Listener Finance Review: Knocking Out Debt to Start Investing

Mindy:
Welcome to the BiggerPockets Money Podcast, show number 149, where we interview Nick Gruver and review his financial situation to see what tweaks he can make to further himself down the path towards financial independence.

Nick:
I follow the Dave Ramsey approach a little bit by saving up a little bit of money for a little nest egg. That was my plan, was to go smallest to largest, just because I think that’s just the best approach. And like you said, either way, that’s the way to do it, I think, so that’s my plan. Yeah.

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

Scott:
Mindy, thank you for always calculating a new introduction for us. I really appreciate it.

Mindy:
Scott and I are here to make financial independence less scary, less just for somebody else, and show you that by following the proven steps, you can put yourself on the road to early financial freedom and get money out of the way so you can lead your best life.

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 simply get your financial house in order, we’ll help you build a position capable of launching yourself towards those dreams.

Mindy:
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 decision you contemplate.

Scott:
That’s right. That’s Mindy’s way of saying that everything you hear today is for entertainment purposes only and not to be trusted in any format, so with that, let’s go ahead and bring in Nick.

Mindy:
Nick, welcome to the BiggerPockets Money Podcast. I’m so excited to have you today. How are you?

Nick:
I’m great. Thanks for having me on the show guys. This is awesome.

Mindy:
Today’s show is a little bit different than our normal shows in that we are reviewing Nick’s finances. Nick is a listener and we’re seeing what jumps out at Scott and I as maybe an easy win or something to tweak just a little bit that can give Nick some leverage in his financial journey. Nick, can you give us a bit of background about your financial situation and what challenges you’re facing?

Nick:
Yeah so starting out, graduating high school. I’ve always worked since I was 16, got a job. And I was starting to save a good amount. I saved probably 50% or more from the get go. And that lasted shortly, after, kind of going through like a young life crisis, I guess you’d say, where I didn’t know what I wanted to do. Just trying to find my path. And so I ended up quitting my job and used all that savings in probably about two months. Planned on traveling, that didn’t work out, really just spent it on a bunch of dumb stuff.
So from there I got back into working. That’s when it just, I hadn’t been saving. I got into vehicles and that was a big no-no. I got really into vehicles, probably had seven or eight since I was 16. Half of them were new, so big no-no there. So now I’m 25, just turned 25 on Saturday. And I’m ready to take this a lot more seriously. I’ve got a little baby girl now, she’s nine months. I’m getting married in 2022. So I want to start it off right. Reset.

Mindy:
Well, that’s fantastic that you’re thinking about this now. I know a lot of people your age, aren’t considering this at all. What is your job now? What is your income now?

Nick:
Yeah, so I work for, it’s actually a Peterbilt dealership for truck parts. So I’m in outside sales for truck parts. So I just run around shops and I’m bringing in roundabout $3,600 with a commission. That’s commission included.

Scott:
Is that per month?

Nick:
That’s per month, yes.

Scott:
All right and before we get to expenses, could you give us a little high level about, what are your long-term goals here? Are they to begin saving? Are they to work towards financial freedom? Towards investing? What are some of those big goals you have?

Nick:
Yeah, so long-term goals, I’d say my big goal is I want to hit financial freedom before I’m 40. That’s my big goal, which I feel like is very attainable, but just for timeframe, that’s really my big goal. Whether that’s real estate investments, however that ends up coming about, that’s the ultimate goal for me.

Scott:
Okay. Great. Could you walk us through your assets and expenses?

Nick:
Yeah. So bought a house about a year and a half ago, so I do have a mortgage. And that is one thing I did right is we bought this house as foreclosure and we do have some equity in it. So that’s always good. But I’ve got a truck that’s in my name, I owe about $10,000 on it.

Scott:
What kind of truck is this?

Nick:
This is a 2007 Ford F150.

Scott:
Okay.

Nick:
Yup. And before then I had a little Volkswagen, diesel, got great gas mileage, but we ended up starting cutting grass on the side this past year. And so I made a truck, so that’s why I have the truck. But anyway, so I’ve got that, I’ve got a water filtration system that I owe about… We paid about $10,000 for, which is a lot. I know. But our water was really bad.

Scott:
Two questions here. Are you continuing to earn income from the grass cutting side hustle?

Nick:
So it’s slowed down a lot to where we’re about to stop just from the season changing. So that’s about to stop indefinitely until next year, next spring anyways.

Scott:
And do you have any considerations of like… How much are you able to make from that side hustle on a regular basis? Do you have any estimates for that?

Nick:
Yeah, so it actually started off pretty good. I’d say we bring in, net, after everything gas and everything, we’ll probably $300 a weekend. The only thing we’re just trying decide, because I work during the week and then we’re working on the weekends, so it’s very strenuous. But we may continue to do that. We’re unsure about that. Because me and my fiance do that, so.

Scott:
And then do you have any… Where exactly in the country are you located. For example, is there a capacity to do snowplowing?

Nick:
Not really. No, it’s more like family in Alabama, right outside of Birmingham, so the only snow we get is really iced.

Scott:
Fair enough. So there’s not as much need for this service in the winter and they’re not really a couple of instantaneous ones that come to mind to keep doing that.

Nick:
Right, right, yeah.

Scott:
Okay. So walk us through this water filtration system. $10,000 water filtration system. What’s going on with that.

Nick:
Yeah, so we were actually at home Depot and they had those little free water test packages. And I was like what, I’m going to take one just to see it. We did it, shipped it off, completely forgot about it. We got a phone call saying they found something in our water. So the guy came and tested it and showed us all these tests. And made us open up our eyes about how important water is. And we were told Alabama has the second worst water, I guess, treatment you’d say in the US. Don’t know if that’s true. Don’t know if that was just sales guy. But he sold us on it. So we ended up buying it and we pay like $111 a month for that.
So it was a peace of mind really, since my little girl was being born. I wanted to have good water. You always want to have that. So that was a gray area. I don’t know if that’s a good or bad thing. Probably a bad thing.

Scott:
Okay. Well, let’s keep moving through your expenses here.

Nick:
Yeah. So I’ve got those, let’s see, we’ve get some credit card debt. We owe about… It’s about $4,000 in credit card debt. And then I’ve got a personal loan that’s about $2,000. I use that to buy a lawnmower and actually that I use for lawn cutting, And yeah, that’s about it.

Mindy:
Something that stuck out to me when you sent over your list of debts is that if you go by Dave Ramsey’s snowball method, you would pay the smallest debt to the largest debt first. And if you go by the avalanche method, you would pay the highest interest rate to the lowest interest rate first. And what is a little unique in your situation is the debts line up. Either way, if you go snowball or avalanche, they’re in the exact same order, the entire way down, which is good. You don’t have to make a decision.

Scott:
That’s right, yeah. And just to recap that if you’re listening. Look, we’ve got the personal loan for $1,800 at 17% interest. We’ve got credit card debt at $4,000 at 12%, which is the next highest interest rate. Then next largest amount. Then we’ve got our filtration system at $9,000 and 9% interest rate. Then truck loan at $11,000 and 8%. And then the mortgage at $83,000 and 4.37%. So in your case, if you’re looking for example, for help prioritizing which debts to pay first, to Mindy’s point, you just go right down the list and you have an easy decision. So I’m sorry. I’m just basically restate what Mindy said there.
But I think it’s very interesting in your case that it lines up so perfectly, it makes it so simple of a decision in a lot of ways to, in terms of the approach we could use, where you could pay. Any surplus dollars should go to that first personal loan first, then the credit card, then the water filtration system, then the truck loan, and then maybe the mortgage pending on your philosophy from there.

Nick:
Right, right.

Scott:
Is that something you’ve considered before? Do you have a philosophy around paying those debts other than what me and Mindy have just described?

Nick:
Yeah. So I follow the Dave Ramsey approach a little bit, by saving up a little bit of money for a little nest egg. And then that was my plane was to go smallest to largest, just because I think that’s just the best approach. And like you said, I mean, either way that’s the way to do it, I think. So that’s my plan. Yeah.

Scott:
Okay, great. Can you walk us through your other… Kind of like your day-to-day expenses and lifestyle expenses?

Nick:
Yeah. And so I actually… So I just got promoted to outside sales and I’ve got a truck that I take home. So that was another reason why I’m contemplating doing the lawn care next year or not. Because if I don’t, then I can probably get rid of the truck. And I do a little more than I should on it. So I’ll have to figure out something there. So yeah, I’ve got… So I don’t have to worry about gas. Really, my only, I guess, variable expenses would be food, is really my only thing. Because we don’t… With a little baby it’s really hard to go out, kind of thing. So we don’t really do that.

Scott:
Well, let’s walk through your fixed expenses first. Well, how about first, how much are you spending on food per month?

Nick:
So per month on groceries we’re probably spending about $250, maybe $300. And then, lunch for me, because my fiance stays home. I probably spend, I try to do $50 a week at the most because I’m always driving around, but I plan to cut that here soon.

Scott:
Okay. So you’ve got a $250 to $300 a month, average for groceries, plus another, maybe $200 for eating out at lunch, over the course of the month. That gives us about $450 to $500, kind of rounding out around there in food expenses. What are some of your fixed expenses that you’d say are recur every month?

Nick:
Fixed. You’re talking about like our bills and everything like that.

Scott:
Yep.

Nick:
Power bill and everything? So our power bill is really high right now. And we actually just figured out why we just hired an AC guy finally to come out and look at it. But so it’s been running about close to $500 a month, but hopefully that will drop down to at least $300, somewhere in there. Our water bill is also high, but it ties in with the same problem. So hopefully that’ll drop, we’ve been paying about $125 to $140 a month. And so hopefully that’ll drop. And then of course our mortgage, taxes and insurance and everything is $592 a month. And then insurance, I’m paying about $115 a month on insurance. And now my fiance’s vehicle [crosstalk 00:13:32]-

Scott:
Is this for your car?

Nick:
Yes. Correct, for my car. Yep, yep, yep. And my fiance, her vehicle was in my name, but her dad actually has a agreement with her. He’s going to pay for her vehicle and insurance while she’s in college. So that’s awesome. So I don’t have to worry about that. Did I leave anything out. I think that’s it.

Mindy:
Okay. So you sent all of these numbers over to us earlier so that we could review them. I want to talk about your truck insurance right now. That’s your payment for your vehicle insurance, correct?

Nick:
Right, yes.

Mindy:
Okay. You just turned 25. Have you reached out to your insurance company to let them know this? Because as a single male, I believe you’ve got the highest insurance in the world until you’re 25, and then it should drop significantly. Also you have a baby now. So I would make sure that they know that as well, because insurance companies discriminate against young men and jack their rates up. But now that you’re 25, you’re all of a sudden responsible and you should see a big reduction unless you have some high-risk activity or maybe you got a lot of tickets as a younger driver.

Nick:
Okay. I have not done that, but that is something definitely I will be doing.

Mindy:
Another thing-

Nick:
My insurance guy actually just started his own insurance place. So I didn’t talk to him yesterday, but he hasn’t said anything about that. So I’ll have to ask him about that.

Mindy:
Yeah. They’re not going to keep track of it because they don’t want you to pay lower rates if you don’t have to. And another thing to do is shop your rate around. I was listening to the Clark Howard Show and some guy called Ben and he’s like, “Hey, my rate is super, super high.” And Clark’s like, “You should not reward them with loyalty because they won’t reward you with loyalty. They’ll just jack your rate up every single year.” So shop it around. Maybe you can get that down a little bit more. Another thing to do with insurance is you can pay it every six months instead of every month. And that comes also with a deduction in total amount paid. So those are things to consider as you are shopping around your insurance.

Nick:
Right.

Scott:
Hey Nick, do you have any… You said you have a small cash position, is that right? Approximately how big is that cash position?

Nick:
Yeah, so it’s the Dave Ramsay typical, it’s right at $1,000 dollars.

Scott:
Great. Wonderful. And then do you have any other investments or sources of income that we haven’t covered yet or expenses?

Nick:
I do. I just looked at my list again for expenses. As far as income on belts, but more expenses. I forgot about my phone bill. That’s $183 a month. I’ve got TV and internet at $115 a month and life insurance is $16 a month. And that’s it.

Scott:
So when we tally this up when we look at the income, it sounds like you have $2,600 a month in base salary plus $1,000 in commission, so that’s $3,600 a month. And your expenses including the $650 in debts, plus the expenses we just went through, leaves us with a total monthly cash outlay, if you will, of about $2,700. Is that right? Yeah, yeah, that’s about right. Okay, so that situation, if we’re looking at it, that leaves you about $900 a month, $800 to $900 a month in surplus. We got to factor in taxes as well. So perhaps a big chunk of that is coming out in the form of taxes on that income. Is that $3,600 net of taxes or is that pre-tax?

Nick:
That is net, that is net of taxes. That is bring home.

Scott:
Okay, so we do have $800 to $900 in certain plus here. Are you finding that you’re accumulating wealth at a rate of $800 or $900 a month or does that seem high and maybe there’s some other expenses or something else going on that’s maybe having that leech out of your financial situation.

Nick:
Yeah, I think it’s more of like a… I know I’ve got that commission coming in, which is right around what you’re talking about. So it’s like, there’s always that we’re saying, “Oh, well, we can use that to spend on this or that.” It’s just not being disciplined with our money is really what it comes down to. So that’s the reason.

Scott:
So when we look at this expense profile, there’s a lot of unbudgeted items or non-recurring items that are showing up on a month to month basis that are really taken out of your ability to save. Is that fair?

Nick:
Right. Correct.

Scott:
Look, I think the simple… Mindy, what do you think the simple answer to this challenge is?

Mindy:
Well, I’m thinking to myself, first of all, is his fiance on board. And second of all, I see no budget. I haven’t heard the word budget. I haven’t heard anything about, “We sit down and budget,” or, “We sit down and talk.” And I would say of the couples that are on our podcast on a regular basis, 40% or 50% of them at least have regular money meetings where they sit down, they make it a point to discuss their finances, discuss their budget, discuss what’s going on. And a budget is really fluid. It’s not a rock-hard “Well, we said we were only going to spend $200 on groceries and you spent $204. Now our budget’s blown.” But having a framework for where your money is going, is going to be so important. But even more important than that is having your fiance on board. Is she on board?

Nick:
She is. And I think doing this right here will be even better. She used to be the spender of us two, but she’s gotten a lot better. So she’s definitely coming on board with that. Yes.

Scott:
Yeah. What I would consider doing here, Nick is first I would consider some of these fixed expenses. Is there a way to reduce those on a regular basis? Is there a way to like, maybe reduce that $50 a week you spend on lunch to $25 by packing lunch a few days more. Is there a way to… It sounds like you’ve got an interesting issue with your power and water. Take care of those immediately because they’re… Well I guess now it’s the winter. So you may not be spending quite as much on the AC. So perhaps that bill will come down a little bit here.
But make sure that you’re in control of those. And see if you can get in the sense of a budget to the point where you are spending less than that base salary amount. Because that commission may not be guaranteed. You may miss it some months, those types of things. And if you do get it, you can then begin applying a greater percentage of that towards these debts. If you can do that, then all of a sudden you’re going to be saving like a 15%, 20%, 30% rate of your income here. One additional trick there, too, I think as you sit down with your fiance and look through these numbers is to think. And we’ve learned this from a number of folks in the BP Money Show is to say, “Okay, great. We can’t just live like hermits for forever, but why don’t we take two months and just see if we can’t knock out this personal loan of $1,800.” And that’s $100 a month.
And once we’ve knocked that out, let’s celebrate. Let’s go on a nice date. Let’s go on a nice dinner. Let’s do whatever that is. And then let’s start setting aside $50 a month each for our discretionary budget, or items that we can… A date night or whatever that is, and then begin attacking that credit card debt. Each time you do… There’s a way to make this, I think, a fun game, or to create a situation with your budget where you still have some discretionary spending and each person has that control over that additional spending, so you could still have some fun there. But that you’re really disciplined on a month to month basis with knocking out these debts. Imagine this situation, Nick. You’re sitting here in a year or two from now, and you’ve knocked out your personal loan, your credit card debt and your water debt. That’s $336 a month based on the numbers we got here that you’re just no longer paying any more.
Well, now you can continue paying the next debt and have $150 a month that you can spend completely guilt-free on those types of things. And then you think about like in the summers layering in additional use, or even getting more aggressive with that lawn cutting business. Or using that to allow yourself some additional luxuries, like saving up for that next vacation or those types of things with that additional income that you’re able to generate outside of this plan. These are some of the things that strike my mind as I think about your position here, and some of the ways that you can begin creating a template to achieve your goals here. Any reaction to that?

Nick:
Yeah, yeah, no, I think that’s great. That’s my plan is to knock these out and of course, we’ve got Christmas coming up, so there’s a few expenses that are coming up that I know I’m going to have to save for. But yes, that is my ultimate plan to knock them out. I hate debt and I’ll have it with me my whole life.

Mindy:
Okay. You mentioned Christmas that makes me think of that B word again, you and your fiance in order to have the most success for this Christmas season should sit down and budget. We are going to spend $4 on the baby. Listen, give her a box and some wrapping paper. And there is your… Give her a box of tissues. She will pull every tissue out and that’s her treat. She’s nine months old. She doesn’t need a gift. Which sounds so mean, but really she’ll play with the boxes more than she plays with anything you give her. But make a budget for parents, for friends, for family, for whoever that you’re going to give a gift to. And try really hard to stick to that gift budget. Start now, look for things, “Oh, Bob would really love these gloves.” Or “Jane would really like this beautiful necklace and I found it on sale and it’s great.”
And you start shopping now, instead of waiting until the last minute, maybe you’re not me. I wait till the last minute, I’m a terrible gift giver. So don’t do what I, do what I say. But the budget is really going to help you not go overboard because, “Oh, it’s only five more dollars. Oh, it’s only 10 more dollars.” And then all of a sudden you’ve spent 1,000 more dollars on Christmas presents than you had planned or wanted to. The budget doesn’t have to be a really negative thing. I think a lot of people have this connotation like, “Oh, we’re on a budget. Therefore I can’t do anything fun.” And if you love to give gifts, give really great gifts, just make sure that you’re staying within the budget that you set for yourself.
And you mentioned Dave Ramsey earlier, Dave Ramsey has this program called Every Dollar. And I think the slogan is something like “Give every dollar a job so it doesn’t go out and do its own thing.” If you have a dollar coming in, you want to tell that dollar where to go. You don’t want to let it spend itself because it will, it will so easily spend itself. And I like Scott’s suggestion to try and get your day-to-day expenses, your monthly expenses down below your base salary. And then using that extra $1,000 to just throw at the debt. Because I truly believe you can get those three big ones done by the end of next year, or maybe even sooner. Once you start thinking about how you can save money, it can become a game. “Oh, I didn’t spend any money at the grocery store today. Or I went in with a list and I stuck to my list.”
That’s my huge problem is the grocery store. This isn’t about me. This is about you. You said that your power and water, you figured out the issue and those should be going down. I haven’t been to Alabama, but I’ve been to the deep South and boy that air conditioning is really tempting to just crank way down. Can you start cranking it up a degree? Because the difference between like 64 and 65 is no big deal, but the difference between 64 and 72 can be a really big deal. But once you get up there, it might not be such a hard thing to take. I know you have humidity and God love you for…

Scott:
I bet you he’s trying to go from 80 to 74. I don’t know.

Mindy:
No, the thermostat setting.

Scott:
Yeah, I think that’s wise advice. I think the key thing again is if you can get your monthly expenses down below your targeted base pay there, after tax base pay and have that commission be the surplus that you’re spending, that you’re able to move towards that debt. I think you’re going to be in really good shape. And you’ve already proven really creative, your ability to generate $300 per weekend. In addition… on the side there. If you just do that, even part-time throughout the year. What, you do that 10 weeks, that’s three grand you’re making immense additional progress towards paying down these debts and knocking them out one by one, which again, just gives you that much more clearance between your base pay and your expense load.

Nick:
Right, yeah. And just talking to you all makes me more excited about it, honestly. Hopefully I can come back maybe a couple of years and say I paid everything off.

Mindy:
Oh, I think you can come back a lot sooner than in a couple of years and say you paid everything off. But Scott and I are giving you advice. But also you’re really close. It’s like you’re not hopeless, which is a horrible thing to say. I don’t mean to say that word. But you’re so close. A little bit, just a nudge will really help. And I think budgeting is going to do it for you. Hand in hand with budgeting is tracking your expenses. And I have always been super old school, notebook with a pen right by the door that I come in from the car so that I can write it down as soon as I get home.
And the waffles on Wednesday couple have created a mobile expense tracker that you can use. You create it through Google Forms and you just put it on the front page of your phone. And every time you spend any money, you just type it in there. And once you start tracking your expenses, you will see where the money’s going. Track everything, anything more than a dollar, track it. And you would be shocked at where your money goes. It’s just so easy to spend. “Oh, it’s only $5. What does it matter?” It adds up super quick.

Scott:
Yeah. Nick, I see a reality for you that is possible with hard work over a 6 to 12 month period, where look if you can get those expenses below that threshold and incorporate your fund budget all within your base pay and put that $1,000 a month towards each of those personal loans, credit card and water filtration system, and then maybe make a big move with the truck as you alluded to earlier and figure out a way to use the company vehicle. All of a sudden you’re going to go from having $2,700 a month in expenses to, I think $2,100 a month in expenses, net. And you think about the ways you can layer that in. You can accelerate that with the extra side work as appropriate making sure that you’re still having a enjoyable life and spending time with your family here.
But if you think about it, you can make $300, 20 weeks in a row. That’s six grand. 20 weeks out of the year, that’s six grand that goes towards this. Two of that could be for the fun stuff, four of that might be accelerating your debt pay down. And all of a sudden, you’re in a completely different ballpark where you have no bad debts anymore. And now you’re able to put $1,000, $1,500 a month towards building wealth. Stacking up for that investment property or putting that in your 401k or building out a year of financial runway so you have a huge cash cushion to fall back on and a lot of good options there.
I see that as a very attainable reality for you within a 12 to 24 months, six to 12 months, frankly, in some cases, 12 to 24 months, I think even conservatively. And I think that might have some profound lifestyle impacts for you.

Nick:
Oh yeah, definitely. Would.

Mindy:
Scott, do we want to talk about some of the future that Nick is looking towards such as real estate and starting a trucking company?

Scott:
Okay. I think people will learn from this and your situation because it’s real. Lots of people have situations like this that they’ve fallen into or created. And I think you’re not in really bad shape, here. I think you’ve got a path to a big surplus, so I think it’s going to be inspiring and motivating. With that though do you want to talk about your other options here?

Nick:
Yeah, yeah, definitely. Yeah, so one thing I’ve gotten into the past few months is looking at maybe buying a dump truck, which I know is it’s a big expense, but there’s so much work out here, with a dump truck that it’s just hearing the numbers from people that do it almost seems like a no brainer in a way, to really bring in some additional income. So that’s one thing I’m looking at doing. My ultimate goal would be real estate and I would use just the dump truck to use that as a tool to put up capital to do real estate.

Scott:
How much would the dump truck cost to purchase and how would you finance it?

Nick:
Okay. So a good, used mechanically sound dump truck. You’re looking at about 40 to $50,000. And about $10,000 down is what they’re going to want. And there’s actually a place I know he does in-house financing.

Scott:
Okay.

Nick:
Or you could just do a commercial loan to get it. That’s for two different…

Mindy:
Do you need a commercial driver’s license to drive a dump truck?

Nick:
Yeah. So actually, you need a CDL class B. It’s not class A, so you don’t have to go to school for it. Class B is like a, you do it online and then you go do like a driving test, just like you would for your regular license.

Mindy:
Okay. Do you have that one now or would you have to get that? And if you have to get that, how much it cost?

Nick:
Yeah. So that is something I would have to get. I’ve heard varying different costs on it, so I’m not 100% on cost. I want to say it’s around $500. Somewhere around there

Mindy:
Okay, okay, we can ballpark that. And do you know how to drive a dump truck?

Nick:
Never driven one. No. My thing was actually I would be hiring someone to put in it, to do it while I work my full-time job.

Mindy:
Okay.

Scott:
Here’s my initial reaction to this, Nick, is I think while there may be a lot of potential with this particular venture, I think that right now, frankly, your position is one of relative financial weakness. You only have $1,000 in the bank. You’re not… Even though you appear to have the ability to right now, at this moment in time, you don’t seem to have the consistent pattern of accumulating wealth and paying down these debts on a regular basis here.
I would really focus on the disciplined budget process here. I would pay down some of these debts and I would think about building that reality we just talked about maybe having $10,000, $20,000 in cash in the bank. Sorry about that. Having, having $10,000, $20,000 in the bank there. Having most, or all of these personal debts with the exception of the mortgage, paid off or in a much better place, refinanced to a lower rate, those types of things. And approaching this venture from that position.
So think about this. If you have that reality in place, I’m saving $1,500 per month on average, and building that into my cash position, I’ve got $10,000 in debt. I’ve got… Oh, sorry, $10,000 in my cash bank account. I’ve got no personal debt besides the mortgage. Now, you’re in a position of like, “With my $10,000 in the bank, should I consider buying rental property? Or should I consider a creative business opportunity like this one?” Which may well be a great business opportunity. But again, I think it’s just layering on a risk profile to your situation right now that I think could set you very far back in the short run versus being all gravy if you’re approaching the investment from a position of financial strength. Do you have any reaction to that, what’s your thoughts on that?

Nick:
That’s something me and my fiance have talked about is we would definitely have that paid off before I even started doing that. I’d definitely do that. Yeah.

Scott:
And why for our understanding, why would you not run that business yourself, for example. Do you think you’d had the ability to earn, if you ran that business more than $3,600 a month if you operated that truck?

Nick:
It would be real close to it. The only reason I don’t want to do it is just for stability reasons, to just stay with my job. And really, I know a guy who’s about to do it right now. So I’m really just going to see how it goes for him. Let him be my guinea pig, per se.

Scott:
How much is he paying the operator of the truck?

Nick:
So most of them get paid off a percentage of what he brings in, whether that’s per load or per week. It’s typically 25% of whatever the dump truck makes. So normally it’s $1,000 to $1,200 a week.

Scott:
Okay.

Mindy:
That the operator is making.

Scott:
And how many hours is this consuming?

Nick:
It’s really up to the driver, but it’s typically a normal eight to 10 hour day. So 40, 50 hours a week.

Scott:
That seems like a very low wage to make less than $400 per week on that. And to arbitrage that spread, what you’re trying to do is say, “Okay, the truck’s going to bring in 3,600 a month in total income.” Is what I heard based on what you say and, “Hey, I think I’ll be real close to my current pay if I were to do that.” And then I’m going to actually pay someone significantly less than that. And that’s going to be my spread is the business model. I think you’re wise to watch your buddy experiment with this and learn from the lessons there rather than take the plunge, with that big financing for now. If it works, it works and you’re able to find an operator for that and pay them really, it appears to be close to minimum wage to operate that truck there, that could be the case, but I think you’re going to have interest on that debt and payments on that debt. You’re going to have insurance, you’re going to have gas. You’re going to have other types of things there and expenses that come with operating that.
That I think you’re budgeting exercise for your personal life here and getting really disciplined around that, I think will really help you if you want to consider this investment thoroughly. Because you’ll be able to put all of those line items into your spreadsheet and say, “This is how much I’m going to budget for gas. This is how much for insurance, this is how much I’m going to pay my employee here. I’m going to contract them. I’m going to insure them. This is how I’m going to get the bids and the business. That’s so much revenue I’m going to bring in and there’s going to be my profit margin. And is that worth the $10,000 investment that I’m getting there risk adjusted?” Those are all good things to think about as you’re putting that together.

Nick:
Right. Yes, absolutely.

Scott:
Awesome. What are some of the other investing and income ideas?

Nick:
Well, I’ve never thought about it until I started listening to both you and Mindy. But starting maybe an index fund would be, I think, next. I do have a 401(k), but I only put in the minimum so at least I get the free money.

Scott:
When you say the minimum you mean the amount that your employer matches?

Nick:
Correct. Yes.

Scott:
Okay. So you have a 401(k) and some matches there. That’s great that you’re doing that in addition to all those other things. Is that coming out of your paycheck? So you said your salary is $2,600. Is that after the contribution to the 401(k)?

Nick:
Yes, that’s after. Yep.

Scott:
So that’s the money that you’re getting into your bank account is that $2,600 and then the extra $1,000.

Nick:
Yeah. Yearly. I say I’m right at 60 grand. So however that is broke down monthly, but net $2,600 and $1,000 dollar commission.

Scott:
Okay, great. When it comes to index fund investing, I think that’s where… Look, your debts right now are financed at 17%, 12%, 9%, 8%. And then your mortgage is at 4.4%, we’ll round. So most of those interest rates are high enough where personally, I don’t like investing in an index fund rather than paying down an 8% debt, even. The 9% and 12% and 17% certainly seem to be beyond that threshold where I wouldn’t be investing in index funds rather than paying down that debt. I think that the debt rates are too high. So you have two options if you’re interested in investing in index funds and you agree with that philosophy.
One is consider refinancing the debt. Can you get a new credit card with a 0% APR for 12 months and then make sure you pay it off before that 12 month period. Can you refinance your personal debt with a lower interest rate loan, basically. And maybe refinance it at 7%. Can you consolidate some of those things. Can you maybe take out a personal debt or HELOC on your home, for example. Pay down the water filtration system, the credit card debt and the personal loan, and then begin paying off the HELOC at 4%, or 5%, or 6%, rather than these higher interest rates. Have you considered doing any of that with your current debts?

Nick:
I have. The credit card is actually something that I did consolidate. I had some other credit cards and I just consolidated them on one and it’s a lower fixed rate. I mean, lower than it was. But I do like the HELOC idea. I didn’t know exactly what you would get percentage wise typically on a HELOC.

Scott:
Can we ask how much equity you think you have in your house? What’s your house worth and what’s the mortgage amount?

Nick:
Yeah. So the mortgage amount about $83,000. I believe it’s worth $115, $120 somewhere in there.

Scott:
There may be some room there. If you talk to you to your local bank or your mortgage broker or shop around a little bit to pull out maybe a $10 or $15,000, HELOC based on those numbers, potentially. Which could be at a lower interest rate and help you consolidate some of that debt. Don’t go out and spend that on the next thing, use that to reduce your interest rates and those types of things, but that may be an option available to you.

Nick:
Okay, cool. Well, good deal. I’ll write that down.

Scott:
Awesome. And I would do that… And then look, if you have a HELOC and a mortgage, now at 4% or 5%. Okay, now, we can consider maybe investing in additional index funds or contributing more to the 401(k) there because you might get a better long-term return on that than aggressively repaying your mortgage debt or those types of things. But that’s where the decision begins to get a little bit more fuzzy. I think right now, I think it’s pretty black and white for me, that it’s probably a little better to pay off the debts than to invest in index funds. What do you think Mindy?

Mindy:
No, I agree completely Scott. The HELOC, you’re only going to get 80% of your home value over the mortgage that you have out, plus the additional HELOC that you’re getting. So you’re not going to get a HELOC, but you can reuse that. A HELOC is a home equity line of credit. So you can pull those funds out, pay off the personal loan, pay off the credit card, maybe even pay off part of the water filtration system and then start paying back the HELOC while still making the water filtration system payments, the truck loan payments and your mortgage payments. But now your personal loan and credit card, all the money that you were paying towards those debts is now gone. Or back in your pocket… How do I phrase that Scott? All of that money that you were spending is now-

Scott:
They’re refinanced.

Mindy:
… refinanced.

Scott:
Consider them refinanced because they’re now part of your… The way it would work is… And I just did some simple math. Look, if your house is really worth $115, then that would imply an ability to get about $92 in total financing to get up to that 80% threshold. So that would allow you to pull out about nine grand. That could help you pay off immediately the personal loan at 17%, $1,800 pay off the credit card debt. And now you’ve got another $3,200 that you could apply towards early paying that water filtration system.
You still have the same amount of overall debt, but let’s suppose that HELOC’s at 4% or 5% interest. Well, that’s a little, that’s a lot better than paying 9%, 12%, and 17% interest on that other debt. And now your payments will be a little bit lower. It’ll allow you to pay that off a little faster.

Nick:
Okay.

Scott:
So that would be the perhaps tactic potentially to consider given that. And then maybe you’re also able to get a personal loan at a lower interest rate than 17% going forward. And maybe that allows you to arbitrage the remainder of that water filtration, the truck debt to a lower interest rate. But that will depend on your credit score and a number of other factors. If you’re able to do that. Something to explore.

Nick:
Yeah, definitely, definitely will.

Mindy:
And the last thing I want to suggest before we talk about real estate is the truck loan. You said that your company has now given you a truck. Can you use that personally as well or is that only for the job when you’re going to the other truck distribution places?

Nick:
So they haven’t really told me. But I strictly just drive it for work and then I park it once it gets home. Just to make sure.

Mindy:
Okay.

Nick:
So yeah.

Mindy:
Then I think the HELOC is really going to be a very powerful tool for you to knock out those two debts and then take the $225 that you were paying towards the personal loan and the credit card and pay that towards your HELOC while you’re continuing to pay off these other debts. And as you pay off the HELOC, then maybe you pull more out to throw at these higher interest rate loans. But I would definitely shop around for a HELOC, talk to your local bank your local credit unions, and shop around to a lot of them and see what rates they have for you and go with the lowest rate. And pro-tip continue to reach out to them. Once you’ve decided which company you’re going to go with. Call them and keep up on top of the progress of your loan. I’ve heard a lot of people saying that they’re trying to refinance, they’re trying to get a HELOC. And it’s just taking forever. Well, the squeaky wheel gets the grease.

Nick:
Right, right. Okay. Yeah. And we have a ton of local credit unions around here. So, I’ll definitely have my job cut out for me.

Mindy:
You said you bought your house as a foreclosure. Are there a lot of foreclosures in the area?

Nick:
No, not really.

Mindy:
Okay. So that was the luck of the draw.

Nick:
Yeah, we got very lucky. We looked for probably a year and put in a couple different offers. And then this one was on the market for like 15 minutes, we put in an offer. But they told us they had like, 20 something offers and they accepted ours so.

Scott:
Way to go.

Nick:
Yeah.

Mindy:
So you wanted to get into more real estate? Do you want to do rentals? Do you want to do fix and flips? Do you want to do another kind of real estate?

Nick:
Yes. So long term, I really just want to do buy and hold.

Mindy:
Okay.

Nick:
Just to get out of the day to day rat race, if you will. That’s the ultimate goal for me.

Mindy:
And your mortgage is $592 a month? What could you rent that property out for?

Nick:
Yeah, so this one we could rent… I’ve looked and we could rent for about conservatively, between $1,000 to $1,100. Somewhere in there.

Mindy:
Oh my goodness.

Scott:
That’s great.

Mindy:
I’m jealous. Okay, so I would say, once we get these debts knocked out, let’s start looking at the market. See where the market’s at, start learning the market again, because you haven’t been in there for 18 months. See what houses are selling for and just keep your options open. I would get a down payment of at least 10%, maybe even 20%, if you’re really ambitious. And start looking for your next primary residence, turn this property into a rental.

Nick:
A rental. Yes, that’s something we’ve definitely thought about. We play around [inaudible 00:48:37]. We actually thought about maybe selling it and using that to pay off our debt, and kind of resetting the button there. But I really don’t want to get rid of it because the rental income could be good.

Mindy:
$400 a month cash flow.

Scott:
Well, I don’t think you need to. I think that given what we… It doesn’t sound like it’s super tight with your expenses here. It seems like it’s something that’s within your control with a budgeting process. And again, the budget should not be a constraint. Don’t think of it as like, “Oh, this is constraining me. I’m going to be hard and messy and a pain to adhere to.” Think of it as freeing you because, if you’re living within the constraints of that budget, you’re going to all of a sudden free up all this cash every month that right now is going towards debt as a consequence of not having the budget previously. Right.
And, will free all those things up. You know, if you were sitting… If it was like hopeless, and your house was 400 grand or your mortgage was four or five times your annual income here. And you had $100, $200,000 in the home equity maybe we’re having a different discussion about how you really need to harness that equity to pay off these debts because you got an unsustainable situation. But I don’t think you have an unsustainable situation based on what you share with us today. I think you’ve got a very clear path to a sustainable situation. And within 12 months, I think you could be at a position where you basically have no personal debts and are saving up for that investment within 12 months or sooner. So I don’t think it’s a significant delay there. Or really accelerates you at meaningful way to sell as far as I am thinking through the situation.

Nick:
Right, right. And another thing I will add is as of right now my fiance is staying home, she’s also going to school. So in about a year, maybe a year and a half she’ll be done with school. So that’s another income right there.

Scott:
Oh man. Now think about that. So if you can set yourselves up, so when she’s out of school, you got a nice $10,000, $15,000 cushion of the down payment on a rental property. And now all of a sudden, you’re saving $1,500 a month, and then you’re adding her income into the mix. I mean, oh my gosh, now all of a sudden, you’re off to the races, you could be saving $2,000, $3,000 per month, $36,0000, $40,000 a year, going into your wealth building portfolio, and buying rental properties left and right, or investing in stocks, or both those types of things. That’s awesome.

Mindy:
That is super exciting. Nick’s going to be rich.

Nick:
Yeah. [inaudible 00:51:18].

Mindy:
Nick’s going to be rich. He’s going to be retired at 40.

Scott:
Any other items that we should be covering before we kind of begin wrapping up here?

Nick:
No, not that I know of. I appreciate you guys.

Mindy:
Nick, we appreciate you being a guinea pig for this episode. I think this is going to be hugely helpful to anybody who’s listening who’s trying to just get over that hump. Because when you’re inside the, I don’t want to call it a hole. When you’re inside the valley, it’s kind of hard to see what’s on the other side. I can see what’s on the other side. And you are so close to being golden. These little tiny tweaks are really going to just push you over the edge and really propel you to financial independence, so you can go on to live your best life.

Nick:
Awesome.

Mindy:
We really appreciate your time today. Nick, thank you so much. And we’ll talk to you soon.

Scott:
Thank you, Nick.

Nick:
Okay, I appreciate it.

Mindy:
Scott, I loved talking to Nick, this was a super fun episode. And I can see some really easy wins for Nick that will really help just jump him down the road.

Nick:
Yeah, I truly believe that someone that has a position like Nick’s can make a really big debt and change in a pretty short order here. I mean, I think he’s got a path to again, reducing some of those fixed expenses and creating a budget that allows him to live within just his base salary. And then harness all of that commission potential to prepay debt, and then ultimately begin investing. And he’s got a bunch of side hustle ideas and clear willingness to hustle and work towards it.
Also, we described a couple of ways to refinance some of that debt to accelerate that position. So I think the guy’s got a tremendous number of options, and a good setup here. And I think that the root thing here is, again, just discipline with those one off expenses. I loved Mindy, how you brought in the Christmas shopping season. Because like we all try to get our budget house in order if we’re just starting right now. Then Christmas comes and you’re like, “You know what, I really do need to get my mom something nice. Shoot, that’s going to blow my budget here.” Budget it, put it in place and put $1 amount and find a creative way to make something special for… Make it a special season for your family this holiday season.

Mindy:
Yep, and budget doesn’t mean you’re giving up everything. I really do like the way that Dave Ramsey phrases it, you are giving every dollar a job. These dollars, right here are the job of buying Scott a gift. And that’s all that… Those are the only dollars that have that job. So I need to make sure that I find a gift that fits within those parameters. And starting a budget is a little difficult. But once you do it for a couple of months, it really just goes fabulously. And you can see “Oh, wow, I…” Tracking your spending. That’s the other one. I know I’ve said this a ton of times, but it was shocking to me where all my money was going. And I could easily make changes, instantly make changes once I saw that. But it’s so easy to be like, “Oh, it’s $5. Oh, it’s $20.” Or “Oh, I just grabbed an extra thing at the grocery store.” But…

Scott:
Nobody likes tracking their spending. Not a single person in the world enjoys the act of tracking their spending, right?

Mindy:
I do.

Scott:
If you want to do it wealthy… Okay, Mindy is the only person in the world who enjoys tracking their spending, right? You know, but look, if you could just take on the inherent burden, that is accounting for your personal finances or accounting in general, knock knock it out every month and stay disciplined, that hour that you spend setting that up in the first month and then a 10 or 30 minutes per month after that you spend will buy you years of your life, I think, in terms of downstream payoff. And if Nick does that, and is disciplined with his financial situation. His lifestyle, his outlook on life and ability to kind of control his destiny and get his financial house in order is going to be completely different this time next year. If he’s able to start doing that this month. That’s just how it’s going to be. And it’s going to save him so many hours of his life and give him access to so much opportunity there.

Mindy:
I am super excited to check in with Nick in a few months and see where he’s at. And see how his story has changed and how his finances have changed. I think he’s going to be doing huge things really soon.

Scott:
Absolutely. Well, I’m hopeful for that. And look, you always caveat that with there’s always life that gets in the way and things that happen with that. But I think that odds are, you’re right, and we’ll see him making some big progress next couple of months.

Mindy:
Totally agree. Scott should we get out of here?

Scott:
Let’s do it.

Mindy:
Okay, before we get out of here, we want to know what you thought of this episode. When we first posted in our Facebook group. “Hey, would you like us to review your finances?” We were not prepared for the overwhelming avalanche of people saying “Yes, yes, yes.” So we want to know, if you liked this episode, did you find it helpful? Were there questions you would have liked us to ask? Would you like to hear something like this again. Please let us know in our Facebook group, which can be [email protected]/groups/BPmoney. And if you’re not a member of that group, what are you waiting for? You listen to us, join our group.

Scott:
That’s right. It’s very fun. We’re starting to see people posting something that there’s like 50 responses on that or 300 likes for an achievement. So it’s very fun seeing the group grow and all the discussion going in there. And yeah, please do give us that feedback.

Mindy:
Yeah, we would love to hear your opinions. Okay. From Episode 149 of the BiggerPockets Money Podcast. He is Scott Trench and I am Mindy Jensen and we are helping you need bigger pockets. And thank you to Sally for that sign up suggestion.

Scott:
Oh, that’s fantastic.

Mindy:
Today’s show notes can be found at BiggerPockets.com/moneyshow149. Okay, Scott…

Scott:
You know what’s going to happen?

Mindy:
What?

Scott:
Is in 12 months, Nick is going to have some bigger pockets. That’s our new sign off. Yeah. Sorry I’m… I don’t know why that… That seemed so obvious. But anyways, moving on. Goodbye, everybody.

Mindy:
Bye. Thank you for listening.