Scott:
I think it’s great.

Mindy:
I think that’s funny. I think it’s great.

Scott:
I was looking for a Steve or Carl, I like those for cats.

Mindy:
We have got to way off topic. But Matthew has a lot of options. I’m very excited for all of them. And I would love to hear your ideas for what Matthew should do in his endeavors. If you have suggestions for Matthew, please leave a comment in our Facebook group, which can be found at facebook.com/groups/bp money. And I’ll go ahead and start a little thread today, discussing his different options and seeing what other ideas you guys come up with, because you guys are pretty clever.

Mindy:
If you’re not in our Facebook group, please join at facebook.com/groups/bp money. So you can about money things with fellow money nerds. Scott, should we get out of here?

Scott:
All right, let’s do it.

Mindy:
From episode 250 of the BiggerPockets Money Podcast, he is Scott Trench and I am Mindy Jensen. Saying, got us cat, kitty cat. In honor of Fred.

Scott:
Thank you, Mindy.

 

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In This Episode We Cover

  • Changing careers even after you’ve been working in the industry for years
  • What to do if you’re young and don’t know which field to study
  • Keeping your expenses low, regardless of how well your job pays
  • Starting side businesses that can help you float expenses
  • Investing in after-tax retirement accounts vs. investing in post-tax retirement accounts
  • Live in flip tips from the master herself (Mindy Jensen)
  • Calculating out your estimated retirement nest egg using the ‘Rule of 72’
  • And So Much More!

Links from the Show

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