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Finance Friday: How to Avoid the “Middle Class Trap” When Building Wealth

Finance Friday: How to Avoid the “Middle Class Trap” When Building Wealth

47 min read
The BiggerPockets Money Podcast

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You’ve heard of middle-class money traps before. Like spending your whole paycheck on rent, not paying yourself first, and the sneaky seduction of obsessive eating out. Today, we’re talking about a far less known type of middle-class trap, the type that keeps your wealth growing but limits the amount of “freedom” you feel in the process. Oftentimes, savers can find themselves in a position with a big cash surplus but hold tight to it to feel “safe” instead of feeling flexible.

Today’s guest, April, falls into this category. She’s done a phenomenal job at building a millionaire life, keeping large cash savings, and diligently investing in retirement accounts. She’s in a favorable position, but it’s not the position she wants to stay in. April wants to feel a true sense of financial flexibility, with the option to leave her job or decrease the amount of time she spends working. But, to do this, she’ll have to confront her limited “cash scarcity” mindset and chase other investing options.

Scott and Mindy guide April on exactly how to do this, walking through various types of investment options that she (and you at home) can use to maximize a lifestyle for freedom, not just wealth. Even a financial powerhouse like Mindy struggles with these same issues, and you might too once you hit millionaire status!

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Read the Transcript Here

Mindy:
Welcome to The BiggerPockets Money Podcast show number 300, Finance Friday edition, where we interview April and talk about the trade-offs between the tax savings of retirement accounts and after-tax investments.

April:
My personal education, I had scholarships, I went to a state school, top of my class, so I was able to go for pretty much free, anything that I didn’t get a scholarship for. I got other scholarships for 2000 here, a thousand here and then cash flowed by working part-time jobs. So my concern is that, are we at a point where if we keep saving it’s just going to get used and is there a better way for us to allocate the cash at this point in time?

Mindy:
Hello, hello, hello. My name is Mindy Jensen and with me as always is my deep diving co-host Scott Mariana Trench.

Scott:
Always a lot of pressure to come up with a good response to your interests, Mindy.

Mindy:
Scott and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story, because we truly believe financial freedom is attainable for everyone, no matter 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, start your own business or achieve financial flexibility in a general sense, 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 excited to talk to April today. She has a unique set of circumstances where she does have a high income, but on the surface it looks great, down below there’s some bubbling uncertainty.

Scott:
Absolutely great episode, lots to learn from this. Should we jump right into it?

Mindy:
Well, before we do let our attorneys get satisfied by saying, 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 or 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.

Mindy:
Today, we’re talking to April, a high income earner with a great savings rate. She has her numbers dialed in. Tracking her money through an app called EveryDollar, which is a Ramsey Solution app that was designed to give every dollar a job. But as she shares her current numbers, keep in mind that it wasn’t always like this. She grew up in scarcity mode and that had a profound impact on her relationship with money. In fact, one of her top questions is, how do you balance spending money on things you value now with saving for the future? And we all know that I have this same problem. So April, welcome to the BiggerPockets Money Podcast.

April:
Thank you very much. Mindy and Scott for having me. It’s a pleasure to be here.

Mindy:
We have a lot to talk about today. So let’s jump right in. Let’s look at your numbers and let’s look at where they’re going. What is your income?

April:
Sure. So gross, me and my husband together make about $330,000 a year. I make about 200,000 of that. So I have a base salary of 158,000, and then I get bonuses twice a year, which amount to approximately 20K. And then I also get restricted stock units that are about $20,000 a year.

Scott:
Ma’am, what do you do?

April:
I’m an IT program manager.

Scott:
Awesome.

April:
And then my husband, he is in the construction business. So he does home building, he’s our construction superintendent. And so he manages the construction of homes, and his base is 80K and then he also makes bonuses based on performance. And so that’s at about 50K. So that’s how we come up with the 330,000 a year.

Scott:
Awesome. Super strong income.

April:
Yes. And this is fairly new. We’ve just the past couple years. So very different from where we were a while back, so-

Mindy:
Okay. And then do you have any additional income?

April:
We do not at this point in time and that’s what I want to talk about as well, is how we can look into passive income sources.

Mindy:
Well, at three 330 annually, I think you’re doing okay.

Scott:
Yeah.

Mindy:
Where is that money going?

April:
Good question. I’ll do a high level in terms of giving, we give about $500 a month. We save about 2,900, almost 3000 a month in addition to, I should mention, we’re maxing out our 401ks for both of us. So that’s about 41,000 a year that we’re putting away in our 401ks. We’re also putting money into our HSA, we max that out for health savings account because we have a high deductible plan. And then we also max out the flexible spending dependent care because we have two kids that we have to pay Childcare for.

April:
And so our take home pay ends up to be about a little short of $14,000 a month. And so it’s about 13,868 to be precise. So the numbers I’m giving are for that. So it’s 500 in giving, 2,900 in savings, about 4,500 for housing, transportation at about 920, we have food at 1200, lifestyle at 1500, insurance and tax at 1500 and then we have daycare, which includes a sinking fund for our summer camps, et cetera, at $750 a month.

Scott:
Awesome. So we’ve got $10,000 in expenses, let’s call it $11,000 in expenses with $3,000 in savings, which you’re calling your expense.

April:
Yes.

Scott:
And your monthly take home is what?

April:
About 13,800. So it’s just short of 14,000.

Scott:
Okay, great. Awesome. And where are your assets and liabilities?

April:
Sure. So where they’re located? Let me run through here. So I have several retirement accounts. I have a Roth that’s at 28,000 in IRA, a SEP IRA from a previous employer that’s at about 52, I have a 401k at my current company at just about 62K, I have a Rollover IRA at 143, a Rollover Roth at 16. And then my husband’s retirement is at about 125. So I think Mindy, you had added it all up because unfortunately, I hadn’t. Just retirement accounts, I think we’re at about, did you say 495,000, somewhere in that range?

Mindy:
So yes, April shared all of her numbers with me in advance and I added these up in a little bit of a different way. I have your retirement accounts at $495,000.

April:
Yep.

Mindy:
I have your cash at $151,000, which we will talk about.

April:
Correct. Yeah.

Mindy:
I have your home equity at $603,000, cars at $30,000 and crypto at 1300. I’m going to jump in here on my little soapbox and say that her total assets are 1.3 million and her total crypto is 1300. And if you do the math, that’s 0.00000001% of her entire portfolio.

Scott:
I love that allocation to crypto. That’s wonderful.

Mindy:
I do too.

April:
Thank you.

Mindy:
If you have more than that, you’re doing crypto wrong.

Scott:
I don’t know about that but, yeah.

Mindy:
And yes, I don’t care. Send a note to [email protected] if you want to argue about that because I don’t want to hear it.

April:
[inaudible 00:07:19].

Scott:
You have slightly more crypto than I do at zero.

April:
Yeah. And that’s my husband by the way, who wanted to play with it. So that’s like his little gambling we’re calling it money. So-

Mindy:
I love it. Play with it, and it’s gambling. Yes. I hope it goes up to a billion, but if it doesn’t, you’ve wasted no money.

April:
Yeah.

Scott:
What are your goals? How can we help you today?

April:
So the biggest goal is that, so as Mindy mentioned in the intro, I come from a very much of a scarcity mindset. And basically, we’ve gone through two Live-In Flips. We’re in a third house here and we’ve built up our assets, and I’m at a point where I’m just trying to figure out, we’re at 39 and 40, we’re in the typical 9:00 to 5:00 grind. I’m incredibly grateful for where we are, but I’d like the opportunity to build in some flexibility in terms of passive income. And so I’m looking to see, what can we do in the next eight to 15 years so that we can have options so that if we don’t want to work in our typical 9:00 to 5:00 or we want to go part-time or we want to work on those passion projects, we can do that.

April:
And so I have some short-term questions such as, I don’t like debt as it was mentioned. And so I have a $24,000 car loan. Should I just pay that off and then I don’t even have to think about it since we have the cash? And then some questions about kids college and what should we really do with that extra money to build in some flexibility and how do I balance spending now versus saving for our future? Because as Mindy mentioned because I come from a very much of a scarcity mindset and having money is somewhat new to me, I’m just trying to balance all of that and enjoy now as opposed to just always looking at the future.

Scott:
Well, let’s start with flexibility here first as a theme. And let’s just acknowledge your portfolio appraisingly from an outsider’s perspective. What was the total amount of retirement accounts again, Mindy?

Mindy:
$495,333.

Scott:
Okay, great. And we’ve got a home equity balance of 600,000. So that’s a 1.1 million of your 1.3 million just in those two things, you got another $30,000 in equity value in your cars.

Mindy:
And $151,000 in cash.

Scott:
So the cash is the first place we get to in this discussion that says flexibility, right? That’s the only part of your portfolio that offers … So you’re doing great from this, but let me ask you this. If you had a pile of 1.3 million in cash right now, what would a flexible situation look like to you? Forget all your assets? What would you build from there?

April:
One of my passions is actually financial literacy for children. So I would probably figure out a way to spend some of my time to volunteer to teach children financial literacy.

Scott:
Sorry. That’s awesome. What you use the flexibility for is great. What financial position would you build if I gave you 1.3 million in cash right now?

April:
I get what you’re saying. Okay.

Scott:
And you said, “How do you want to invest that? What does a flexible financial position look like?”

April:
For me, that would be money potentially in an after-tax account, a brokerage account that then is generating dividends or potentially in real estate. We either continue this Live-In Flip or investment properties that we buy and then flip. I’m not sure that I want to be a landlord.

Scott:
Great. So I’m going to spitball this and you react to it.

April:
Yeah.

Scott:
So let’s say that your position, instead of looking like what it looks like today, it look like this, a hundred thousand dollars in cash in the bank, no debt besides home mortgage, $200,000 in home mortgage equity, 500,000 in after-tax dividends and 500,000 in rental real estate equity across a portfolio of a couple of rentals. What is that portfolio? Do you feel better?

April:
Much better. Absolutely. Because I’m diversified and it’s not in … Right now it feels very much like we have money that’s locked up until we’re 59, right, in our 401ks and then in our home, and so we’d have to sell our home. So that to me is flexible.

Scott:
Let’s use that as our straw man for today’s discussion, that portfolio. Again, $100,000 in cash, 200,000 in home equity with a mortgage for the rest, 500,000 in real estate equity and 500,000 in index funds. Okay. And let’s presume it’s all after-tax for now. What you’re currently doing, where’s that going to lead you in two years, right? In terms of max, you’re going to save 3000 a month and then 41,000 in these things, plus you have huge lump pay days coming right, from your bonuses.

April:
Mm-hmm (affirmative).

Scott:
So what will happen if you keep on your current track? What will your portfolio look like in two years?

April:
So current track is, those 401k balances are going to continue to build, current track, what we were doing and what we did last year was, we dumped the money into our home. So paying off the mortgage, which at this point at a 2.5% rate, I don’t think is worth it with the equity that we have. So right now it’s either I dump it into a savings account, which is not going to do anything, or we throw it into a VTI in an after-tax account.

Scott:
Okay. So what I’m hearing, if you continue doing what you’re doing-

April:
That’s what we would be doing.

Scott:
… Yeah. Then you’ll pile up another $50,000 in cash, another 80,000, 90,000, a hundred thousand in your 401k and another a hundred thousand in home equity-

April:
Correct.

Scott:
… in two years, which is awesome wealth building. You’re building a lot of wealth, but you’re not achieving your goal of financial flexibility if you do that.

April:
Correct.

Scott:
So I think what I suggest from a strategic sense is, sit down with your partner and think about, “Hey, if I could reset this whole thing, what would it look like from that? Will I be more comfortable with that? Okay. Now let’s dramatically change the profile of what we’re doing here to match that reality that I want to get to.” It won’t be painful, it will be big and it will feel uncomfortable decisions. If, for example, you are like, “Hey, in two years, our net worth should be 1.5 or 1.6 million with our wealth accumulation rate.” Essentially all of that accumulation needs to happen in after-tax brokerage accounts or real estate to begin even moving me slightly towards this new goal. And that’s going to come at the expense of investing in these, in the IRAs or whatever with that. And that’s going to be a challenge to think through, because you’re going to lose tax advantages and all that kind of stuff, but that’s going to be part of the trade-off potentially, of building in that flexible position.

April:
At what point do you know if you can no longer save in your 401ks? Do you think we’re at that point where if we want that flexibility, we should drastically change our advantage?

Scott:
I think it’s an art and you guys are in a privileged position where you could max out both … You have enough income where you can max out both 401ks and that’s 41 grand or 81 grand.

April:
That’s correct. 41 grand.

Scott:
So 82 is two years?

April:
Because it’s 25 each. Yep.

Scott:
So that leaves you with 290 left over at income, you need 120 to pay for your lifestyle. And you’re going to have 80 go to taxes. So that leaves you with 50 grand leftover after all of that that you can deploy towards your wealth. So the question is, walk me through your housing expense because that’s 4,500 of your expense.

April:
Yeah. So what I have in there is, so where we live, unfortunately, the real estate taxes are high and we happen to be in Texas. And that’s one of the things. We don’t have a state income tax, but they get their money in other ways, one of them being real estate taxes. So in terms of our housing expenses, our real estate taxes are almost a thousand dollars a month. Our mortgage is only 1767. And then from there, we’ve got our utilities, which add up about $600 to $700. I would say about $600 a month in utilities. And then I’ve got a repair fund in there and stuff like that. And we also just recently started getting a house cleaner and our lawn care, which I count in there as well, which again, we could cut that right now. We’re just at a point where we’re trying to save our time so that we can spend our weekends with the kids as opposed to cleaning and doing lawn work.

Scott:
Yeah. Well, I think outsourcing lawn maintenance and those types of things makes sense for a couple that makes $330,000 per year. It would not make sense for someone making $80,000 per year.

April:
Right.

Scott:
Okay. What is the house worth?

April:
Just under a million dollars?

Scott:
Just under a million dollars. Okay.

April:
Yeah.

Scott:
So I think that that is a big one for you guys to think through.

Mindy:
I have a comment. Okay. So she didn’t buy it for a million dollars or just under a million dollars.

April:
We did not.

Mindy:
She bought it for a significant discount and she’s in that weird space where they bought it a couple of years ago, it has appreciated so much. Where would they go that they could reduce their housing cost and maintain the same level of housing comfort. So I think there’s a lot of people that we’re going to start talking to in this same situation where it’s going to be really difficult to reduce your housing expenses, because there’s not really any place to go that’s going to be any cheaper.

Mindy:
She might be able to go get a $600,000 house instead of a $900,000 house or whatever, but it’s going to come with a higher interest rate. She’s got a 2.5% interest rate. I actually know a lot more about her numbers that maybe she shared. She gave me this big email. But I wanted to jump in here and say something else. So you’re asking about, should you continue to contribute to the 401k? Do either of your companies have a Match program?

April:
They do. Yes.

Mindy:
Okay.

April:
So mine matches up to 4% of my salary.

Mindy:
Okay. So-

April:
In a 50%. So if I put in 8%, they’ll do 4%. So I get 12% of my salary in total.

Mindy:
That is, what do we call that, Scott? Free money. I would continue to put that in if you can comfortably do so, which your numbers say to me, you can. Does your husband’s company have a Match program?

April:
They do.

Mindy:
Okay.

April:
I need to get the details on that. They took it away during part of COVID and then it just came back. So I need to get the details on his, but-

Mindy:
Okay. So I would say, look into the Match and see if they match 1% on, if it doesn’t make any sense then no, but right now, according to the Rule of 72 and past performance is not indicative of future gain, but the Rule of 72 says that, on average, your stock holdings will double approximately every seven to eight years. I did seven years because that’s easier for me for math. So at age 40 where you are right now, you have $495,000, at age 47, you will have $990,000. But age 54 is when it gets really fun, 1.9 million at age 54, at age 61, 3.9 million, and at age 68, 7.9 million. And that’s just an average return.

Mindy:
We have been seeing outsized returns. You may not see quite this much, you might see a lot more. You’re in VTI, you’re in the entire stock market and a rising tide lifts all ships. And how many other cliches can we throw out here, Scott? But that’s a sizable amount of money. And-

Scott:
Yeah.

April:
I think, more than we honestly need

Mindy:
… again, coming from a scarcity mindset, that can seem really-

Scott:
And you’re still going to contribute to that the whole time if you take the match.

Mindy:
Correct.

Scott:
So even if you don’t get those returns, that return profile, that the average Rule of 72 depends on which is about 10%. Some people think that’s aggressive. You’re still probably going to have 4, 5, 6, 7, 8 million dollars in there at 68, with that. So I think that that’s the big decision here is, you can’t have it all. You’ve got a great income. You can get a lot of what you want, you can get a lot of options, but you can’t have your whole set of options. You can’t go way down your whole stack of maxing out these retirement accounts, college saving plans, all this other stuff and buy real estate assets and build a massive after-tax brokerage position. So you have to prioritize with some of those things.

Scott:
And again, I think the best way to do that, I think that answer maybe already becoming clear to you when you just think through, “Hey, I have 1.5, 3 million bucks, how would I allocate it if I were starting with a blank piece of paper?” And if you just begin backing into that, then you can make those decisions over the next two or three years and say, “Great. That’s what I’m going to get to.” And it will continue to accelerate most likely. There’ll be some setbacks and there’ll be some wins hopefully, that will help you put that. And you can say, “Okay, in five years or 10 years, my portfolio should look like it’s between two and a half and 3 million dollars between, hopefully some appreciation and my income savings and all that. And it should look like this.” That’s a reasonable thing here. I’m not going to liquidate my house.

Mindy:
Yeah.

Scott:
That would be the fastest thing you could do is liquidate the house.

April:
Which is something that I am considering, but as Mindy was mentioning, we would have to move from this area.

Scott:
Yeah. Well, that’s one thing to consider. So let’s just do a straw man there. You have 600,000 equity in that house and at a 10% return rate, you’d be generating $60,000 per year on that equity with something else. Your house is also going to appreciate, let’s assume it’s going to appreciate at 3.4% per year. So your spread there is six and a half 7%. That’s going to be 35, 40 grand a year, right? Can you rent a place for 35 or 40 grand a year that is going to meet all your requirements and put all of that equity to work and rental real estate, for example? I don’t know, that might be a preposterous suggestion, it also might be an interesting thought exercise to walk through.

April:
Yeah. Where we’re located right now, rents are about 7,000 a month, which is just hard to even imagine. Because of when we bought, and I would never pay that much. So I think this is something to consider if we would consider relocating to a different area.

Scott:
Yeah. So I think that would be great. You don’t have to do that. You have the luxury of making enough income to have lots of good options, but if you were saying, “Hey, I want to transform my situation and you’re saying much more flexible, man, you could have a hundred thousand dollars in cash and put your $600,000 in equity work, you also have 50,000 additional on cash. You have 150 right now. So you could put 650 to work essentially instantly, in a portfolio after-tax, if you decided to relocate. And so that would be the absolute fastest move to get towards flexibility, would be making a decision with that.

Scott:
After that, I think that you can have a choice of, “Okay, I’m going to probably wind down these retirement account things as much as possible, or as much as practical, and maybe take the match and begin deploying that.” And knowing I’m going to accumulate at a rate of 50 to a hundred thousand a year in liquid, and then begin plowing that into a rental property or an after-tax brokerage account, or a combination of that if you like that portfolio we talked about earlier.

April:
Would you suggest, obviously, BiggerPockets is a real estate investing, but would you suggest that someone in this position look at real estate as opposed to just after-tax accounts?

Scott:
I think you guys are on a bubble for that. I think that the price to get into real estate investing is 250 to 500 hours of self education. That is a expensive self education at your hourly rate. So I don’t know. It depends. If you want to get to $10 million in real estate wealth over the next 15 years, you should definitely do that. If you’re looking to get to flexibility in five to seven years, you may not need to do that. So that will be the trade-off I think, that you’re going to have to think … You could probably achieve that by making one big move with your house and then plowing a lot into after-tax brokerage accounts. What do you think, Mindy?

Mindy:
I am thinking back to episode 260, where you told Madison that she makes too much money to be spending her time learning how to invest in real estate and that she should instead focus on the stock exchange.

Scott:
Madison earned 300,000 on her own, right?

Mindy:
Did she? I can’t remember the exact details of her money situation, but I know they made a lot of money and weren’t they in real estate or maybe they weren’t. I should really listen to these episodes again. I should listen to all the episodes before I record every episode. But I remember you saying that she would have so many hours to devote to learning about real estate, that may not be the best use of her time. What I’m wondering is, April, where would you invest in real estate? Texas is expensive.

April:
It wouldn’t be Texas just because of the, especially the real estate taxes and where I see them going. And honestly, when we retire, I don’t think we’ll retire here because of that.

Mindy:
Okay.

Scott:
It’s so funny because we were in a San Diego virtual meetup maybe a year ago, Mindy and I. And all the folks from San Francisco were at the meetup because the real estate’s so much cheaper in San Diego. And all the San Diego people were talking about how much cheaper the real estate is in Denver than San Diego and how the cash flow is way better. And all the Denver people were like, “The Midwest and Texas, where all the cash flow is.” And you’re like, “You’re not going in Texas because the taxes are too high.” So around and around the circle we go with where the best market is.

Mindy:
I think people don’t realize that the taxes are really expensive. She said her property taxes are a thousand dollars a month. When I moved from Wisconsin to Colorado, my property tax bill in Wisconsin was my entire mortgage payment in Colorado. And that was a huge difference. And of course it was a bigger house. Colorado’s a nice place. It was a different house, it was a different time, but that was still such a change to my finances. And I would say, if you want to invest in real estate, make a list of the affordable places where you know people. Maybe you’re from Ohio or Indianapolis or Kansas city, or one of those places.

April:
Unfortunately, we’re from up Northeast.

Mindy:
Okay. Well, that’s not affordable,

April:
Yeah.

Scott:
You will also meet the criteria for an accredited investor because of your income. You will not meet it with your net worth because too much of it is in your primary.

April:
Okay.

Scott:
But your income will allow you to do that. So you could consider syndication investments as well, if you’re looking for a more passive alternative too.

April:
I’ve heard those are hit or miss though, and you can really do well or not so much.

Scott:
Yes, you’ll need to invest-

April:
And don’t have control.

Scott:
… 50 to a hundred thousand per investments, but it is a way to potentially get into real estate. You’d still have to spend, let’s call it a quarter to a third to a half of the time, learning about how to invest in real estate as an active manager of the asset in order to get a good feel for that stuff. But you could put in five or 10 syndication investments over the next couple of years that will allow you to diversify across a couple of different syndicators and different assets that might help you achieve the same benefits of real estate investing more passively if you felt that the time commitment for real estate was too large to do in a traditional sense.

Mindy:
And I’m going to plug episode 219 with Jay Scott, he sat down with us for two hours and explained how syndications work, how to vet them. He gave suggestions like, “Hey, sign up for a syndicator and just get on their mailing list and go to one of their webinars and see the questions that people are asking, ask questions yourself, see what’s going on, and so you’ll start to learn a lot more when you can ask questions directly. And syndicators will answer a lot of questions because they want you to invest with them. They want to be really open and honest. And that’s a really easy way to vet them is, when you ask the question and they’re like, “Let me get back to you.” “Well, why? You should have all these answers.”

Mindy:
So let’s see. So yeah, if you want to invest in real estate, I think real estate’s great. I work at BiggerPockets. Of course I love real estate, but I would say, make a list of the areas that you want to invest in and then start looking at what’s available. Just at a very high level, go to realtor.com and let’s call Indianapolis, just as, give a name.

April:
I had Indianapolis actually in my mind, because there’s a-

Mindy:
I’m a mind reader.

April:
… I’ve heard the price point is attractive if you will. Yeah.

Mindy:
Yeah. So look in and see, what would it cost me? What is the state of that property? What would it rent for? And how do I feel about this? Hop on a plane and go to Indianapolis and have an agent ahead of time, but talk to people in Indianapolis and see some of these houses and see what they’re renting for and make a good decision based on being there you are a cautious person. So I don’t think that investing site unseen is a great choice for you. I think that you should go there and see what you’re going to buy at least in the beginning. And then once you have an agent that you can trust, maybe you can buy site unseen, but in the beginning I think-

Scott:
Property taxes will also be high in Indianapolis.

April:
Good to know.

Mindy:
Well, high relative to the price point, but it’s not a thousand dollars a month.

Scott:
Yeah. A similar percentage of home value will probably go to property taxes in Indianapolis as Austin, Texas, but you will also have lower property values. So-

Mindy:
Yeah, I think that’s fair.

April:
Okay.

Scott:
And rents.

Mindy:
Scott, I want to talk about her cash situation. It’s a little high.

Scott:
Yeah.

April:
It’s like my blankie.

Mindy:
You have $151,000 in cash. Why and where is it? Is it just under the mattress or is it in a high yield savings account? Is it in an easy to access bond fund? Is it just super, super liquid in a checking account?

April:
It’s a great question. So we had a certain percentage of it of just under 40K was in a high savings yield account, but that is now down to 0.5% or even lower when I looked at it last. So it’s earning close to nothing. And then we do have the remainder, over a hundred K just sitting in a lovely, plain old checking and money market account, not making close to any money at all.

April:
So I am very aware that is not the best place for it. However, given my past history, I wasn’t able to give the background here, but our first house that we purchased, we were able to turn a $10,000 investment into $117,000 in cash when we sold it five years later. And that was life changing if you will. However, our taxes increased over 50% the time we were there and the payments. It was about 50% of our take home pay was going just to put the roof over our head without any utilities and such.

April:
So that was from, 2012, we bought that house to 2017, just stretched financially. So we were able to get that money. So then once we got that money, I used it to pay off debt. My husband’s school loans, and then a bunch of it just went and sat. And then we purchased our next home and used part of it for that. But basically, our second house that we bought, we did a Live-In Flip as well. We downsized quite a bit, but we walked away from that house with $168,000 because we had paid down the principle.

April:
So we basically just kept trying to roll the money into houses, and then anything that was left over, I just parked it in cash because that’s my blankie if you will, like I said, it’s the soothing mechanism that lets me sleep at night to know that if myself or my husband were to lose our job, that we would be fine for an extended period of time.

Mindy:
Okay.

April:
I think in talking to you both, I’m now realizing that our retirement assets could also be used in a dire situation to help us. And so I think I have to realize maybe we’re past the point where I’m not sure how we’re going to pay this month’s bills and can maybe take on some more risk. So-

Scott:
Yeah. I actually don’t think your cash position is that unreasonable. I think it’s a little high.

April:
Okay.

Scott:
But you think six to 12 months is a really reasonable cash position and your cash position is probably 18 months. So you can probably wind it down to 120 or a hundred thousand. And that puts you at close to a year from a cash position.

April:
Yep.

Scott:
But I don’t think it’s an egregious amount of too much cash from that. I could argue that you could go down to three months because you both have stable jobs and your monthly cash flow is able to do that. But if you like having the extra cash, that’s there. I would not tap your retirement accounts as a source of liquidity, I’d tap your home equity as a source of liquidity-

April:
Got it.

Scott:
… if you needed it with a HELOC instead of thinking about the … So I think you have access to 300 to $400,000 in liquidity if you needed it in a pinch and you will probably never need it with the situation that you’ve got here from your cash position. So I think that, if you wanted to move toward flexibility tomorrow, the first thing would be to consider moving or relocating and redeploy the 600,000 in home equity into after-tax investments in stocks or real estate or a combination or something else like that, and deploy $50,000 of the cash.

Scott:
Cease or dramatically reduce the contributions to your pre-tax or tax deferred retirement accounts like the 401k, except for the Match, and begin generating a hundred thousand dollars per year in liquidity. And within 2, 3, 4 years, you have a really good shot at having a million dollars outside of your 401ks in assets that will provide flexibility to some degree. How much cash flow you generate will be dependent on the risks and the real estate and the stock and the bond mix that you choose.

Scott:
But that will be one way to get there very, very quickly. Other options to get there, which will just take maybe just a few years longer, because of your great situation would just be, continue to do what you’re doing and shifting that allocation out of the 401k and into the after-tax stuff, maybe deploying $50,000 in cash right now. But that’d be how I’d think about it at a high level. Is that helpful?

April:
No, that’s very helpful. Thank you. Because I hadn’t thought about it in that way. I think I just always thought, if you can max out your 401k, max it out and haven’t thought about maybe how we could dial that back to then use that money to help us build additional flexibility. And the house is something I’m going to have to have a discussion with my husband on to figure out.

Scott:
Yeah. The trade-off with all that is, if you came in and said, “My goal is to maximize the pile size at 68.”

April:
Yep, it’s not.

Scott:
Then we’d be saying, “Go all in on the 401k. Continue doing that and minimizing your tax burden with that and find a way to arbitrage them with the rollover or a conversion ladder downstream.” Which could also be an option. Actually, that is one thing we could talk about here is the conversion ladder. One thought here is, suppose you wanted to just totally call it quits in five years or 10 years. You could continue maxing out these 401k plans and when you stop working, you generate no income. You can begin a conversion ladder moving the funds from the 401k into a Roth, has to sit there for five years after you convert it, but then you can begin withdrawing much of that principle that you put into the 401k plans out of your Roth, because it’ll be principle.

Scott:
So there is a long-term planning approach you could do to take advantage of those 401k plans. But I think that it will somewhat limit your flexibility because you’ll be baked into, has to be sitting there for five years after the conversion. And you got to be really careful and think long-term and strategically. So I don’t like that approach personally and I don’t do it and plan my life around that. But it is an option that’s worth noting.

Mindy:
I like that approach.

April:
I think I had listened to one of your podcasts on that, right? I think you guys have covered that before.

Mindy:
Yes.

April:
Okay.

Mindy:
I like that approach. I am planning on doing that when I no longer am generating income. Right now I am generating too much income to be able to take advantage of that from a good tax perspective. We talked with Mad Fientist back on either episode 17 or 18 about that plan. And he has an article called, How To Access Retirement Funds Early, that covers a variety of different ways to access your retirement funds early. And he was on episode 18. He really easily explains how it goes. There’s several different ways to do that because right now you don’t qualify for contributing to a Roth. Traditionally, there’s the backdoor Roth and the mega backdoor Roth. But I think that if you want to get into real estate, your funds can be used in a different way.

Mindy:
I think that a research opportunity for you and your husband is to look at what is the bare minimum of cash that you feel comfortable with. And Scott had a good point. He doesn’t think that this is an egregious amount of cash. I look at this and I think, “150, that’s a lot of money.” Well, what is that? A year’s worth of spending, 13 or 14 months of spending? That’s not outrageous. I don’t hold cash, but I have a lot of different buckets to pull from should I stop generating income, which isn’t going to happen anytime soon.

Mindy:
Another thing to think about is, and this is in tandem with the bare minimum of cash is, how easy would it be for you to go and get another job at the same level? How easy would it be for your husband to go and get another job at the same level? And unrelated, but sort of related is, tapping into your equity. I think that it would be interesting to start looking at a HELOC. Scott brought this up, the home equity line of credit. You don’t have to use this right now, but you are qualified based on the equity you have in your home and your ability to pay it back, which is your income.

Mindy:
So right now, when you have a really high income, you would be qualified for the most amount of home equity line of credit that you would probably ever get. And then, should you need money, you can just pull into that right away. They’re not going to give that to you should, let’s say your company goes out of business tomorrow. They won’t give you a HELOC when you don’t have a job.

April:
And so with the home equity line of credit, just because I’m not familiar with it, because I tend to shy away from debt. But the idea would be I could open that up, it just sits there and until we use it just would basically be an open line of credit that’s available should we need it?

Scott:
Yes.

April:
Okay.

Mindy:
I have one and I currently owe $0 on it. But I have, I don’t know, a hundred thousand dollars available to me should I need to use it. But I don’t owe anything until I actually pull that money out.

Scott:
Yeah. I think it’s a valuable tool to have access to. You don’t have to use it, if you do use it, think of it as a short-term debt like your, maybe not credit card debt, but close. Think about it as like, “I’m going to pay it back within a year or two. I’m not going to borrow this for a long time.” This is not a down payment on a rental property in your situation, I don’t think. Unless you’re going to plan to flip it really quickly and pay it back. It’s a better source of hard money for example, than a hard money loan. But-

Mindy:
Exactly. Yeah. Let’s say you start looking at houses, you find one in Indianapolis and it is a cash only deal. This allows you to grab the money out. You can pay for that property in cash and then once you own it, you can cash-out refi the property down the road. I have a question about your RSUs as well. You get approximately $20,000 a year, are you able to sell those at any time? And what are you doing with them?

April:
I’ve been selling them immediately and then it goes into cash.

Mindy:
It goes into cash. Okay.

April:
Yeah. I just sell it and then I cashed out and then-

Scott:
Okay. I think this is a good point. I would think through that and I would say, “Is there a tax angle?” This would be a great time to talk to a tax person and say, “Am I getting taxed at long-term capital gains rates or short-term capital gains rates?” Because as long as your company doesn’t go belly up or have a huge problem, it’ll probably make sense to hang on to them long enough to get a long-term tax capital gain on that. After that you can make a decision. Do I want to be invested in the company or do I want to be invested in something else? So you could sell it and then transfer it into your index fund for example, or a real estate investment or towards your real estate fund if you want to do that. But I think that would be a little, a mini homework assignment that could be valuable for you.

April:
That’s good. I had looked at it before, but I should probably talk to a tax professional. The reason that I’ve done that is because when they grant them to me, they actually show up on my W2 as income. And so they take out a percentage to cover the taxes, and then whatever I get left over is there, but I should just probably do some more homework and double check, understanding-

Scott:
Well, they have value at the time that they’re granted and then they change in value over time. You may not be able to sell them immediately after they’re granted. You may have to hold them for some time. Is that right?

April:
Yes.

Scott:
Then they’re all going to be long-term capital gains.

April:
Yep. They grant them to me, it’s vested and then, yep. I get them. And so then I’ve been selling them.

Scott:
Okay. So you probably don’t have a tax angle there at the end of the day. You probably just have to have a thesis. Going back to what we talked about earlier, “Here’s what I want my portfolio to look like. And any excess cash is going to go here first, here second, here third. According to my intentional strategy, it’s going to get me to flexibility at this time.”

Mindy:
Okay. So I have a friend who works for a big name company that you would recognize, and I’m not going to name it, who gets these same RSUs and he holds them.

Scott:
Should I change my name to the last name to the name of that company?

Mindy:
No.

April:
They’re right down the road. Yeah?

Mindy:
It’s not that one. This is more of a rainforest company, not the Rainforest Cafe. He works there, he gets his RSUs and he holds them because he believes in the long-term viability of the company. I have another friend at another big name company who, as soon as he gets his RSUs and can sell them, he instantly sells them and puts them into VTSAX because his plan is to only have index funds. So I’m wondering why you are holding this money in cash instead of putting it into an index fund? And I’m just asking, I’m not trying to make you feel bad about your choice.

April:
No, absolutely. In December I just started doing 500 a month into VTI. And so I’ve just started getting comfortable with doing an after-tax account. And so that is something that I thought about as going forward when I sell them because I do believe in index fund investing would be to take that money and put it into VTI.

Mindy:
Yeah. Have you read The Simple Path To Wealth?

April:
I have. Yes.

Mindy:
Yeah. I think that’s a great book. I think that’s a really solid choice, the index fund. We are transitioning out of holding individual stocks until Carl gets a wild hair up his nose and then he is like, “Oh, let’s buy this.” “Okay, fine.”

Scott:
You seem to be doing pretty well with that strategy.

Mindy:
Well, yes, but I don’t know. That’s another story for another day.

April:
Well, because it’s hard because if you believe in a company, you think it’s going to do well. But at the same time, I like the idea of not having to worry about what’s doing well and what’s not doing well. And just riding the wave if you will of-

Mindy:
Yes. Well everybody knows Carl loves Tesla. Let’s look at Tesla. Tesla’s stock was going along just fine, and then Elon Musk, went on the Joe Rogan show and there was a big dip because he smoked pot with Joe Rogan and then it came back up and then it goes down and it goes up. And if you want to roller coaster, just follow Tesla. It’s going up now, which is awesome. And there’s supposed to be a big split and I’m not complaining that we hold it, but if you can’t stomach the up and downs, then index funds is where you should be.

Scott:
Did you have some other questions outside of the flexibility thing that we’ve spent most of the time on that you wanted us to cover today?

April:
Yeah. One of them was, I’ve been keeping a car loan. It’s only 500 a month, I say only, but should I just pay that off since we have the cash for that?

Scott:
What’s the interest rate?

April:
3.5%.

Scott:
What’s the interest rate on your mortgage?

April:
2.5%.

Scott:
I’d pay it off before I pay off the mortgage, but I wouldn’t pay off either early.

April:
Got it.

Scott:
Personally.

April:
Because the interest rate is so low?

Mindy:
I would not pay off the mortgage at all early if I was in your position, the car loan, I don’t know. I identify with the whole, I want to be debt free. I don’t consider mortgage debt to be debt and I don’t care about that. But with the car loan, I see why you would want to pay it off. You have the cash to do so if it weighs heavily on your mind to have this loan out, I would pay it off just to get it done and then take the 500 that you’ve been paying towards your loan and put it into the stock market.

Scott:
If you’re just going to have a big pile of cash, it definitely is better to pay off the car loan. So you might consider, “I’m just going to pay it off and then I’m going to rebuild my cash position to whatever I’m comfortable with.” That would make sense rather than building the cash position and then-

April:
Got it.

Mindy:
Yeah. Or if you’re not paying the entire thing off, go back to that research opportunity. What’s the bare minimum you feel comfortable with? If it’s 12 months of spending, that’s 132,000, you could almost pay off your car loan with that, the extra cash, that Delta. And then in that case I would pay it off and then just throw that 500 a month back into the emergency fund until it built up to where you were comfortable and then start throwing that 500 into the VTI again.

April:
That’s helpful. And my other question was just related to college savings for my children. I have two kids, six and eight right now and we have 529 plans for them. And we currently put in about 200 a month. And so we have about $40,000 right now in their 529. I don’t go back and forth. We don’t know what college is going to look like for our kids. If they’re going to go, if they’re going to get scholarships, you just start to think about all these things. Do we just stop that and just let it ride and then know that given our financial position, we could probably cash flow college if they do decide to go?

Mindy:
I have two kids, 15 and 12 and I have saved $0 in a 529 plan for both of them. Because even now, I don’t know if they’re going to go to college, although I hope so. They’re both very smart. They both want to do big things, but maybe they change their mind. 15 years old, she’s already changed her mind six times and the 12 year old hasn’t even started yet. She wants to go to college this week and next week she doesn’t. And what we have done instead is just continue to invest in the stock market.

Mindy:
And that is my money, not hers. And when it comes time to pay for college, I would like her to have a little bit of skin in the game. I feel like my parents gave me such a gift by paying for my college, but I also, and I really shouldn’t complain. I’m such a horrible person for complaining, but I wish I would’ve had a little bit more guidance. “Don’t study fashion design, Mindy, you don’t care. It’s not your passion. Go with business or something more generic so that you can at least have a fighting chance of getting a good job instead of the not great jobs that I had for so many years.”

Mindy:
But I think that continuing to save for college for them doesn’t necessarily have to be in a 529 plan. Maybe you open up-

April:
That’s what I was thinking.

Mindy:
… another brokerage account. And now this is for child number one, and this is for child number two. And we continue to put money in there because the 529 plan, I believe the way it works is, you’ve put in a total of 10,000, but it’s grown to 29,000 and they don’t go to college. Well, here you can have the 10,000 back, not all 29 that’s for, I don’t even know where it goes, but you can have what you put into it and that’s it. And that seems really unfair. Whereas if you did it into an after-tax brokerage account, all that money’s yours and you can put it towards college, you can put it towards whatever.

Scott:
Yeah. I completely agree with what Mindy’s saying with a couple of twists. So first for my future children, maybe sooner than later, we’ll see, I do not plan to put any money into a 529 plan. I don’t think it’s bad to have money in a 529 plan, but I don’t plan to do it because I think that the best option is to just build general wealth and flexibility for my family so that I can provide lots of good options while they’re growing up and with respect to college, right? So an au pair or a nice house in this school district or private school, if that’s what we decide they need, could be more valuable than just the college. And I guess, some of those things could be paid for with the 529 and some can’t. So I don’t like the constrictions that would come with the 529 plan.

Scott:
And I think I can just build the wealth in general, in real estate and other areas and harness it to pay for those things as they come up. And that will be more advantageous as a holistic strategy.

Scott:
Second, I am skeptical and someone will have to come back and ping me in 20 years and see if this is correct or not. But I wonder aloud if college education’s going to be much cheaper in 20 years than it is today, in at least real dollars, right? Maybe nominally it’s more expensive because of inflation booms, but you just think there’s a ton of people with student loans right now. And that’s going to come to a head in the next couple of years in one way or another either. It’s going to get canceled by one political party. And if it gets canceled, they’re going to reform, I imagine, how you get new loans in the future, which will change the way that you can, if you can’t get loans in the same way for fashion degree, sorry, Mindy, the fashion design degrees, then that is going to reduce the cost of fashion design school, right? Because people just can’t afford it. They will literally won’t be able to pay for it without getting debt. Therefore, the costs will come down because demand’s going to come down.

Scott:
So either that’s going to happen or they’re going to reform the debt without canceling a lot of the student loan debt. I just think one of those two outcomes has to happen in the next five to 10 years, because it’s just a huge mess right now. And either way, the conclusion’s the same, there’s going to be a reform in the way that you can get debt for these schools.

Scott:
And then third, I think that there’s a fundamental thing that’s related to that problem about whether college is a good ROI or not. And we just had Preston Cooper on the show recently to talk about the ROI of various degrees. And I think that research is going to be very powerful and people are only going to accept degrees that are very strongly in the positive, from an ROI perspective and that have very quick payback periods, especially if we reform student debt and say, “Hey, for example, this student loan is now subject to bankruptcy protection.” That will be the simplest way to solve this whole problem, in my opinion, not to get too political, right? You just, “Hey, I get a loan and then I just quit declare bankruptcy.” So no one’s going to lend you money if it’s a bad ROI, because you’re going to quit declare bankruptcy in a few years. So there’s going to be much more reasonable amounts that people can pay back very quickly for example, would be one way to solve that.

Scott:
So that’s my high level thoughts on college education. I’m not going to save in a 529 plan because of lack of flexibility and because I don’t think I’m going to need quite as much as you need today for college education. We’ll see if that gamble pays off, but I don’t know.

April:
Yeah. And that’s where I was leaning as well, just because my personal education, I had scholarships, I went to a state school, top of my class, so I was able to go for pretty much free. Anything that I didn’t get a scholarship for, I got other scholarships for. 2000 here or a thousand here and then cash flowed by working part-time jobs. So my concern is that, are we at a point where if we keep saving, is just going to get used? And is there a better way for us to allocate the cash at this point in time? And I think the answer to that is, yes. We’re better off taking that money every month and throwing it in an index fund that we can use for whatever purpose we want, whether it be college or a certificate program for them, or who knows what?

Scott:
Great.

April:
So thank you. That’s helpful.

Mindy:
Yeah. And you have a decent amount of money in the 529 plans, 28,000 in, I’m assuming, the older child and 10,000 in the younger child.

April:
Yeah.

Mindy:
I just looked up what can you use the 529 plan for, computers, software, the cost of internet access, the expenses related to students with special needs, students living off campus, rent utilities and food, not purchased directly from the college may qualify, $10,000 per year per designated beneficiary for tuition, expenses for fees and books. So it’s not just tuition, it’s a room and board as well. And yeah, a lot of that can be covered from a scholarship as well, but that’s still … You look at the cost of college and it’s hundreds of thousands of dollars, tens of thousands of dollars, and I don’t mean to make light of your situation, but you’ve saved a meager $40,000 for that. I think that if I was in this financial position, I wouldn’t put any more in, but I don’t think that it is a wrong move to have done it so far.

Scott:
I completely agree. Yeah. I think you could say, great thing to have 40,000 in there, that’ll grow, Rule of 72 for college anyways, and be there. And then, you might wish you had a little bit more, but it might be a better bet to put it into more flexible alternatives.

April:
Helpful. Thank you so very much. All right. And yeah, I talked to Mindy about this before, the only other thing that I’m just grappling with is just the fact that our spending per month is 10,000, just to me it seems crazy. And so what I’ve been trying to figure out is justifying spending money on things that we enjoy now as opposed to saving for the future. So-

Scott:
Let’s walk through a couple of those real quick. We already went through housing, transportation, you crush if you pay off the car loan, right?

April:
Yeah.

Scott:
That gets eradicated. Your food budget’s not out of control, you’re giving budget is super reasonable. That leaves us with insurance and tax and lifestyle. Lifestyle is not crazy. Walk us through insurance and tax, what’s going on there?

April:
Sure. So-

Scott:
1500 a month. Yeah.

April:
Yep. So we’ve got life insurance, which is, we pay about $180 a month and that’s term life insurance for me and my husband, so that if something were to happen, we’re covered. And then we’ve got auto insurance at 225. And then the bulk of it is actually in estimated taxes. I put away 1100 a month for that. This past year, we owed just under $10,000 in extra taxes because of the fact that we get paid out in bonuses. And so that impacts when our accountant does our taxes, how much do we owe? So this year we had 13,000 that we had to pay for 2022 in estimated taxes.

Scott:
So your employers are paying you a bonus, but not withholding the federal taxes.

April:
They are withholding federal taxes. But because when you combine our two incomes and we’re both getting bonuses, it pushes us over.

Scott:
Okay. So you can resolve that issue by contacting your HR departments.

April:
Okay.

Scott:
And just tweaking the withholding amounts from your paycheck with that.

April:
Okay.

Scott:
So I think you have to do a little bit of homework, but you should be able to get a correct amount withheld from your paycheck if you’d like to. And some people like to pay less and then pay the government the 3% fee-

April:
I don’t [inaudible 01:00:10].

Scott:
… Yeah. Okay. I would get on the phone with your HR department and tell them what’s up and they will likely be able to withhold the correct amount of estimated taxes. So you don’t owe a big thing at the end of the year, instead, you’ll get a refund or ideally, close to zero as possible.

April:
That’s a great, I will do that. Thank you very much. I appreciate that. Yeah. Because that’s always a fun surprise. I’ll put it that way. So yeah, that could bring that down quite a bit then if we’re able to get it on the front end.

Scott:
Yeah. Okay. So we’ve really got, you could probably bring down your expenses by about $2,000 a month by making that tweak and then paying off the car if you so choose maybe 1500 to 2000. And then there’s other puts and takes you could put in there, but you really don’t have an unreasonable spending profile with the exception of the housing expense, which is crazy high, not crazy high, but that’s 50% of your spending of your actual spending. If you make those two tweaks that we just talked about. Is coming in that housing category between the mortgage payment, the taxes and the utilities.

April:
Okay. Well, I’ll see what we can do there then. Maybe if we want the flexibility enough, we’ll look at doing our own lawn care and house cleaning and then shovel that into VTI. I don’t know. We’ll see.

Mindy:
No. I don’t think you should. I’m looking for somebody to come in and clean my house. And that feels-

Scott:
I’ve got somebody doing that once every other week. And I am very thrilled with that expense.

Mindy:
It feels like a waste of money because I’m perfectly capable of doing that myself, but it comes down to time and you have more money than time. And that is something that is hard to come from a place with. I have more time than money because I don’t have any money. It’s hard to flip that switch and episode 243, Ramit Satey came on and he talked to us about letting go and spending on things that matter. And it was really hard for me to listen to him and he pushed and pushed and made me cry, but it was good to get out of that comfort zone and start looking, and I have changed the way that we spend a little bit. And we just got back from a vacation a couple of weeks ago. And on that vacation, we tracked our spending, but we didn’t care what we spent.

Mindy:
We went out to dinner every night on vacation and normally we stay in an Airbnb so we can cook dinner at least a couple of nights a week. And we eat in all the time on vacation. And this one, we went out and, “Oh, this looks fun. Let’s do this thing. Let’s try this thing.” We rented a Tesla because car rentals are expensive anyway. And Carl really wanted it and it wasn’t that much more to get a Tesla. And we saved a little on gas and it was a fun experience. And at the end of it, we got through our spending and I’m like, “How did we spend so much money?”

Mindy:
But we had such an enjoyable time knowing that, I know I can afford this vacation. I know that I can spend this money and it isn’t going to change my net worth. Just like, I know that you’re going to take a vacation and I know that it isn’t going to change your net worth. If you spend $2,000 on that vacation, or if you spend $10,000 on that vacation. That is, Scott do the math. What’s $10,000 of 330000%?

Scott:
3%.

Mindy:
3%. That’s like 0.3%. You’re you’re spending 0%.

Scott:
10,000 is 1% of 1 million.

Mindy:
Okay. Well, whatever. It’s 3% like Scott said. So you’re spending 3% of your annual salary on a vacation that your kids are going to talk about for years.

April:
Yeah.

Scott:
Yeah.

Mindy:
Take pictures, get them each, an old iPhone where they can take lots and lots of pictures the whole time and spend time on the beach and get fun towels. And that doesn’t mean that you have to go to spend a thousand dollars on souvenirs, take a lot of pictures and get a super cool seashell or a neat piece of driftwood and be in the moment. And yes, that means that you’re going to go out to dinner every night instead of cooking dinner. But you get so much time back. I didn’t have to go grocery shopping. I didn’t have to cook dinner. I didn’t have to think about things, we took the whole day and just explored. And then at night we went out to dinner. And yeah, it was $120 for dinner, but that’s okay because that’s not hurting my bottom line.

Scott:
You got plenty of flexibility baked into your financial plan. It’s super strong. You definitely know that coming in.

April:
Yep.

Scott:
But you have, yeah.

Mindy:
Knowing and accepting are two different things, Scott.

Scott:
Yeah. You can get what you want out of life here on a short-term basis. And then from a flexibility standpoint, you just need to let a couple of years go by or need to make a couple of big reallocation decisions.

April:
Well, thank you very much. This has been very helpful, very, very helpful. It’s nice to get other people’s take on it as opposed to just what’s going on between myself and my husband when we talk about it. So I really appreciate the insights.

Scott:
Well, thank you for coming on. Congratulations on becoming a millionaire. That’s always fun.

April:
Thank you.

Scott:
And we enjoyed the discussion here. Glad it was helpful.

Mindy:
Yeah. April, thank you so much. This is a lot of fun. And we’ll talk to you soon.

Mindy:
Okay. That was April, that was a lot of fun. And I really identify with a lot of the aspects of her story, Scott. It can be really hard to go from a position of, I have no money to a position of, I have money and I don’t want to spend it because I still remember back to the time when I didn’t have any money.

Scott:
Yeah. I don’t want to sound too harsh when I say this, but I think April in her situation is really emblematic of the, what I would call the middle class trap in America with this. She’s obviously moving a little out of the middle class with her income level, but essentially 90% of her net worth is in her home equity and retirement accounts. And as she pointed out and we discussed on the episode, that leads to a lack of financial flexibility. And it’s hard to move your assets out of your retirement accounts and your home equity, right? So when I asked the question, if you had a blank piece of paper and could draw a brand new portfolio, what would good look like? And we have a hundred thousand dollars in cash, 200,000 in home equity, 500 in real estate and 500 in stocks, right? You can’t do that overnight from April’s position without taking huge tax penalties or withdrawal fees, or making a massive change with your permanent residents.

Scott:
One way to avoid that if you’ve listened to the episode here is, don’t build your wealth that way from the get go, build it with the flexibility goal in mind when you’re getting started so that most of your wealth, when you look up at your 1.3 or 1.5 million in net worth is in your, if you like real estate, real estate portfolio, after-tax stock portfolio a little bit in your home equity, and you’ve got your cash position, right? And it’s much easier to build towards that gradually over a five, 10 year period and end up there than it is to try to convert a position like April’s overnight into that. She’s going to have to make a major set of life with that.

Scott:
So while she can certainly do that and she’s in a great position, right, April’s got an enviable position with being a millionaire and having a great income and plenty of savings right now and all that kind of stuff. Just something for you as a listener to think about, map out that piece of paper and say, “What does my end state portfolio look like? And what’s going to happen to me if I just follow this automatic path?” You have to make some intentional trade-off decisions to get to that flexible end state I think, that we articulated there and have it in mind and begin working towards it.

Mindy:
Absolutely. It’s one thing to max out your 401k, which is a great thing to do when you’re in early wealth building mode. But you can’t forget about your after-tax investments because especially if early retirement is your plan. If you’re planning on retiring at age 55 or 65, then the after-tax investments aren’t necessarily such a big deal. But the after-tax investments are really, really important when you are contemplating this early retirement stuff that we talk so much about.

Scott:
It’s a financial decision, as you just said, to contemplate.

Mindy:
It is. Okay, Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
From episode 300 of the BiggerPockets Money Podcast, he is Scott Trench, and I am Mindy Jensen saying, goodbye for now, brown cow.

 

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In This Episode We Cover

  • Whether or not you’re overinvesting in retirement accounts (and how to find out if you are)
  • Converting from a scarcity mindset to money abundant mindset to truly take worthwhile risks
  • Investing in passive income streams like rental properties, syndications, and dividend stocks
  • How much to keep in your cash position and when to start investing your excess capital
  • HELOCs (home equity lines of credit) and how they can combat a low-cash position
  • Whether or not to pay off your mortgage early (or your car loan!)
  • And So Much More!

Links from the Show