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Finance Friday: Financially Independent, But Not Feeling “Free”

The BiggerPockets Money Podcast
36 min read
Finance Friday: Financially Independent, But Not Feeling “Free”

Financial independence isn’t for everyone. That comes as a surprise for most of us within the personal finance community. Whether we like it or not, the “save, invest, and grind” until you can retire early lifestyle isn’t a commonly accepted one. But what happens when your partner is the one who doesn’t agree? What steps can you take to help them see why early retirement is such a crucial piece of your life?

This is just one of the topics we touch on with today’s guest, Mark. Mark is in a great position, and he’s already financially free. But, he doesn’t know what to do next, how to optimize his portfolio, and whether or not he’s making the right moves. With a blend of stocks, bonds, and real estate, Mark has a million-dollar diverse portfolio, but where can he tighten it up? And, if he’s able to do so, how does he get his wife on board?

This episode serves as a reminder that even when all the hard work pays off, there is still a life to live. If you’ve spent years, or decades, grinding to finally reach a comfortable position in life, it’s necessary to know how to use that time once you have it. Do you keep stacking up investments so your children are ensured a comfortable life, or do you take some time for yourself, chase after your own dreams, and live a life you would love to live?

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Read the Transcript Here

Mindy:
Welcome to the BiggerPockets Money podcast, Finance Friday edition, where we interview Mark and talk about money dates, true portfolio performance and planning your future.

Mark:
So the reason for that is because that $3,000 a month that’s coming out of my portfolio is going to my wife and we have separate finances. She’s got student loans, she has a car loan and things like that and again, when we ran the math so that she could stay home with the baby, that’s basically bank rolling, her cost of living expenses.

Mindy:
Hello. Hello, hello, my name is Mindy Jensen and with me as always is my one throat to choke cohost, Scott Trench.

Scott:
I am liking like I’m that intro. Mindy. Thank you.

Mindy:
That intro is courtesy of our guest today, Mark, who introduced me to my new favorite phrase.

Scott:
If you never heard the phrase one throat to choke before. We all learn something new each show.

Mindy:
Okay. We do learn something every new on BiggerPockets Monies.

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

Mindy:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate or start your own business, we’ll help you reach your financial goals and get money out of the way so you can launch yourselves towards your dreams.
Scott, in addition to learning a brand new favorite phrase, I had a really good time with this episode. Mark has an interesting financial situation. He also has seven rentals, six of which are doing great and one of which I think he should really review the numbers again and potentially look into getting rid of.

Scott:
The first 30 minutes of the interview with Mark, we uncovered a couple things, but Mark’s a millionaire, he spends a lot less than he earns, he’s got a pretty balanced portfolio between equities and real estate. He’s got a strong cash position, make him beef that up a little bit. We found a couple of things, a couple of cash properties may not be cash flowing and I think that’s a good call out for anyone who is a real estate investor, analyze your properties and determine if each one individually is cash flowing. If you have seven properties and your cash flow is $1,000 a month, you have a very good chance of having a dog that is not actually cash flowing in that portfolio, really good advice and then if you have a financial planner, make sure you know what they’re doing because that was another big takeaway from this. But then we get into the real issue in Mark’s portfolio about 30 minutes in which I think is a fun twist.

Mindy:
Yes, I think that is a really good way to phrase it, a fun twist. I think that when you are running your own personal numbers, you need to account for everything. Every dollar that leaves your pocket in one way or another needs to be accounted for and every dollar that comes in your pocket needs to be accounted for. So 30 minutes into this show, we-

Scott:
Have a twist.

Mindy:
… have a twist. I think that’s a good way to say it.

Scott:
All right. And before we bring in today’s guest, Mindy’s attorney makes her say. The contents of this podcast or informational on nature and are not legal or tax advice and neither Mindy nor I nor BiggerPockets is engaged in the provision of legal tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal, tax and financial implications of any financial decision you contemplate. Mindy, let’s go talk to Mark about his money now.

Mindy:
Mark, welcome to the BiggerPockets Money podcast. I’m so excited to talk to you today.

Mark:
Thank you. Thank you for having me, Mindy. I appreciate the time.

Mindy:
Before we jump in and give you advice, first we have to see what we’re dealing with. I’m going to run through your numbers really quick. We have a salary of approximately $8,500 a month, which is no small potatoes, you’re doing pretty well. Rental property income which nets you approximately $1,000 a month after mortgages and property management fees. Primary residents mortgage. For your expenses, we have a primary residence mortgage of about $1,400 a month and all your other expenses lumped in at $1,500 a month. This is clearly not the issue, so we’re not going to focus on that, and quite frankly, Mark doesn’t even keep track of his minute individual expenses because he knows that as long as he is keeping around $1,500 a month, he’s doing just fine. And how does he track it? Well, he’s got a running spreadsheet that dates back to 2016. So he is aware of what he’s spending and he just knows that this isn’t where the focus is.
So this gives us a grant total of personal expenses at $2,900 a month. Remember, back up at the top, $8,500 a month income, 2,900 going out, I think that’s pretty good. He did note that his collective mortgages for rental properties is $2,400 a month and I wanted to point out that rentals are a business and not a personal expense. So rental mortgages would therefore be a business expense. We’re keeping his personal expenses at $2,900, which he says has been fairly consistent for a long time. Business expenses, this is more for people listening than directed at Mark, business expenses come out of your business accounts, they don’t come out of your personal accounts.
On the investment side, we have $750,000 split up among 80% stocks, 15% bonds, 4% real estate and 1% cash. We have $22,000 in an IRA, $16,000 in a Roth IRA, $34,000 in personal cash reserves, which I love, $11,000 for the business cash reserves, which I am going to talk with him about in a bit, $850,000 in total real estate value, $400,000 in mortgages, giving him approximately $450,000 in equity in his rental properties.
So Mark, welcome to the show. What can we help you with? What are your goals for your financial situation?

Mark:
Thank you. Thank you so much for having me, Mindy and Scott. I really appreciate the time. Big fan of BiggerPockets and BiggerPockets Money for sure. So today I really just want a second set of eyes. I’ve got a lot of, call it balls up in the air at this point, between the real estate, the stocks, the bonds, and I’d like to see if there’s any opportunities for improvement. It’s kind of the old adage of I don’t know what I don’t know. I’ve definitely been a student of money for a long time, student of the BiggerPockets for sure, but with that being said, I also consider myself a lifelong learner and I’m always open for feedback and recommendations.

Scott:
Awesome. What are the goals that you have?

Mark:
So to provide you a little bit of background, my wife and I just had a baby girl about a year and a half ago. I did not want her to go to daycare, so she actually stayed at home with me while I worked from home for about the first eight months or so. My wife was a teacher, so when the school year ended we decided that she would actually stay home with the baby. We had conversations amongst ourselves, amongst the financial advisor as well and really determined that we would be able to cash flow $3,000 a month from just the investments, which would allow her to support the baby and stay home indefinitely. She does plan on going back to work once the child is in school, but for the time being, that’s kind of where we’re at. We do, for the most part, have separate finances.
So I think my goal being is realistically what options might we have for one of us at least to retire if you will, indefinitely? I think there’s a little bit of golden handcuffs on my side, if you will, which we can certainly talk about as well. Mindy, you mentioned, I think you said it was the $85 K but with commissions, my total yearly W2 take-home is about $155 K. So it’s the cost benefit analysis of do I stay in that position or do I become a stay-at-home dad? So that’s kind of where we’re at.

Scott:
Love it. Could you give us a three minute background on your money story, how you got to this position because you’re in a strong position, I probably some good news for you on the goals that you’re asking about.

Mark:
Okay. Yeah. So I’ve always been interested in real estate. My father dabbled in the real estate game. He was a white collar professional growing up, but I guess you could say it was his side business. He cash flowed from some rental properties. So for quite a while growing up I saw the benefits of owning real estate and then after college and I was fortunate enough to be on scholarship throughout college and graduate school, so I didn’t come out with any student loan debts.
So after college, once I started my career, I started saving money, educating myself. Obviously I found my way through BiggerPockets and slowly but surely just started buying rental properties. All of mine are the turnkey model. I know some people like that, some people don’t. I’m happy to discuss why I chose that model and ultimately now we’re here.

Scott:
Awesome. And could you give us a breakdown of a typical turnkey purchase? I would love to hear why turnkey and then what that is, how those cash flow.

Mark:
Yeah, for sure. So I use a one particular provider, where they essentially buy, call it dilapidated properties. They do the fix and flip internally, then they sell it, call it retail to investors like myself. Then they also have an in-house property management company. They have in-house repair personnel. Everything is one throat to choke in-house. So there’s really no finger pointing between anybody, I guess [00:10:39][inaudible 00:10:39]

Scott:
Which firm do you use?

Mark:
I use Mid South Homebuyers.

Scott:
Mid South Homebuyers. Okay.

Mark:
Out of Memphis, Tennessee.

Mindy:
I’m sorry, I’ve never heard that term, one throat to choke.

Mark:
You’ve never heard that before?

Scott:
Oh, I use it all the time, Mindy.

Mark:
Yeah, Choke slim in people over here.

Mindy:
Clearly you seem the type.

Scott:
Could you walk us through the numbers on a recent purchase and how you arrive at cash flow for that?

Mark:
Yeah, for sure. So, again, they actually set the price, especially this provider, they do such a good job that the demand is very high. The waiting list to get a property for them is usually about 12 to 18 months. So I purchased the property using the conventional 20% down and then on average I usually cash flow about $200, $250, $300 a month per property. And they’re single family homes or… Well, most of them are single families. I do have a duplex that they sold, but that’s kind of where we’re at. Price points used to be as low as about 60.

Scott:
So you think that’s a conservative estimate of cash flow at a $150, $250 a month?

Mark:
That’s where they started, but now with the rents going up, it’s definitely more.

Scott:
So I think we have earlier stated you have $1,000 in cash flow per month. After accounting for conservative things like CapEx allotment, vacancy, those types of things, what do you think is a conservative number for cash flow for rental properties and what’s a more believable likely estimate, if it’s higher than that?

Mark:
Yeah, well the $1,000 I mentioned was the all-up number, between all of the rental properties. Actually this month, I’ll actually probably net closer to about $2000. Last month it was about $1700, but then again you’ll have the months where I have to do a get-ready and a tenant is leaving and I’ll lose $2,000.

Scott:
All right, Mark, could you give us the numbers on one of the recent purchases? Let’s walk through it.

Mark:
Yeah, so one of the most recent ones I purchased for 97,5 and as of right now, according to Zillow, it’s actually worth about 1039, so it’s already gone up several thousand dollars. The rent on that is 775. Again, that’s not accounting for the 10% property management fees or anything like that and I believe the mortgage on that is going to be the $416.18, so about $400 a month. So again, roughly $200, $300 a month in cash flow on that particular property and that’s about the same across the board for all of them.

Scott:
Awesome. Let me provide a couple of thoughts here. $775 in rent, minus a 10% management fee is $77.50 per month. We have a $416 mortgage each month. I’m going to allocate $60 for you in vacancy costs, that’s about 8%. You’re not going to have that property occupied year-in and your-out long term. Hopefully you beat that, but that’s a good conservative estimate for vacancy. And then I’m going to estimate $100 for maintenance and because it’s a turnkey property and hopefully everything’s brand new, I’m going to estimate $75 per month in CapEx because that’s for your roof in 15 years, those types of things.
So that leaves you about $50 in cash flow, which is still positive. So you’re making money on this investment most likely I think, with some conservative vacancy maintenance and CapEx numbers, those maintenance and CapEx numbers will increase 10 years from now, but hopefully you have a fairly well conditioned unit if you’ve got a reputable turnkey provider there.

Mark:
Yeah, and that’s a good point, and again, that’s actually one of the reasons that I choose the turnkey providers, is because they do everything from the roof to the HVAC systems and Mindy, it’s one throat to choke at the end of the day, so new floors and everything like that.

Scott:
I think it’s great and I think there’s every reason to expect those expenses to be lower. If you weren’t using a turnkey provider, I’d be telling you you need no need less than $150 per month for maintenance and probably the same for CapEx. Hopefully, you’ve got a better deal there, but you want to be conservative with those, but that will depend, but you’re not cash flowing $250 on this property. They might hit that might your bank account some months, but other months you’re going to get a $2,000 dinger or a turnover event or something that’s going to wipe that out.

Mark:
Yeah, and you’re right and like Mindy mentioned at the beginning of the show, I track the monthly cash flow from all of these properties and that’s a perfect example. Like last December I was actually negative about $1,200 for that exact reason to get ready where they had to flip for a tenant, another month earlier this year I netted all of $26 for the same reason. So it definitely all averages out.

Scott:
Yep. So I would just think about it whenever you’re analyzing a new property, think about it in terms of those averages and bring down those expectations to account for the things that you can’t see, which include vacancy, maintenance and CapEx that will come in. Those are the big ones that are, again, hard to see. You’ll obviously know the management expense, of course. If you have any utilities that you pay, probably not. Those will be things you should include in as well.
So if I were to include those items in your overall estimate, does that change your cash flow number? Does that reduce it from $1,000 a month you anticipate to something lower?

Mark:
Oh yeah, probably. So the $1,000 a month, again, is just the average of what’s actually hitting my bank account. So we’d have to do whatever… what did you mention per property or per door, if you want to do it that way?

Scott:
I think you should estimate an 8% vacancy rate per property, that’s one month of vacancy. I like that because we have a great property manager. A good property manager, they will probably charge you about 50% of the first month’s rent and they should be able to turn around the property very quickly, within two weeks.

Mark:
This particular provider, knock on wood, there’s never been… whenever the first tenant moves out, the next tenant moves in the very next month, which has been fantastic.

Scott:
Great. So you go a week or two with vacancy and then you have a new person in?

Mark:
Correct. Yeah and again, a lot of that’s contingent upon what the get ready looks like. Sometimes it’s just cosmetic stuff, sometimes it’s more, but I don’t think I’ve ever gone a month with vacancy.

Scott:
Perfect, but you are paying them a half a month rent most likely for placing the new tenant?

Mark:
I believe that’s correct. Something along those lines, yes.

Scott:
That’s why I like to use one month vacancy or 8%, is because you’ve got the two weeks turn plus the 50% of that first month’s rent going to your management company, which I put into the vacancy column. You could put it into the management expense, but I like to allocate mentally in the vacancy thing. So 8% vacancy is what I would recommend you always account for on these properties and that assumes one turnover event per year. Hopefully your tenants stay a little longer and you only have that turnover event once every two or three years and you beat that number, but it’s a good conservative number to underwrite too in my opinion.

Mark:
Okay, cool.

Scott:
And then I think that if you have an older property, you got to assume… or a big yard that’s unkempt or whatever, you’re in the southeast, you’re going to have to do that, but you’ll have $250 a month in maintenance would be my allocation. For a turnkey property I’d hope that would be less, which is why I’ve allocated $100 for years mentally, and then for CapEx, depending on the condition of the property, this is anybody’s guess, but an older property needs a lot of work and you’ve got deferred maintenance, I’d budget $250 or $300 a month. For a newer property or one that’s been recently remodeled or turned by a reputable turnkey provider, maybe you need less than I’d allocate $75 or $100 a month. So that would be some rules of thumb that I would put in there and that will help you actually know your cash flow over the course of a year.

Mark:
Gotcha. Okay, cool.

Scott:
And your numbers will prove it out over time. You’ll know if you’re too high or too low and you’ll get your averages. You probably have enough historical data already to give yourself a good guess at what those should be.

Mark:
Actually yeah, over the past two years I’m averaging $1,100 a month net cash flow and that’s turnover events and what have you.

Scott:
Great. So we’re probably in a good spot there. Do you have any properties that you think are not cash flowing out of that because seven properties with $1,100, that means each property’s averaging about $125. It begs the question, is there a loser in that mix that could be one to sell?

Mark:
I don’t think so, at least not at this point. I do have concerns over one of my particular tenants. So I purchased the duplex from another investor, so it wasn’t like a brand new, net new turnkey model. However, it was purchased from Mid South from the investor and then I purchased it. So call it certified pre-owned, if you will, and one of the tenants on a month by month lease, which I’m not that big of a fan of. So I’m not looking forward to that get-ready when that happens.

Mindy:
I have a comment, Scott. I do have the privilege of seeing all of the numbers that you have shared. I’m looking at investment property six where the rent is $775 and it looks like the mortgage payment is $699?

Mark:
Yep, so that was one of the newer ones. I think the provider or the lender that I used required me to do 25% down. I don’t really remember why that mortgage payment is as high as it was, but I was kind of shocked when that happened as well.

Scott:
Well that’s a great one to go looking for. You’re probably losing money on that one.

Mark:
Yeah.

Mindy:
So what did you purchase it at versus what is it worth now? Are there any opportunities to change it out? Have you thought about a short term rental model or a medium term rental model?

Mark:
I’m going to be honest with you, I’m not that big of a fan of the short term model, the Airbnb piece.

Mindy:
Okay.

Mark:
I know that they can make a lot of money but they also require a lot of management and if I was to do something like that, I’d definitely hire a property management firm as well. For me, I just like to set it and forget it and have my tenants in there for at least a year.

Mindy:
And that’s totally valid. I love that you know what you like and you know what you don’t like and you don’t want to just throw spaghetti on the wall and see what sticks, I love that. I’m going to try and throw one more thing at you. There’s the medium term rental concept where you’re still doing the furnished rental so you’re getting more income because people aren’t traveling with their stuff but they’re staying longer. It’s a way to get… I have to be careful the way I word this. You’re not getting around short term rental laws because you’re not doing short term rental.
These are minimum 30 day stays and it’s more like traveling nomads, traveling professionals, traveling nurses or military. It’s people who have, sometimes they have a stipend to travel, sometimes they are just out and about traveling, all us frugal weirdos that are travel-fy people and they are willing to pay a higher rent because they are unwilling to sign a one year lease. In general, there’s less turnover. It’s $150 cleaning fee that you can charge them versus $10,000 in turnover costs when you’re replacing the carpet and doing all of that sort of thing.
We have a new book coming out, BiggerPockets has a new book coming out. It’s so new, I don’t even know the actual name of the book, which is really poor planning on my part, but it is about medium term rentals. I’m going to send you a copy so you can read through it and really determine, “Hey, this looks really interesting,” or “You know what, I’m going to stick with this,” but that could be a way to juice some returns on this property that isn’t such a return winner right now. And maybe that one isn’t in the right neighborhood to do a medium term rental or maybe it’s located across the street from a corporate park or by a football stadium or by something exciting where people want to come and see things.
A great way to just look for this is to go on VRBO or Airbnb and just search for rentals in your area and see what’s available, and based on the makeup of this particular property, let’s say it’s a three bedroom, four bath house, see what other three bedroom, four bath houses are out there and what they’re renting at for month long rentals.

Mark:
Okay.

Mindy:
So maybe you could juice your returns on that one a little bit. And the same with the duplex. If you’ve got a big turnover coming up, maybe that would be worth it to turn it into a furnished rental, but you don’t have to do the whole properties, but that’s an option. So just a bit of homework.

Scott:
I completely agree with Mindy’s premise here though, that $775 in rent at a $700 mortgage payment, this property’s going to suck cash out of your life until you sell it or until many years pass. So you could make money, it could go up in value, you could amortize a loan, but it’s not a property I would invest in and I’m on team sell if you’re not interested in short term or medium term rentals and just reposition it into another one of these other properties or use it to pay down debt or something like that.

Mark:
Okay.

Mindy:
Yeah, and if you are going to turn it into a different property, look into a 1031 exchange.

Mark:
Oh yeah. Yeah, for sure.

Mindy:
I don’t think it matters if you bought it yesterday, you can still 1031 into something else because you purchase it as an investment property and now you’re going to buy another investment property. To get a 1031, you need to have a qualified intermediary, that’s a specific job title, qualified intermediary to hold your hand throughout the whole process, they take possession of the money and then buy the next house for you. I mean they don’t, you still buy it. There’s a lot of hoops you have to jump through to make it work, but it’s worth it because then you’re not paying any taxes on the gains, you’re just kicking that can down the road.
So that is another homework opportunity to look into and you don’t have to make any of these decisions right now, that’s just something to look into and see if it makes sense.

Mark:
Okay, cool.

Mindy:
You said something about you’re taking $3,000 a month in cash flow. Are you selling down stocks?

Mark:
So the majority of that is coming from the dividends popped off by the stocks. Full transparency, my financial advisor handles the majority of that. When we ran projections on that, I don’t know, several months ago, he showed me that it could work. So some of it’s the dividends on the stocks and then I believe we’re selling down some bonds as well.

Mindy:
And have you looked into the tax implications of that?

Mark:
Yeah, so I am going to get taxed on it, but we also did something, if I can remember what he called it, tax depreciation, where essentially we sold some stocks and then bought some at a lower rate where it essentially would offset the taxes, if that makes sense at all.

Mindy:
Is that tax loss harvesting?

Mark:
There you go. That’s what I was looking for.

Scott:
Let me… I think I know the answer to this question. How does your financial advisor make money?

Mark:
He makes money off of me.

Scott:
You pay him by the hour or do you pay him based on assets under management?

Mark:
No, it’s assets under management.

Scott:
I am not a fan of that and my instinct every time I hear that is move on from the financial advisor in those cases, because I think if you’re not paying your financial advisor by the hour, you’re paying them out the wazoo in terms of fees that they’re going to be harvesting from your portfolio, often in the 1 to 2% range.

Mark:
No, it’s a lot less than that. I think it’s actually a 0.1% or something like that. The firm is actually called Creative Planning and we can actually cite some of the books that I did the research on. According to everything that I’ve read, they actually had the lowest fees across the entire industry.

Scott:
Fair enough. I will look at Creative Planning and take a look at them after this, but I do think that you have some homework to do in understanding what your financial planner is doing with this portfolio because this is most of your net worth. We just talked about a minority of your net worth and your rental property portfolio, but more than half of it is going to be in this stock portfolio and I think not knowing what’s going on there is a major homework assignment for you in a general sense.

Mark:
Okay.

Scott:
I do want to just take a step back and zoom outlook at your position. You are worth $1.5 million and you spend $3,000 a month. So you’re done. In order to spend $3,000 a month, you need like $750,000. So just with your stock portfolio you can cover all your housing and other types of things and your real estate is gravy in terms of a traditional retirement planning thing. Do you plan to spend $3,000 per month on a go forward basis or do you want to spend more in order to achieve your financial goals?

Mark:
For the most part, probably on a go forward basis. Half of that it is actually my mortgage as well. The $1,400 is cooped into that, so the $1,500, as you mentioned at the beginning of the show, Mindy, $1,500 is everything from gas, food, insurance, phone bill, things like that. So that actually begs the next question of whether or not I should pay off my mortgage. I’m definitely in the camp. Yeah, I’m definitely in the camp of not doing it, but to your point Scott, I don’t foresee myself significantly increasing my cost of living expenses anytime soon.

Scott:
So then do you want to quit your job? Do you want to hang out? Like why do you want to keep-

Mark:
Well that’s part of it as well because I’m clearing well into the six figures. Quite honestly, my job is not very difficult. There’s the health insurance piece of it and to be honest with you, I’m not entirely sure what I would do with my time if I quit. I could spend my days out on the water fishing and doing things like that, but I can’t see myself doing that for the next six years.

Scott:
What happens in six years?

Mark:
I don’t know nothing specific. I was just saying further down the road.

Mindy:
Okay, my first comment is why are you taking money out of your portfolio when you already make more money than you’re spending at your job?

Mark:
So the reason for that is because that $3,000 a month that’s coming out of my portfolio is going to my wife and we have separate finances. She’s got student loan and she has a car loan and things like that, and again, when we ran the math so that she could stay home with the baby, that’s basically bank rolling her cost of living expenses. Whereas my finances, the money that I’m saving each month from the job, and this is actually one of the questions I wanted to ask you guys, is being invested back into real estate. I just put money away for her college, home improvements and things of that nature.

Scott:
So this is really interesting. This is the other half of the story. So like, “Hey Mark, you’re worth a million and a half, you spend three grand a month, you’ve got a good rental property portfolio and you’re able to harvest a lot of cash from your portfolio. What’s going on?” Well it sounds like there’s really a family financial situation that we need to discuss here as well, in the sense that your portfolio is paying for your wife. Is there a reason you haven’t combined finances? What’s the backstory behind that?

Mark:
It’s a little bit of an emotional one because she’s had the opportunity to pay off some of the loans and be more strategic with finances and she’s decided not to. So we don’t see eye to eye all the time on finances, so it’s the kind of the agree to disagree at this point.

Scott:
There’s a conflict in terms of household finances?

Mark:
Correct.

Scott:
And the resolution to that is you pay her $3,000 a month and she does what she does with that and you have your finances separately?

Mark:
Correct. I

Mindy:
I am not here to change your mind. She’s not here to share her side of the story and that’s really not the focus of this conversation. You guys seem to have come up with something that works for you, so I don’t think that we need to focus on that, but I also think we need to acknowledge that it’s there.

Scott:
I think it’s a focal point of the… I think it’s uncomfortable and I hear that you may not be at an impasse with your wife, but I think that how that’s cascading into our conversation today is Mark doesn’t know what he wants. Mark, you don’t know what you want from this. You’re like, “Hey I’m making bank, I have this big portfolio. Life is good, I could retire right now with the way I set up my finances for my personal expenses with this, but I can’t really do that cause I have another three grand in expenses that I got to bank role my family for to a large degree and that’s part of the deal even though it’s not really,” and I think that this is a major underpinning of the conversation. Is that accurate Mark?

Mark:
Yeah, that’s accurate and again, by and large, I don’t know what I would do if I stopped working. I could be the stay at home dad and then she could go back to work, but at the end of the day that would be a teacher’s salary versus what I’m making. So it’s kind of a no brainer at least for the-

Mindy:
I think it’s important to talk about that because, yeah, that’s kind of a no brainer to keep… Carl and I had similar salaries. I was making basically a teacher’s salary without being the prestige of a teacher and he was making a salary similar to yours. I stayed home with the kids because I wanted to stay home with the kids, but also it was not financially advantageous for him to stay home with the kids and me to go work and then we could just scrape by on nothing.

Mark:
Well and that’s exactly what it is.

Scott:
In spite of the fact that there is no formal agreement or you had an impasse, you’ve effectively reached an agreement where you’re paying her $3,000 a month and she is handling all of the childcare expense, frankly, to a large degree with that. So we do have an agreement, it’s just not one that’s been formalized or maybe arrived at in a way that’s in alignment in a formal capacity. But I think going back to you and your situation, I think this is where you got to think about like, “What do I want in three to five years?” It’s as simple as defining that and an artifact for that is this vision document, and I’ve now said this a million times and I feel like a cheese ball when I say the word vision document. But I think it’s a tool that you might benefit from by just go somewhere. Where do you like to go where you feel at peace and you feel like your, “Life is good. I’m happy at this point in time?” Is it fishing or on a boat or something like that, you mentioned earlier?

Mark:
It’s on my boat. Yeah, it’s definitely on my boat.

Scott:
Awesome. Maybe you take a day and you go out on your boat when it’s beautiful out and you bring a notepad with you and you just write one page or one half of a page and say, “In three to five years, here’s what I want to be doing. I want my days to look like this. I want to wake up at the morning at this time. I want to do this thing first thing in the day. I want to hang out with these people. I want to look out my window and see this view,” or whatever that is. And that I think will be a really powerful starting point. And then you can take or leave this because you’ve said there may not have been alignment there, but I might even consider drafting that in a Word document, typing it up on your computer afterwards and presenting the words, “Draft vision for Mark’s [inaudible 00:35:10] draft,” and presenting that to your wife and seeing what her reaction to that is and asking her, “Could you please provide input on this? This is something I drafted. What do you think? Would you make any changes?”
Hopefully she does make changes, otherwise she’s not engaging with the process. But from that artifact you could then begin saying, “Okay, we like those things. Imagine we had all the money in the world. Life is good,” because you do have all the money in the world. You’re a financially independent millionaire at this point in time, so you can dream a little big in this and you say, “Okay, we have all that. What do we want to our life to look like? Okay great. Here’s what would have to be true financially with our household finances in order to make that happen,” and this might be a way to reengage that conversation with your wife, which I think is a major factor in your overall financial story here in talking about this. If you can arrive at a shared vision and alignment, you can maybe restart the conversation around household finances in a healthy way and figure some of those things out. How does that sound? What’s your reaction to that?

Mark:
No, that’s all good man and that definitely has not been something that has happened. So I’ll definitely take that as an action [inaudible 00:36:23] been before. So I like it.

Scott:
“Draft vision,” right? The word draft, a large amount of work there. If you come in with something that is not aligned at first or way off or whatever, the word draft will save you there.

Mindy:
I want to bring up a document that I created last week or the week before on the… I guess it was a couple of weeks ago, the fire planning worksheet that can help you figure out, in conjunction with Scott’s draft vision. This is for you. This could be a separate one, it could be for your wife to talk about what you want your post fi life to look like. I will send you a link, I’ll email you the link, Mark, but I’ll also include a link in our show notes so people listening can download this document as well. And it just asks you a bunch of different questions. What is it that you want your fi life to look like? What do you want to spend your days doing? Why do you want to be financially independent? A lot of people want to quit their job but they quit their job because they work for Scott Trench, the evil troll boss who, it’s not true, he’s really nice. But if you just hate your boss, maybe you really like to work or you would like to work if you didn’t work for this evil troll. So go find a new job.
If you want to be productive and contribute to life in a different way, find a different position, don’t just sit here and muddle through to get to the end, so you can be fi and then you’re like, “Oh, now what?” It’s more of a guiding, help you figure out what you want so then you can shape what your fi number looks like. What does your… I’m not sort sure that 750 is your fi number. I think maybe 1.5 or 2 million would be closer to your fi number and you do have a healthy net worth. A very healthy net worth. Scott, we really stink at saying hurray. So hurray, doing great, Mark, you really are doing great.

Mark:
Okay, cool.

Mindy:
We should have said that at the beginning. We’re like, “Oh you got to do all this other stuff.”

Scott:
Yeah, you’re crushing it. You spend $6,000 a month, not $3,000, but it’s still a very good healthy spread between your income and your expenses. You have a great portfolio, you’ve got strong rental properties. I think if you’re asking us for money advice, if you just keep doing what you’re doing, you’re going to continue to compound your wealth, you’ve got a great situation.
I think you have two cleanup items. I think you need to go through those portfolios. I think you got one to sell, one in that and just maybe just sell it and buy another one that’s a better cash flow. It’s just a simple repositioning exercise. And then I think you have some understanding work to do with what the heck your CFP is doing on in terms of your portfolio and why.

Mark:
I’ll send him your contact info.

Scott:
Yeah, I think you figure out, “What are you doing here and how is this working?” not because he’s doing anything wrong necessarily or she, it’s just because you don’t understand it and you need to understand it because it’s half your wealth. But I think those are the two things. And then the bigger one is figuring out how to get addressing the elephant in the room, which is that twice half your spending is essentially payments to your wife. And I think that even though you may have had some conversations previously with that, trying to re approach that in a healthy way is going to be a game changer for you.
I think your biggest problem is you don’t know what you want and if you keep doing what you’re doing, you’re just going to keep growing your pile of wealth, there’s no question about that, because you’re very efficient at generating wealth at this point. But I think you want to move towards something specific and you’re going to feel a lot better about that if you could do that, especially in partnership with your wife.

Mark:
Yeah, and to be honest with you, that’s something that I’ve honestly struggled with for a long time. I could see myself being, I guess in theory, being on the boat all day. I could see myself traveling the world, but is that something that I could do for 12 months, five years? I don’t know.
So another point to mention is I actually took the entire month of January off because my company gave me that month for paternity leave, and it was the first time that I’d pretty much completely unplugged from work, email, this, that and the other since ever, high school and it was incredible. I was able to be present with her, watched a lot of movies. It was amazing. So what I learned from that experience is that work will always be there. I don’t know what I would do in early retirement, but the flip side of that is do I actually retire and then just take some time to figure it out? Possibly. I don’t know.

Scott:
Yeah. Well, I think you can experiment and it doesn’t have to be an event. You don’t have to know what you want tomorrow. It can be a process of figuring out, but I think that’s your challenge right now. Congratulations, that’s a great problem to have. You’re not in the, “I need to build up an emergency reserve or pay off a bunch of debt or whatever,” it’s, “I’m a multimillionaire and life is good and I got to figure out what the heck I want to do with this immense power I’ve created for myself long term,” and that’s a fun, make it a fun challenge. It doesn’t have to be like a, “Oh, so things are horrible because I don’t know exactly what I want to do next.” It’s like, “No, it’s great. I’m going to go try this out. I’m going to go try this out.” You could start a business, you could switch up your career if you want to do something different. You could just keep doing what you’re doing, that’s a great option and the pile will continue to grow and your options will continue to expand if you keep doing that.
I think that just going through that exercise will be helpful because we can’t give you advice on how to reposition your portfolio other than tweaking a few things. If it’s not, “Oh, I want to live in Bermuda in three years and have a jet ski.” “Well great, okay, we can back into that,” and tell you what needs to be true or whether that’s realistic.

Mark:
Well, so we actually have toyed with the idea of moving out of country probably to Belize or somewhere like that and if we did, then the question becomes is what do we do with the primary residence? My mortgages of all of $1,400 a month, we could probably clear about $3000 a month in rent here for the house and to your point, that would clearly bankroll our lives in a country like that as well.

Scott:
Yeah, man, I think it’s great and I think that would be really fun exercise to say, “And here’s a good one. Over the next three to five years, we don’t know what we want. We’re going to figure out what we want and in that process, we’re going to spend six months here with Meek chilling at home. We’re going to spend six months in Belize with me working full time. We’re going to spend six months in Idaho or six months in Portugal or six months,” or whatever, three months there. That could be a fun exercise as a thought starter, for example. Or, “We’re going to continue to living here and I’m going to start a business,” or “Things are good. I can see myself here for five more years hanging out in my boat with that.”
With that, no change is necessary and the pile will just continue to grow even though we don’t really need the pile to grow that much at this point, or “We’ll just finish the journey, coast over the next five years to financial independence,” because you really need that probably two to… close, $1.5 to $2 million is probably the range you need to spend $6,000 a month.

Mark:
Yeah, and that’s the other piece of it. That’s one of the other reasons that I don’t really want to quit my job, is because this year, after taxes, I’m probably going to save cash of about of $50,000. Last year I saved $70,000 after tax and that paid for my daughter’s college. It’s going back into another real estate and things like that. So the opportunity cost I think is there if I were to leave my job, which is one of the reasons that I don’t really want to do it at this point.

Scott:
Great, but you don’t have to. All you need to do is sit down and say, “I got this great position, what do I want?”

Mark:
Okay.

Scott:
Love it. Anything else you can help you with today, Mark or is that helpful?

Mark:
No, this is definitely helpful for sure. Some of it I definitely already knew, but it’s nice to confirm some of the thoughts that I had and I think that the fire planning worksheet and the vision documents will definitely be integral because you made the point before, Scott, I need to figure out what the next three to five years looks like in a perfect world and start forging the path to get there.

Scott:
And that’s a hard change. Most of us don’t spend our lives thinking about, What exactly do I want?” It’s like, “What do I need to do? I need to get good grades, I need to get a good job, I need to start saving money, I need to do this,” and then you grind long enough and you look up in you’re a millionaire with all these options and it’s very hard pivot to be like, “Oh, I can just do what I want.”

Mark:
Yeah, that’s kind of what happens to be honest with you. Like once I… and again, it’s a good problem to have, but it’s also a problem nonetheless.

Scott:
Well thank you very much for coming on the show today and we’re glad this was helpful. We have a couple of good action items there and hopefully they’ll be helpful. We’d love to check in a couple months and hear how things are going.

Mark:
Absolutely. Yeah, let’s do it again, guys. I appreciate the time and thanks for the conversation.

Mindy:
Awesome. Mark, thank you so much for your time and we’ll talk to soon.

Mark:
Thank you.

Mindy:
All right, that was Mark. That was… Scott, as you alluded to at the beginning of the show, that was a fun twist and I do think that in order for Mark and his wife to fully embrace this fire lifestyle, I think that a money date would be in order.
My action items for Mark would be to have a money date with his wife and because they’re not on the same page financially, this is going to be a delicate introduction, “Let’s listen to episode 157 together. Let’s listen to that new money documentary on Netflix.” What is that called, Getting Good With Money?

Scott:
Yeah. Well, I completely agree with that. If you’re going to suggest stuff, Get Smart with Money is the new documentary. There’s Playing With Fire, it’s another good documentary. There’s episode 157 of our podcast of course, but it might be hard to get your spouse to listen to or watch one of these things, but it probably will be an easier entry point to say, “Hey, spouse, I was thinking about this and I love you very much and this is what I want our life to look like maybe in a couple of years. So I put together a draft of it and would love your input on it. Would you be willing to look at that with me one day this week, like Saturday morning or something like that over breakfast?” And that is I think a really good way to break the subject of, “Okay. Oh, this person wants these things, I want these things. We’re actually very aligned on most of those.”
And then I love the tool from playing with fire that you mentioned around listing and all the top 10 favorite things you like to do and saying, “Let’s optimize our life so that we’re doing more of those 10 things and not spending money or doing things that are not in that top 10 list,” or reallocating time and money to enabling that. I think that’s how you broach the conversation with money, not by saying, “Hey, I want you to spend an hour and a half watching the fire documentary with me.” That’s great, maybe that’s after the first conversation.

Mindy:
We did have a guest who said, “When I want my husband to listen to something, I just lock him in the car with me and we drive for a while and I make him listen,” and that might work, that might not work. Maybe if they have a great big long road trip coming up that might work, “Hey, I’d like to listen to this podcast together.” Whatever you can do to get the conversation going and it has been quite a while since we recorded episode 157, Scott, but I remember that we had several ways to get the conversation going.
Rule number one, make it non confrontational and nonjudgmental, “This is how I see our lives, us spending time together.” You get married to spend time with someone, you don’t get married to never ever see them. So I think there’s a lot of ways to have a conversation, but non confrontational and nonjudgmental should be in the forefront of your mind when you’re thinking about how to approach it.

Scott:
Speaking of Get Smart with Money, that’s fantastic. It’s a new documentary out on Netflix. It features Mr. Money Mustache, it features Paula Pant, it features Tiffany Aliche, and it features Ross Macdonald, and it was just great. It follows four different money stories, and my favorite part of it was, Mr. Money Mustache follows a fairly well to-do couple in Boulder, Colorado, who are looking to achieve financial independence and at one point they cut $3,000 out of their spending. Hopefully this is not too much of a spoiler and Mr. Money Mustache’s reaction to that is something to the effect of, “Wow, you cut $3,000 out of your spending. That’s like cutting a whole family’s budget out of your budget,” and I think Mark’s budget today really reminded me of that or reinforced that. So anyways, it’s a great show. There’s folks from different walks of life and it was really a fun thing and pretty educational.

Mindy:
I actually have not seen it yet. We’re having a watch party at the coworking space in just next week and I’m very excited to watch it. It actually came out when FinCon started, so we couldn’t do the watch party. I am very excited.

Scott:
Should we get out of here, Mindy?

Mindy:
Yes, we should. Wow. We really flip flopped these roles today, Scott. That’s great. From the Finance Friday episode this week of the BiggerPockets Money podcast, he is Scott Trench and I am Mindy Jensen saying Bye-bye, butterfly.

 

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In This Episode We Cover

  • Why cutting down your expenses remains one of the fastest ways to hit financial independence 
  • Recalculating your rental property profits and making sure your cash flow is correct
  • Turnkey rentals and using them as a low-stress way to quickly build a profitable portfolio 
  • Selling off investments to pay for your lifestyle and the risk of doing so
  • Combining finances as a couple and how to propose the idea to a not-so-convinced spouse
  • Defining your goals and drafting your “vision” that’ll help you make the right steps to achieve ultimate freedom 
  • And So Much More!

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