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Finance Friday: Got Extra Cash? Here’s the Investment Plan for You

The BiggerPockets Money Podcast
33 min read
Finance Friday: Got Extra Cash? Here’s the Investment Plan for You

Retirement planning is something best started early on. The more time you give yourself to invest, the faster your accounts can grow, giving you early financial independence well before the age of sixty-five. But what are the two best ways to do this? On one hand, you’ve got cash-flowing rentals that appreciate while giving you freedom-enabling income with long-term wealth growth. On the other hand, you’ve got passive retirement accounts, many of which can save you boatloads on taxes and grow discreetly in the background while you work away.

It’s hard to say which is a better bet, so why not do both? Today’s guest Benjamin is feeling a little under-diversified after heavily investing in real estate, but without much in his retirement accounts. Benjamin is well versed in the pros and cons of pre and post-tax retirement investing, but with a high income, he’s worried that he may have already reached the income cap for his Roth IRA. Thankfully, he’s unlocked the “holy grail” of retirement accounts, one that will skyrocket his retirement quicker than he thinks.

But before all of this is done, Benjamin and his partner need to build their investment plan. This will help them stay the course when life events come up, allowing them to still retire rich, hopefully in less than a decade. If you want to build your own investment plan, we highly recommend using the one from our own Scott Trench!

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Listen to the Podcast Here

Read the Transcript Here

Mindy:
Welcome to the BiggerPockets Money Podcast Finance Friday edition, where we interview Ben and talk about investment strategies after paying off massive student loan debt.

Benjamin:
Now, I guess I’m in a position where we have been maxing out our Roths for a little bit for probably about two years now. I’d say we’re more heavily invested in real estate, so I want to get into how we can best invest, I guess when it comes to the stock market. I know we should be in low cost index funds. How exactly should I be doing that? Like I said to Mindy at one point, I think we’re going to be over the income limit for Roth IRAs. So, now I’m curious, what should I be doing?

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

Scott:
You know what they call a courteous spy, Mindy?

Mindy:
No, what?

Scott:
Agent. Agent.

Mindy:
A gent. Oh, that’s a great joke.

Scott:
Thank you, Mindy.

Mindy:
Scott and I are here to make financial … Scott is here to make very bad jokes. Scott and I are here to make financial independence less scary, less stress 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 or how bad your jokes are.

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

Mindy:
All right, Scott, today we’re talking to Ben who has recently paid off $120,000 in student loan debt. Hooray, hooray, hooray, hooray, hooray. That is fantastic news. But now, he would like to do something with his extra money and like I said before, there’s no such thing as extra money. You have to just tell that money where to go. So, we are going to talk to Ben today about what he should do with the funds that he has left over from his income versus what he’s spending.

Scott:
Yeah, it’s a great discussion we have with Ben and hats off to Ben. He has really built a strong financial position, that is built on a foundation of hard work and discipline with his spending. And then a couple of smart investments and a sustainable approach to building wealth and generating increasing amounts of freedom in his life. So, really optimistic for Ben’s future. We had a couple of tweaks, I think today and a couple … and Mindy had, in particular, some really good advice for him. But this is somebody who’s already on a really strong trajectory and only getting stronger.

Mindy:
Yeah, I think he’s got a lot of potential and he’s just in that beginning of the grind phase, but starting from really strong position. He has no debt. He has two rental properties that are doing really well and now he wants to know where else to put his money. So, I think that we have a lot to talk about today.
One thing that I have to say, because my lawyers, make me is the contents of this podcast are informational in nature and are not legal or tax advice. And neither Scott nor I, nor BiggerPockets, is engaged in the provision of legal, tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal tax and financial implications of any financial decision you contemplate. And before we bring in Benjamin, let’s take a quick break.
Benjamin and his wife just paid off $120,000 in student loan debt, yay. And got married and had an epic honeymoon and now, they’re ready to buckle down and grow their wealth. He and his wife have a great salary and the ability to save multiple thousands of dollars per month, but he’s not quite sure where to put that money. Benjamin, welcome to the BiggerPockets Money podcast.

Benjamin:
Thank you. I am very excited to be here and have definitely been waiting a long time to be on the show.

Mindy:
I’m very excited you’re here and I can’t wait to jump into your numbers, so I’m not going to, let’s jump in. I see a combined salary of approximately $230,000 from your W2 and some overtime, which is awesome. I also see rental properties that bring in … two rental properties that bring in $1,800 a month total. We’re definitely going to talk about that. I also see monthly expenses of about $5,000, so I am not going to go into these, they seem pretty spot on. You do have an elevated travel budget, but again, we just said you have your honeymoon, which is eating up a big chunk of your travel budget and you don’t get to go on a honeymoon every year. I mean, I guess you could, but … So, the delta between your income and your expenses is between $4,000 and $6,000 a month. Clearly that’s not where we need to focus.
You have investment accounts 401(k), $30,000 in a Roth, 401(k) and $10,000 in your wife’s Roth 401(k). You have $45,000 in cash reserves including $10,000 parental property and six months of reserves personally. Yay, again. Sorry, I have to comment because that’s awesome. And rental properties, you have a … you hae two rental properties, one on $259,000 purchase at 3.875%, hooray. And one at $262,000 at 4.5%.

Scott:
Is there any other debts or assets? We have a primary house.

Benjamin:
We do have a primary house, yep, and we owe about $205,000 on it and it appraised at $285,000, so we’ve got about $80,000 there in equity.

Scott:
Fantastic. And then how about any other debts?

Benjamin:
Just my wife’s car loan, which is a part of that budget. The $51.23 a month.

Scott:
All right, awesome. And Ben, what would you estimate your net worth at, totaling up all the things we just discussed?

Benjamin:
My total net worth, I’ve estimated at $357,500.

Scott:
So Ben, would you mind telling us a little bit about your money background and story? How’d you get here?

Benjamin:
Yeah, definitely. So, I grew up in a middle class family and I definitely like to earn my money as a kid. I did the lemonade stands and delivered papers and worked tobacco and all that kind of stuff. But I was always saving for something, whether that was a PlayStation, or a dirt bike, or whatever. I got into my early and mid 20s and I spent most of that time being in a band and being very, broke just enough to basically get ourselves from point A to point B. And in 2016, me and my guys decided, “Well, let’s disband and it’s time to actually get full-time jobs.”
So, I didn’t have my first full-time job until I was 27. At that point, me and my friend Rich started talking about how we could make money, what we were going to do, and he read the book, Rich Dad Poor Dad, which I know is a common one, and he had told me he had saved $10,000. So, I was like, “Give me that book.”
So, I read that book in 2016 and was like, “Okay, I need to eliminate … ” or come close to eliminating my housing expense and if I can do that, then I can do anything. So, I began saving money at a job where I was making $15 an hour and doing any side hustles that I could and I saved enough to buy a three-family multi-family home in 2017 in December. And from there, I basically rehabbed it a little bit and saved as much as I could. At the point I had lived there for a year, I had met my wife and we’d been dating. I moved in with her and she had bought this three bed, one bath house, that needed a complete renovation. And when I saw that I was like, “Yes, forced appreciation, let’s do this.” And jumped right in with her and we tackled that and we had some pretty big money talks early on in our relationship because I just wanted to be upfront about who I was. I was like, “Hi, I’m Ben, I’m going to be hard to deal with because I want to make something of myself.” And she was all about that and thought it was really cool.
And so, we spent between 2018 and 2021 renovating our house and adding a bunch of forced appreciation, paying off $120,000 of school loans that she had. Luckily, I didn’t have any because I was a college dropout and yeah, I was halfway through and I ended up getting into the Department of Corrections Academy and so I did that. But yeah, and just eliminating any kind of credit card debt, or anything that either of us had to just avoid consumer debt and yeah, we did all those things and now here we are in 2022 and we’re looking to save a bunch of money and invest heavily and really project our lives forward.

Scott:
Awesome. What do you and your wife do?

Benjamin:
So, my wife is a registered nurse in the ER and I work security at Yukon as well. That’s how we met. And I also just got my real estate license, but I am brand new to that, so I haven’t seen any income from that just yet.

Scott:
Awesome. Any big things, tips to share around how you paid off the student loan debt? Was it all just grinding away, or did you have any big events that helped out with that?

Benjamin:
Yeah, no, we actually did have a big event that helped. We definitely grinded but partway through in, I want to say 2020 when loans … or I’m sorry, when interest rates were really low, I took a look at what we owed on her school loans and decided to look at if we had lowered our interest rate on our mortgage and also eliminated our PMI because her original loan was an FHA loan. So, we decided to get the house appraised. She’d originally bought it for $162,500 and when we got the house appraised, it appraised at $285, $285,000. So, we were able to take out about $58,000 from our refinance, eliminate the private mortgage insurance, bring down the interest rate, and ultimately pay off that $120,000 of school loans and our … I’m sorry, our payment on our house only went up about $120 a month. So, that was an $1,100 and change savings for us monthly.

Scott:
You should feel fantastic about that. Congratulations, you grinded and paid off tens of thousands of dollars and at the same time, you clearly were working hard and spending very little and fixing up the house, and you were able to reap the rewards in a big way. So, life probably feels much better right now, in a much stronger position than it did just a few years ago.

Benjamin:
It does, it does. And I’ll tell you, it wasn’t without its hardships, there were points where I was like, “We have to pay off the school loans before we can update the house.” And one day, I walked into the kitchen and it was out of the 1960s and my wife was basically in tears because she hated it so much and I was like, “Okay, I’m going to cave.” I was like, “We can do the kitchen. I can’t see that happen.”

Scott:
Awesome. Well what’s the best thing we can do to help you today?

Benjamin:
Yeah, so I mean now, I guess I’m in a position where we have been maxing out our Roths for a little bit, for probably about two years now and I’d say we’re more heavily invested in real estate. So, I want to get into how we can best invest I guess, when it comes to the stock market. I know we should be in low cost index funds because I’ve read the books, but how exactly should I be doing that? Like I said to Mindy at one point, I think we’re going to be over the income limit for Roth IRAs. So, now I’m curious, what should I be doing?

Mindy:
Well, okay, so once upon a time I contributed to my Roth IRA in January, max it out because that’s the greatest, then it’ll grow the whole year. And by the end of the year, I had sold so much real estate that I had kicked us out of the, you can contribute to your Roth IRA qualification, which is a super fun … it’s a great problem to have but it’s a pain in the butt because now you have to go back and figure out not only how much did you put in, but how much did that money grow over the year? And of course, it was during a high growth year. So I actually did have growth. Now if you put in too much this year, you may not have any growth.
I am edging into the, I don’t know what I’m talking about department right now with the, maybe there is no penalties because you lost money. You definitely have to take that money out and maybe you’re going to be upside down because you still have to take out all $6,000 even though it may have gone down. I’m going to send you to a CPA but also I’m going to tell you what I did, which was to go to fidelity.com, which is where I had my Roth IRA and I reached out to them and I said, “Hey, I made this mistake.” And they said, “Oh, we’ve got a whole document on it, here’s how you do that.” And it’s some fun, complicated math on how much did you put in and how much did it grow, and this is how much you have to withdraw from your account and it is … You already paid taxes on it so you’re not having to pay taxes again. But it’s just a bummer. So at the end of the year, figure out if you did in fact contribute too much and if you did, then that is the problem.
Now, your contribution, your income limit is based on your adjusted gross income, your AGI, so that’s your income minus any traditional 401(k) contributions that you may make. Traditional IRA contributions that you may make. I don’t know if you have the opportunity to make the switch from Roth 401(k) contributions to traditional 401(k) contributions. If you’re right there at the limit, maybe you could make some traditional 401(k) contributions to pull you down so you can keep all your contributions to your Roth IRA in there.

Benjamin:
That’s true, yeah.

Mindy:
This is what we get into the weeds a little bit. The Roth IRA contribution income limits are a sliding scale, so up to a certain amount you can contribute the entire amount and then there’s a little bit less that you can contribute, the more money that you make. But you cap out, I want to say at 244, probably should have looked this up before I started talking about this. Married, filing jointly it’s $214,000 for this year. So, you’re going to be over and if you’re making 230, you could contribute 15,000 to pull you back down underneath that.

Benjamin:
Now, what if I have a loss on a investment property? Would that count against that total number?

Scott:
No, you earned too much income to claim a loss from your rental property against your ordinary income. Let’s pop out for a second here and frame the question. You’re saying, “I’m going to accumulate … ” I’m trying to reframe for you, so correct me if this is the right question, if this is not the right question. You’re going to accumulate $50,000 to $60,000 in cash over this next year.

Benjamin:
Yep.

Scott:
Is that right in terms of savings? Because you’re doing a phenomenal job with the basics and the fundamentals here. You’re saying, “I want to put that into stocks not real estate because I want my position to be more diversified.” Is that what I heard?

Benjamin:
Oh, I definitely want to go heavier into stocks this year. Absolutely, yep.

Scott:
Okay. So what’s the best way to put that $50,000 or $60,000 into stocks. And now, the next question is where do you want to be in three to five years? Because you can dump it all in your 401(k) and we can find ways to get more of it into the Roth, for sure, but then that’s going to soak up as much as $50,000 of that $50,000 or $60,000 if we put it all into the tax advantaged accounts. In five years, you’ve accumulated 250 grand and probably gotten some growth on that, but it’s all in your retirement accounts. Is that what you want in three to five years?

Benjamin:
No, probably not quite that much. So, we are going to continuously be saving to get outside of our starter home currently. But I would say probably at least half of that because we are going to be saving for our longer term family home, as we anticipate having children within a year or two. But still, I would say at least half.

Scott:
Okay, so we want half of this to go into tax advantaged accounts, the other half to be accessible at your option, within three to five years?

Benjamin:
Yes.

Scott:
Okay, that helps. I think then that you have the 401(k) or the Roth question. And you’re making a long-term bet either way. I have my slight preference towards the Roth. If you would like to do a Roth, maybe one of your employers offers a Roth 401(k). Have you checked that?

Benjamin:
So, we’re technically … our employers are government, so we have the 457 and 403(b), I believe, options.

Scott:
Okay, is one of those a Roth equivalent?

Benjamin:
Yes, yep. I believe the 457 is the traditional and the 404(b) is the Roth, I believe. Because yeah, Yukon is technically state of Connecticut.

Mindy:
Oh the 457 is the holy grail of investment plans.

Benjamin:
We’ve unlocked something.

Mindy:
Yeah, yeah, yeah. Okay, so we need to have a thing on the application that says, “Do you work for the government?” Because the 457 is, you can contribute to the 457 and the 403(b) at the same time, same contribution limits. I want to say they’re 20,000 this year, 20,500 and they go up to 22,000 next year.

Benjamin:
Wow.

Mindy:
You can put 20,500 into your 403(b) and an additional 20,000 into your 457 and your wife can do the same thing.

Benjamin:
Wow.

Mindy:
So that’s, what is that? $80,000, $90,000 right there.

Benjamin:
That’s definitely a lot.

Mindy:
And then you can do that again next year. Now, if you both separate from employment with your current company, you can pull out money from the 457 with no penalty, I believe you pay taxes on it but if you already paid taxes because you’re doing the Roth option, then you just get to pull that money out. If you have low expenses and all of this money at your service in the 457 plan, you could really be doing some interesting things. I am going to send you to the Millionaire Educator website. He is the expert on the 457 plan.

Scott:
Yep, so I think that’s a great option, right? Maxing out potentially those two 457s.

Benjamin:
Yeah, that’d be great.

Scott:
Now, if you stay at the job, you can’t access it without penalty. So that’s one caveat.

Benjamin:
Well, that’s okay. Actually, something that’s cool about working for the government in Connecticut is after 15 years, my wife and I are both vested with insurance for the rest of our lives. So, I don’t intend to be with the state beyond that point, which for me is another seven years. So, I intend to grow my business as a being a realtor and then at the point that I have that insurance, I would be out anyway. So, I guess that would leave that accessible at that point.

Scott:
Awesome. Well, then this is a pretty good, easy answer potentially if you’re trying to get more stock exposure and your plan options are reasonable, dumping everything into your Roth equivalent, in the 457.

Benjamin:
Yeah, I definitely want to focus more on stocks in general because I know when we buy our next home we have the $80,000 in equity in this home and if we’re still in that position and the market hasn’t changed crazy, I intend to get another two to four unit multi-family from that. So, I want my main focus over the next few years to definitely be the stocks, knowing that the real estate side of stuff is going to be taken care of itself and that money’s technically already there.

Scott:
Awesome. Would you mind giving us a quick overview of your real estate portfolio and the two properties?

Benjamin:
Sure. So, I own a three family that I bought on an FHA loan at the end of 2017, which I bought for 259 and now I owe 233 on. That is appreciated a ton, some through forced appreciation and just some through the general market. And now, is estimated between 380 and 400 I would say, based off current comps.

Scott:
And what’s that rent? What’s the rent for?

Benjamin:
3,375. It’s actually a duplex and a single family. Single family’s super small, like 550 square feet, almost like tiny home living but not quite. And then I’ve got a garage over there that runs for a couple hundred bucks a month. Mortgage, taxes and insurance on that are 1,980 a month. And then I set a bit of money aside as well for just typical expenses. Up until this point, I’ve handled landscaping and snow myself, looking to get out of that in the next year.
And then on the one in Enfield I just purchased back in April, that was 262,000 and that was on a conventional 25% down and that currently rents for 3,100 but through a couple items, like we’re going to turn the first floor from a one bed into a two bed. It’s got a huge dining room and we’re going to turn that into a two bed and a few things, we anticipate at least $3,600 a month by springtime and that’s on a $1,702 a month mortgage, taxes and insurance.

Scott:
Thank you for coming on and acknowledging that my cash flow is not my rent, mine is my mortgage. It’s also my allocation for expenses, which seem in your case to be very healthy in a ballpark sense. So, these seem like two winners from a investment standpoint. And just a sanity check it, do they tend to put money into your pocket on a monthly basis?

Benjamin:
Yep, they definitely do. I tend to just let it all sit there throughout the year and then I try to pretend that that money doesn’t exist unless I want to invest a little bit of it further. Or I don’t know if we’re already at our monthly budget and once in a while, maybe once a year I’ll be like, “Well, we can take $200 from that account because we never touch it,” but otherwise, I’m just trying to let it build or reinvest it, or something. I try to forget that it’s there.

Mindy:
What is the CapEx situation on both of those properties? The roof, the systems, the appliances, the HVAC system?

Benjamin:
So, both properties have new roofs. I did the roofs in 2018 on my first multifamily, which cost me probably a combined 11,000. The one in Enfield had a new roof when we purchased it, so that was great. Furnaces are all midlife. Windows, pretty good. Siding is good on both of those. I am going to have to put in a driveway on the Enfield home in the spring. I don’t anticipate anything too crazy, we’re just going to do enough so they can get off the street during the winter, when there’s snow. Otherwise, they have plenty of room for street parking.
When we got the Enfield house, we did put $12,000 into that, to the third unit to basically fully redo the unit because it was renting for like 850 and now it rents for 1,200 and we will probably be putting $5,000 to $7,000 into that first floor to turn that into a bedroom, or into a two bedroom in the spring. Otherwise, not too many major things that need immediate attention over there.

Scott:
Awesome. Well, how else can we help you today? Besides the stock question?

Benjamin:
I think this just my overall allocation was my biggest question. I just want to make sure that I’m well diversified and that I don’t end up too heavy in one area. I’m not very risk averse, so I like to feel safe. So, when I think about my retirement, that’s definitely where I need to be, is a question. If I’m thinking about the number, then I think right now we’re spending say $40,000 to $50,000 a year. Based on average inflation, are we going to need double that by the time that we retire? And if we want to inflate our lifestyle at all, I’m thinking we need maybe $125,000 to $150,000 a year. Does that seem like a reasonable thought process?

Scott:
I think that that sounds reasonable to me at a high level, from this, I think. How old are you guys?

Benjamin:
I’m 34, my wife’s 28.

Scott:
I think you guys are in an outstanding position. You save a tremendous amount of money each year. You’ve got two really strong properties here. You’ve locked in your home mortgage at a low interest rate. You’re thinking about all the right things. You’re going to be able to accumulate 250 grand over the next couple of years. You’re not going to see your salaries go down, or probably your savings go down, over the next couple of years. You have plans to buy more property and continue investing.
So yes, I think that there is some math we could back into from a retirement perspective. Whatever that math is though, your current trajectory is going to carry you past that. I’ll tell you that right now, based on that. I’m not sure, your fundamentals are very strong, you’re going to get wealthy with each passing year. Some years there may be some market declines or whatever, as the portfolio becomes a bigger percentage of the change in your net worth, if your portfolio performance is a bigger impact than your savings rate, but you’re not quite there yet.
So, I think you keep doing what you’re doing and you buy another property in the next couple of years and add a couple hundred thousand to the stock portfolio with the process you’re doing. This is a winning formula. This is a strong financial position. You should feel secure in what you’re doing, in my opinion.

Benjamin:
Awesome, thanks. Yeah, definitely looking forward to it. Definitely want to keep building, that’s for sure.

Mindy:
Have you created an investment plan yet?

Benjamin:
Truthfully, no. My plan was max out my Roth IRA and max out my wife’s Roth IRA up until this point and then I would check when we want to retire and at a conservative interest rate and just be like, “Oh yeah, that number seems really good.” And if I do the 4% rule, then I think I’m there. And that’s about where I’ve left it up until this point. And just knowing that I want continuously get more real estate through refi-ing out and slowly building a portfolio.

Mindy:
So, I think that you and your wife can do some homework and conversations about your investment plan. How many properties do you want to own? And that is not a judgmental question that is a, you guys need to talk about it so that you’re on the same page. You want to own two and that’s it, and she wants to own 200, you need to start having more conversations. If you’re both happy with two and you have two, great, you won. Then what do you do with your money?
You want to invest in the stock market. How much do you want to invest in the stock market? Do you want to have a stock market portfolio where you put in $10,000 a year every year, no matter what? Do you want to have a plan for putting in like hey, when the stock market goes down, Mad Scientist, I keep going back to him because he is like all he does is think about this, but he was talking about how he had this plan to invest and he had a bunch of money and he was investing at this price point and this price point and this price point. And then when the market started going down, he wanted to invest more but he couldn’t do it when it came time to pull the trigger. So, he automated all of it.
So, what does your level of risk look like? What does your comfort level with risk look like? I mean, think back to March, 2020 when the market was starting to go, deep dive down into negative, into lower territory. Did that make you feel like all of your investments in the stock market were a mistake? They weren’t.

Benjamin:
No, I didn’t. I was like, “Okay, everything I’ve ever read says this is awesome and a great time to buy and if you miss the 10 best days in the market, don’t pull out.” Always stay in the market no matter what.

Mindy:
Yes, but you might feel this way. How does your wife feel? It’s one thing to say, “Hey, when stocks are on sale, I’m going to buy more.” And it’s quite another to actually do it. So, having an investment plan and a written investment plan can be so helpful when you’re in the throes of, “Oh, I just put $10,000 in the stock market yesterday and now it’s worth 9,000. The money that I’ve had yesterday has now gone down 10% and I’m freaking out.” Keep to your plan, it says next month I’m going to put in another 10,000 and that’s how it’s going to be, or five, or whatever.
So just, I think an investment planning meeting with your wife, and this is not a 15 minute, “Wow, now we’ve come up with all the answers.” It’s a conversation to have over the course of several weeks or several months. What does our stock investment portfolio look like? What does our ideal rental portfolio look like? And just start, that will help you come to a decision of how to allocate your funds.

Benjamin:
Yeah, no, that sounds awesome and I think you’re right. It’s definitely something that we need to do and further discuss.

Scott:
Yeah, I have a template that I’ve provided that I’ve prepared, that could be a helpful starter piece for that. So, I’ll send it to you. It’s just a one-page investment plan.

Benjamin:
Awesome.

Scott:
So, in three years, I want my portfolio to look like this many properties, this much cash flow, this is my stock position, these are my other assets, this is my side hustle, agent job. Those types of things. And that enables us to do X, Y and Z.

Benjamin:
That’s awesome. I appreciate that. Thanks man.

Scott:
Awesome. Let me ask you, I’m trying to think through your situation and find opportunities here. Your fundamentals are really strong. It’s going to carry you to wealth, like I mentioned earlier. So, I guess one challenge we could talk through is speed to completion of financial independence, the baseline level of financial independence.
What I heard you say is that you’re really backing into an event seven years from now. How do I have the maximum possible wealth in seven years, when this government benefit kicks in? Is that right? Is that how you’re framing things?

Benjamin:
Yeah, I’m thinking of that seven years really allows me the opportunity to build out being a realtor and just overall be in the world of real estate because I do want to, like I said, further build out my portfolio and also, just become a realtor. And so yeah, in that seven year period, I would have the opportunity to leave the state with the insurance for life and just get out of that W2 job. So, I guess that’s more like the opportunity of a little bit of entrepreneurship versus just the W2 paycheck, where my growth will definitely be limited because there isn’t a ton of growth in my department, truthfully.

Scott:
Well, in that case, I would do that exercise in a three and seven year period. Say, what is possible three years from now if I crush it? Too many people I think, start with the conservative case. What’s the worst case scenario? You should do that. That’ll make you feel good. But you also should think about what is the best case scenario, or what’s a likely scenario if a couple of these things hit? Like my agent side business or whatever. And that can produce interesting math.
It could be that some of these other projects that you work on, or side hustles that you work on over the next couple of years, make the benefit of staying for the additional four years to get that insurance benefit, irrelevant to a certain degree. So, something to think through when you’re going with this, is that your fundamentals are strong enough to allow you to actually plan on being a little bit more aggressive. Although, I think there is another component to this, which is if you guys are planning on having children, that will also change the math and we need to be more conservative in a couple of things.

Benjamin:
Definitely. Luckily, my wife’s position as an RN, she works three days a week. So, they are a long shifts, she works 12 hour days. But that definitely for childcare, at least gives us the opportunity to avoid a major cost there because also both of our jobs … more so mine, I get the chance to bid on a shift every three months. So, at the point that we have children, I could go to first shift while she works 3:00 PM to 3:00 A, which is what her shift is. And yeah, it might be tough, but we would be able to switch on and off with the childcare there, so that we didn’t have a massive childcare cost, which I know it can be super expensive.

Mindy:
And if your wife is working three days a week, if one of those is a weekend day, then you only need childcare for three days a week as opposed to-

Benjamin:
Yeah, and she does work a weekend. So, definitely.

Mindy:
Three days a week is a lot better than five days a week. But that’s something to consider. Childcare is very expensive and start … Your salaries make it so that you can afford that easily but that is going to eat into your ability to save. We just did an episode with Jen Narciso from Investor Mama and she was talking about different creative ways to lessen the cost of childcare, maybe connecting with another family and splitting the cost of childcare, or splitting an au pair, or connecting with them and you watch their kid two days a week and they watch your kid two days a week. And some sort of hybrid solution, there’s a lot of hybrid solutions available. You just have to get creative. So start thinking about that now.
But in your application, you mentioned that you may be adopting rather than having children natural … Let’s see, how do I phrase this without sounding a horrible person? Rather than having biological children. And you did address the idea that adoption is expensive and that’s so sad because there are so many kids that need to be adopted. But you’re right, it is really, really expensive. What is it? Like $60,000 or something?

Benjamin:
Yeah.

Mindy:
It’s so expensive to adopt a child and I don’t know any way around that.

Benjamin:
I don’t think so, I heard that … and I haven’t looked into it truthfully enough to know, but I heard that there’s a tax break involved there if you take out a loan for part of it. But I don’t know if it would be worth it, it might just be something that we did straight out, regardless. But I have to look into it more to really know.

Mindy:
Yeah, my sister was adopted and we went through an agency, but I mean, I’m 50 years old, my information is outdated.

Benjamin:
So, we’ll see. We’ll take on whatever comes our way.

Scott:
And that will change the calculus on the side hustles as well, at the very least.

Benjamin:
For sure. I think the plan is just always to be as prepared as we can. Even with that budget that I sent you, Mindy, of 5,123, there’s $1,300 of cost that, if it ever needed to be, we could just cut out right away. Which we didn’t have this up until very recently, but there’s $500 of free spending because we were so budget conscious for a long time, that didn’t get shoes until I needed shoes, or didn’t buy extra clothes until I was like, “Wow, I don’t have good jeans.” So we each allowed ourselves $500 there and then we have $300 that we allocate to a date night or takeout. And so God forbid, if we did have to save extra money to do the adoption, which I’d be happy to do, we could knock out quite a bit of that budget just with extra spending.

Mindy:
Oh, you know what I wanted to suggest, Scott, what do you think of this? A HELOC on his primary right now because they’re going to turn it into a rental. I don’t know if there’s any more opportunity or space in his equity to open up a HELOC?

Benjamin:
I’m not sure, what percentage can you usually go to, loan to value on a HELOC? Right now, we’re probably just under the 80% mark. Yeah, I’m not sure how much more we could go. I think there are some that I’ve seen that’s like 85, 15 but not a ton.

Mindy:
Yeah, okay. So, that doesn’t sound like that’s worth exploring.

Scott:
Yeah, I think you could be able to get some if you really shop around, but it’s not like you have 40% equity in your property right now.

Benjamin:
Yeah, we did, but then with the school loan, that’s no longer the case.

Scott:
I think you did exactly what you should have done. So, you’ve already harvested much of that benefit.

Benjamin:
Thanks. Yeah, I looked at what … because we’re probably 18 months to maybe even further out, probably even further out, from getting our home. And then I looked at what this home would currently rent at in the current market and the cash flow wouldn’t be great, although it’s on super cheap debt, so it kills me to sell it. But we would get much better cash flow by getting a two to four unit when we sell this. So, probably going to do that regardless of the fact that we have a great rate on this house. So, yeah.

Mindy:
How soon do you want to move?

Benjamin:
So initially, we were going to probably be in that mark that I was just talking about, but then we decided that we’ve just been pushing, pushing, pushing for every next move for the last few years and we’re like, “You know what? Why don’t we invest more into stocks and put some of that savings that we were seeing monthly into our next home purchase?”
So honestly, this was a very recent conversation, so I’m not exactly sure what that timeline looks like, but we’ve pushed it out just so that we’re not always like go, go, go, go and stressing towards the next thing, just to give ourselves some, hey, let’s relax, let’s go on vacation, let’s enjoy ourselves a little bit.

Mindy:
Yeah, okay. I think that’s valid.

Scott:
So, your plan, just to be clear, is you’re going to sell this property-

Benjamin:
Yep.

Scott:
… at some point in the next 12 to 18 months?

Benjamin:
Probably. Probably further out, actually. That’s what our original plan was. But now that we’re saving towards the next home, we’re allowing ourselves a little bit more time. So, probably two to three year range, truthfully.

Scott:
Okay. And then do you plan to buy one or two properties at that time? A two to four unit and a primary home? Or is the two to four unit the home you plan to move into?

Benjamin:
Nope. So we’re going be saving part of that $50,000 to $60,000 we talked about, that we have the ability to save per year, if we’re doing say half of that, we’ll be saving that over the next few years and using that savings, not what we’re putting into stocks, to buy the primary home. And then the $80,000 or wherever this home is at in a couple years, all the equity from that will go into our next multifamily purchase.

Scott:
Love it. So, you’ll get two properties and sell the current one?

Benjamin:
And that’s what I love about it because even right now, we’re saving up for, I would say our more expensive house. I think the budget we’ve talked about is like $450,000. I still feel like I’m saving for an investment property right now because I know I get to sell this and get another investment property, so I’m still hyped up about it.

Scott:
I love the mentality. I think that’s 100% the way to think about it.

Benjamin:
Yeah, yeah. Keeps me motivated. Yeah, I love it.

Scott:
Well, great. Any other questions for us?

Benjamin:
I don’t think so. I think you guys have pretty much answered my questions about the diversification, where I can go for further education on what our retirement will look like. And that was definitely my big thing because I like to know what direction I’m heading into. I like clarity. Clarity’s super important to me, so this will definitely help with that. So, appreciate you guys on that.

Scott:
Yeah. Again, I can only emphasize, I’m glad those … I think those are a couple of good points that we had today. One is starting with the end in mind and making sure you’re clear and where the portfolio is going, which is not going to be a hard exercise for you because you’re pretty clear on it, if we’re being honest right now with it. I think it’s affirmation that you’re doing all the right things. There’s not much I would change about the way you’re approaching your personal finances. It’s super strong. You’re going to get rich as you keep this up in a really stable way that you should feel secure about.
And then I think Mindy’s great point about the government benefits that you have for retirement accounts, I think that simplifies a lot of this. Now it’s just, okay, everything goes into that plan except for that which you want after tax readily available for the purchase. Maybe even not that because you can just take it out if you want to buy that property by switching your job.

Benjamin:
Yeah, no, that’s awesome. Thank you for that. Appreciate you both.

Mindy:
Yeah, I can’t find the 457 link to the Millionaire Educator who was the one that I have always gone to, but I did confirm that the 457 can be accessed once you separate from service with the company that is giving you the 457 in the first place. I would do some research into the 457 plan versus a Roth 457 plan. I’m going to ask in the Facebook group and if anybody has any comments about a 457 versus a Roth 457, any commentary on that? I would love to hear it. So please go to our Facebook group at facebook.com/groups/bpmoney to share your thoughts on the 457 plan versus the Roth 457 plan.
I think there are advantages to both, and perhaps it would be more advantageous to contribute to a traditional 457 plan if it reduces your taxable income, so that you can hit on your Roth IRA, now, the Roth IRA contribution limits, you have to get all the way down to under 204,000 as a married couple filing jointly, in order to be able to contribute the entire 6,000 and there’s a sliding scale. At 213,000, you can only contribute $600 to your Roth.

Benjamin:
Okay. All right, cool. I noted that, so I’ll check that out for sure.

Mindy:
There’s lots of options there. And then my last piece of advice is also, I already said this, but make an investment plan. Sit down with your wife and have an investing strategy meeting. Grab a bottle of wine, or a bottle of sparkling water and have a nice dinner with no distractions, and talk about where you want your investments to look like in five years, in 20 years, in stocks versus real estate. And see if you guys are already on the same page, you win. And if you’re not, then you can each pitch your side and see how your plan’s going to work and put it into action.

Benjamin:
Absolutely. That sounds like great advice.

Mindy:
Awesome. Well, Ben, this was a lot of fun and I really appreciate your time today. Thank you so much for coming on the show and we will talk to you soon,

Scott:
And congratulations on all the success you’ve had so far.

Benjamin:
Oh, thank you guys both. Honestly, I’ve looked forward to this for a very long time. When I first found BiggerPockets, I was like, “One day I’m going to be on that podcast,” and I didn’t know which one it would be, but I’m very happy to be here and yeah, it’s definitely dream come true. So, thank you guys so much.

Mindy:
Thank you, Ben. All right, that was Ben, and that was actually a pretty fun story. Scott, I really like all of the options that he has and I am super excited for him and for anybody else listening, to do an investment plan. If you don’t have a written out plan for what kind of investments you want and where you want your money to be going, how do you know that it’s going where you really, really want it to go? Especially in these emotionally charged times where you can see the stock market dropping sometimes rather dramatically and wondering, “Ooh, is it the right time to put my money in there?”
So, I encourage everybody to go to the show notes for today’s episode and we have the link to Scott’s document, his investment plan and download that. And really take some time to either fill it out yourself or if you are partnered up, have a conversation with your partner about where you want your money to go.

Scott:
Yeah, I think Ben was a great example of someone who has a very repeatable set of circumstances. This is a person who is 34, he said his wife’s 28, and they’re about to start their family. So, they’re in the period in which they’re double income, no kids, they’re … His wife is a nurse, he’s a security guard. This is not an unrepeatable set of circumstances. This is not someone that’s not ordinary in the United States, in terms of their ability to generate income and build wealth and discipline, frugality, long-term planning, all of these things, that hard work on the side to repair multiple properties over several years, that’s generated a couple hundred thousand dollars in net worth and a trajectory that’s going to carry them to financial independence over time. They got to be planned, they got to be smart. Their expenses will creep up as they start their family, especially if they choose to adopt, which as we noted is pretty expensive and will suck out about a year of cash flow, but it’s a really strong position and got to commend him for what he’s done.

Mindy:
Yeah, absolutely. They have done so well so far, and I am excited for what they have coming up and just, I like when couples are on the same page, so that’s why I’m encouraging them to have the investment plan. It sounds like they, for the most part, are on the same page. So, I think it’ll be a very easy conversation for the two of them to have. All right, Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
Okay. That wraps up this episode of the BiggerPockets Money podcast. He is Scott Trench and I am Mindy Jensen saying, stay safe. It’s a jungle out there.

 

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In This Episode We Cover

  • Paying off six figures of student debt and using the extra income to invest heavily
  • House hacking and using primary residences to build wealth
  • Roth IRA investing and what to do if you’ve hit the income limit
  • The best way to invest in your retirement with stocks and index funds
  • The right way to do diversification and safely building wealth at a young age
  • Speeding up your path to financial independence with rental property investing
  • 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.