Finance Friday: Debt-Free, Great Pensions, But Will it Be Enough?

Mindy:
Welcome to the BiggerPockets Money Podcast show number 196, Finance Friday edition, where we interview Azar and Jeffrey, and talk about debt payoff and what’s next.

Azar:
When we were drowning and he was purely on the pension, and I was a hospital nurse, I was working nights. We were both in the grind, and our oldest was young. I think, at least I looked at it like it was an obstacle because it was… You couldn’t really make that much on top of it, and it only increased to 35,000 recently. I think before that, it was 18,000. He was very limited in what he could do, and we were constantly feeling like we were drowning. It was kind of an area of contention.
We’ve had our struggles with this whole situation. But for me, it wasn’t until I started finding FI and all the podcasts and everything that I was like, “Whoa, this is actually really, really great.”

Mindy:
Hello. Hello. Hello. My name is Mindy Jensen. With me as always is my country music loving co-host Scott Trench.

Scott:
I mean, if you’re on one of our shows, you’re going to get your dog back, your wife back, your life… Nevermind. That’s what they say about country music.

Mindy:
Yes.

Scott:
Next time.

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

Scott:
That’s right. Whether you want to retire early and travel the world, going to make big time investments and assets like real estate, start your own business, or finish up this journey with a creative approach involving their pension will help their financial goals [inaudible 00:01:38].

Mindy:
Scott, I am so excited to bring in Azar and Jeffrey because their story is not that uncommon. When they shared their story, I kept hearing obstacles that they’re being hit with, and issues that they’re facing and thinking, “Yeah, that happens to a lot of people. I see a lot of people get that too. Yep, that happens to a lot of people as well.” You can wallow in that awfulness, or you can figure out how to overcome the problems and keep on pushing.

Scott:
I think they’re in a pretty good position these guys. They have a very stable income. They seem to have no fear of losing the income from the pension. She seems to have no fear of losing her job. What they’ve done is they’ve gone about tackling their debt, becoming debt free and putting themselves in a really good position. I believe that with… In the discussion, we’ll get to this. We have a very long show today coming up, but I believe that they’re right there. They’re right on the cusp of becoming financially free, and that that pension is a huge asset that they were wildly under estimating in terms of its importance relative to finishing out the journey to Phi.
It was cool to see them laid up a little bit as we explored that and thought about, “Hmm, if we can get the expenses below the amount of that pension, we’re done.” If not, we only need a few 100 bucks a month, really, maybe $1,000 or so to become financially free and have all that optionality. I thought it was a fun show. I think it was really a creative discussion about asset allocation. I think you’ll really enjoy it.

Mindy:
Before we bring in Azar and Jeff, my lawyer makes me say the contents of this podcast are informational in nature, and they 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. Scott, let’s bring in Azar and Jeffrey, and give them a few financial decisions to contemplate.
Today, we are speaking with Azar and Jeffrey. Azar is a school nurse in Massachusetts, and she’s 39 years old. Jeffrey is 47 and receiving a disability pension. With monthly expenses less than their income, they’re on a really good path, but they’ve made some financial mistakes in the past. Well, who hasn’t, right? They became debt free last year, yay, and now are wondering what strategy will benefit their financial situation best. Azar and Jeffrey, welcome to the BiggerPockets Money Podcast. I am so excited to talk to you guys today.

Azar:
Thank you so much for having us. We’re so excited to be here.

Jeffrey:
Thank you.

Mindy:
Let’s jump right into this. Let’s start building your balance sheet, your personal balance sheet. Where is your salary coming in on a monthly basis?

Azar:
I’m a school nurse, a public school nurse, so my take-home pay is $1,985 bi weekly. That’s not including any 403(b) contributions. That’s mandatory 11% pension that gets taken out.

Mindy:
So that’s after the contributions.

Azar:
Yes, so my take-home after pension contributions and taxes and union dues and whatever else, I get $1,985 bi weekly. My salary is about 80K a year. Jeffrey gets $2,873 a month from the pension. That includes full health insurance and dental already removed. We’re all set on the insurance, and that’s the take home every month.

Scott:
Awesome. Are there any other sources of income that you have like side hustles or anything like that, or is that pretty much it?

Azar:
Not right now. Prior to COVID, Jeff was doing some independent contracting work doing property management and project management and general handyman work at a building down the street from us. That’s a lot of the reason why we were able to pay off all our debt. He was working a lot, and I was working, and we were able to pay off our debt. But then when COVID hit, his job was going into a lot of people’s apartments and things like that. We have a two-year-old and a 16-year-old. The two-year-old was going to my mom’s a couple days a week, but then with COVID, she was home, so my husband has been home since basically COVID hit.

Scott:
Well, make sense. It sounds like you have some potential to earn more income, but it’s iffy, and there’s a… You’re not really expecting tons of that in the future going forward. Is that right?

Azar:
That’s right, and also, because of the pension, he’s capped at what he can make on top of it, so it’s around 35K extra that he could make once he exceeds that which he never has. Then they start… We haven’t experienced the process, but I think they start docking the pension, and then also unexpectedly, we found out we were expecting number three just a few days ago, which puts a little bit of a twist on everything we were going to ask. That’s another thing. It’s like we were just hit with this literally a few days ago.

Mindy:
Yay, baby.

Scott:
Well, congratulations. That’s awesome.

Azar:
Thank you.

Mindy:
What is this… Two can live as cheaply as one, or five can live as cheaply as four. Baby number three can take all the hand me downs from baby number two. I mean, have you ever met somebody who has a baby and is done having babies? They’re like, “Can I give you all the clothes and all the toys and all the things that I don’t need anymore?”

Azar:
We actually lucked out. My two-year-old, most of her clothes are hand me downs. Her toys are hand me downs. Jeff has a couple sisters with… We have a whole bunch of nieces and nephews, so we’ve been so lucky.

Mindy:
You’ve been lucky. As a mom who is done having babies, as soon as I was done with all that stuff, I’m like, “Who can I give this to? I can’t throw it away. I will give it to the Goodwill if I have to, but I want to give it to somebody else. I want it out of my house.” Well, congratulations. Well, that’ll put a little bit of a spin on things, but not that much, because I mean, babies are… Babies are easy, right, Scott?

Scott:
That’s right.

Mindy:
That’s like, “Oh, babies are going to be so easy.” It’s so easy to raise them like, “Yeah,” so that’s Scott with zero kids.

Scott:
They do exactly what you tell them, and they cost very little was my understanding.

Mindy:
100% accurate. Yes.

Scott:
All right.

Azar:
I’ll just throw this in there. Our second one, our two-year-old was IVF, so we had infertility for so many years, and so this number three is completely unexpected. If anyone’s listening to this thinking that they’re infertile and had IVF, and they’re not going to get pregnant, definitely-

Jeffrey:
Think twice.

Azar:
… think twice because here we are.

Mindy:
Yes, I know a couple of women who have babies that are, “Surprised. Oh, I didn’t think I could get pregnant, but I guess I can.” Well, fantastic news. Let’s get back into your balance sheet. Let’s look at your debt load. They became debt free. You still have the mortgage.

Azar:
We still have a mortgage, so we’re in a higher cost living area, but we recently refinanced our mortgage. We owe 293 on our house, and we refinanced it at a 30-year fixed 2.5% just this past January, and that’s all we owe. The house maybe could sell for five, 550 depending.

Scott:
Since you mentioned that you became debt free recently, would you give us a quick overview of what that journey look like and how recently you became debt free?

Azar:
Sure. It was September of 20 that we paid off the last thing, which was a old home equity loan, but we owed I think it was… We paid off a total of 83,000 in… It was about two and a half years. We started in February of 18.

Scott:
That’s awesome.

Azar:
We ended in September of 20, and that was my student loan from nursing school, a car loan, a home equity loan. I mean, we also cash flowed… Thankfully, our insurance paid for most of the IVF. We had a little bit of optional testing we paid for out of pocket, so we did cash flowed some stuff in between and the birth and all that. I had some unpaid maternity leave. What else did we have? The car, the student loan, home equity loan, there was a little bit of credit cards at the beginning.

Jeffrey:
There were some credit cards.

Azar:
That was the first to go. We did the debt snowball.

Scott:
That’s awesome. You were crushing debt for the last several years, and snowballing it. It sounds like your accumulation rate was 3,000 a month or something in that ballpark that you’re applying towards this debt every month for a sustained period of time. Is that in the ballpark?

Azar:
I would say so, and it was a lot due to the fact that he was doing… He had his side hustle going, so we were pretty much taking, I think, most of my income at that point, and just throwing it at debt.

Scott:
Love it. Did you build any assets while that was going on? You mentioned that you have 11% goes mandatory to the pension. Are there any investment accounts that were going or those types of things that you have today?

Azar:
Jeff doesn’t have anything except for the pension, and it’s totally stable. We don’t have any worries about that. I have my 11% pension, and I just checked the balance. I’ve been at my school. This is your seven, so I have almost exactly 50K in that account, and then you’re vested after 10 years, which we can talk about in a little bit. I had just started a 403(b), and there’s 4,500 in that, and that’s all in FXAIX. It’s like S&P 500 fidelity index one. I have a Roth that I just started that only has 3K in it, and it’s mostly an FZROX.
It’s all through fidelity. Then I have a traditional IRA, which was from an old 401(k). That has 41K. I had recently… It was in some crazy age-based thing. I just a year ago changed it to FCROX, so that’s 100% in there.

Mindy:
Can I just jump in here and say it’s awesome that you know all the different accounts that it’s in? It’s in this index fund, in this index fund, in this account. I love that.

Scott:
Love it.

Azar:
I’m a little crazy, obsessive person with this kind of stuff. I mean, we won’t go into all the mistakes we made, but we were clueless, and we also… Both of us had different medical things happen in the past, and we were completely drowning. Then once I started… We were getting into paying off debt. I became obsessive about like, “Okay, we’re getting older. We need to get our ducks in a row,” so I’ve been just consuming podcasts for years now the last couple years, and all the Facebook groups and everything that are super helpful.

Scott:
You can tell because that’s like the slog, the self educational grind that you have to go through in order to have command of the situation in every detail the way that you seem to. I think that’s really admirable and awesome that you’ve clearly done that, and absorbed the content over a long period of time across multiple sources to have this beautifully simple clarity on what you’re investing in and how it’s working out there.

Azar:
Thank you.

Scott:
We said the income is about 3,000 a month for the pension, 2,800. Is that right?

Azar:
Yep.

Scott:
I want to call that out as an asset here as well. If an annuity… We expect that to continue for the rest of your life.

Azar:
Yeah, and if he passes, I get, I forget, but some percentage, it moves on to me. I think I’ve got the health insurance and everything still too.

Scott:
Great. An asset like that is very valuable. I would peg… I would think that the value of something like that is between 751.25 million, maybe more, if it’s low risk. It depends on the state and the stability of the body behind the pension, but that is a very valuable asset that I want to call out. You probably don’t think of it that way as an investment asset and those types of things, but I think an income stream that is reliable, like that, is extremely valuable. Is that a new way of looking at things for you guys, or have you thought about it that way?

Azar:
Just… Go ahead. Just more recently, just because when we were drowning and he was purely on the pension, and I was a hospital nurse, I was working nights. We were both in the grind, and our oldest was young. At least I looked at it more like it was an obstacle because you couldn’t really make that much on top of it, and it only increased to 35,000 recently. I think before that, it was 18,000. He was very limited in what he could do, and we were constantly feeling like we were drowning.
It was an area of contention. We’ve had our struggles with this whole situation. But for me, it wasn’t until I started finding FI and all the podcasts and everything that I was like, “Whoa, this is actually really, really great.”

Jeffrey:
I think it’s important to give a little bit of the backstory not to go into too much detail regarding our health issues, but really, we had both comfortable and really good jobs. Unfortunately, when you have health issues, and those health issues become such that you can no longer perform that job, you end up in waters that you’re really unfamiliar with, and there’s a lot of unsteadiness, and on top of that, we owned a two family that we had originally pulled equity out of. We bought our single family home. We had some bad tenants. That threw us into debt. There was almost like an avalanche of events that had occurred, that put us so far back, that it was just trying to navigate the waters on a financial level.
I think on an emotional level, we were really just trying to figure it out, and we had gone down to my dad’s, and my dad gave Azar the book, this Dave Ramsey book, The Total Money Makeover. It was from that book, and then listening to his podcast, that we really understood the snowball effect of paying off debt and how that snowball turned into a bigger snowball. Then it continued to just get so big that we were literally able to just bang that debt out in a matter of a few years. Really, it just all of a sudden have this flexibility and this sense of freedom and a sense of security we had never experienced before.
We’re still experiencing this sense of freedom, in fact, flexibility that we’ve never experienced, and it just so happened to happen all during COVID. Now that we’re coming out of COVID, we’re in a position where we have some capital. We’re thinking, “Okay, what’s that next move that can really maybe push us to that next level, where maybe Azar could eventually at some point leave her job, work part time, and we have some…” So here we are.

Scott:
Thank you for providing that additional context, both of you. I think the way I phrased that was actually thoughtless given all the context that you had there, so I apologize for that. I think that it’s interesting, in the context of the present, that there’s a limitation on the amount of additional income you can get. It’s almost like you have an asset that is also an anchor in some ways, or it could be in some ways if you have the capability to earn more income. I’m not come across this as a challenge before, so I’m interested to think through that with you. Some of it will be exploratory thought with a couple of those things.
If there wasn’t that anchor, then I think that you could argue that there is a value to that asset that is very high, but I think that there is something else to say that the cost of that is obviously very high. We don’t have to go into the details of that There’s that limitation, which I think, devalues it to some degree, but it’s still it’s still an interesting piece of the puzzle that gives some really cool options to you guys going forward, I think, there.

Azar:
For sure.

Scott:
Any other assets? I guess you have no debts, but any other assets to think about?

Azar:
No, just our house. I mean, we have to pay for our cars, but they’re not anything special, and then just my fidelity accounts. We have a 529 for my oldest who’s 16, he’s a sophomore, that has 15,000 in it, and then my two-year-old has just 2,000 in it.

Scott:
Then do you have… You might have already said this, but how much do you keep on hand for emergency reserve?

Azar:
For cash, we have a $10,000 emergency fund, which was a question that I was going to ask also. Then we have 19,000 cash set aside, but that was earmarked for… Our house was built in ’92, and our kitchen is still from 1992, so we were planning to remodel the kitchen and floors in our main living space. Then also, we’re going to Hawaii this summer. Everything is paid for except for the rental, which we travel hacked.

Scott:
Love it.

Azar:
Flights, hotels are all taken care of. I do have to pay for the rental car, which I think is 1,000, and then it’s just going to be food spending money, but my husband, myself and my 16-year-old, we love to eat, and my 16-year-old’s a bottomless pit, so I had in my head a chunk of that 19,000 set aside for purely food in Hawaii, because I know it’s expensive and…

Scott:
$8,000.

Azar:
I don’t know. I mean, if we don’t use it all, but out of that 19,000, I was thinking like…

Scott:
They have Costco in Hawaii.

Azar:
I’ve actually heard so-

Mindy:
Depending on what island you’re going to, it’s right outside the airport, and for the car-

Azar:
Go ahead.

Mindy:
I was going to say for the car, go to autoslash.com, and reserve it there.

Azar:
That’s what I did.

Mindy:
Oh, great. You keep getting emails, “Hey, your $1,000 rental, we found another one for only $850.” Great, let’s do that. I don’t have any loyalty to rental car companies or what kind of car I want. I just need it to sit four people. That AutoSlash is awesome.

Scott:
On the emergency reserve, it sounds like you had a question there. I think there’ll be some with the expenses, but do you want to go ahead and ask that?

Azar:
I know it’s… 10,000, we’re in a high cost living area, I know it’s low for a family of almost five. We also have a dog. The reason that I kind of kept it low is because we have the pension, and I have zero risk of losing my job. It’s really just for anything. I don’t have a sinking fund for the car or the house or anything, but I was thinking like, “10,000 would cover anything, car, house related.” With the exception of if there was some major medical issue or accident or some terrible thing, I was keeping it at 10,000. I don’t know what are your thoughts.

Scott:
Personally, I think that makes a lot of sense. I mean, you have very, very stable income at this point. I don’t think you can be on the very, very low end in your situation from what I see on the emergency reserve. If you want to quit your job at some point in the future, then you’ll need to bump that up, I think, to feel really comfortable with that. But in the period of time where you don’t want to do that, I mean, it sounds like in the worst case, I got a little preview of your expenses here, but we’ll go through them in a second.
It sounds like you would really be able to survive for at least six, seven months based on just the pension and the arbitrage between… the spread between that and the… What am I trying to say here? If your pension is $3,000, and your expenses are $4,000 or $4,500, then you’re going to spend 1,500 a month. You got six months reserve right there, because of the stability, the highly predictable stability of that income stream, and you seem very confident that there’s a low probability of you losing your job for an unexpected reason.
To me, that seems like a very reasonable emergency reserve in your context.

Mindy:
I would agree with Scott. Let’s look at your expenses, because there could be… If you were to both lose your jobs, or well, if you were to lose your job, you still have the pension, but then if you were to lose your job, you would also significantly reduce your expense just, “Oh, we’re going to cut back, and we’re not going to go out to eat, and we’re going to be more conscious with our spending.” The total expenses that you have now would probably be different if you lost your job, which you said is probably not a real pressing issue. Let’s look into where your money’s going.

Azar:
All right, so our fixed expenses, so the mortgage and electric bill, all that type of stuff is about $2,850 every month.

Scott:
That’s all housing related?

Azar:
Yeah. It’s the mortgage, electric, heat, life-

Jeffrey:
Subscriptions.

Azar:
… life insurance. It’s just all fixed expenses, so our car insurance, life insurance, our internet bill. We do water and sewer quarterly. We have HBO Max and Apple Music and things like that.

Scott:
Do you plan to live in a location you’re living in for the foreseeable future for a long time?

Azar:
For the foreseeable future, but it’s not our forever home.

Scott:
I want to come back to that as a strategic Concept here, I’ll show you why in a few minutes with this, but how much of that $2,800, or how much of the fixed cost would you say is just related to your housing category?

Azar:
I’d have to do the math. The mortgage is $1,676. I can’t do math in my head. Mortgage is $1,676. Internet is 80. Heat and electric, I mean, it’s depending, but maybe 300 a month on average for both of them.

Scott:
So your housing alone, not counting internet, is probably in the ballpark of $2,000 a month?

Azar:
Yeah. Our mortgage alone is $1,676.

Jeffrey:
That’s what I figured. I was thinking around $2,000.

Scott:
Okay, great. Sorry, I’ll come back to that, and we’ll see if I have anything go in there. Basically, I’m interested… I’ll give you a preview with this. I think that one of the interesting challenges given your pension situation and that nuance with the lack of ability to earn income to still be eligible for it on an ongoing basis is the trick is to get that housing expense as low as possible. In this case, this might be a good potential area, and I’m not sure, but it might be a discussion point to think about a paid off house, because if you’re going to have a paid off house, then all of a sudden, that $3,000 covers everything, and you’re good to go, and you’re done and to a certain extent with some of that.
Normally, paying off the house early can be a low return investment, but given your situation, and the fact that you already have that asset, I’m interested in that as a strategy. If you feel like, “Hey, I have a paid off house, and I’m just paying the utilities and the taxes and insurance and those kinds of things,” that might be an interesting strategic option for you guys that would be available and more promising or more interesting to explore given the specifics of your nuance. Any reaction to that before we get to the rest of your expenses with this, and thinking through that?

Azar:
I’m totally open to that.

Jeffrey:
I’ve always thought paying off the house would be the best thing, but once again, because of some of the research that she’s done, it’s-

Scott:
Normally, I don’t think that paying off the house early is a really great financial move, because you’re getting… I’ll go into tangent here for 30 seconds on this.

Jeffrey:
Please.

Scott:
When you buy a house and you put down 10%, and it’s $300,000, and that property appreciates by 3%. Because from 300,000 to 309,000, you have made a $9,000 return on $30,000 down. Makes sense? What is that? That’s a 30% return. If you own the house in cash, and it goes up 3% from 300,000 to 309,000, you’ve made a 3% return. As your property appreciates, and as you pay down the mortgage, you get closer to that lower rate of return. Your house on average will go up with inflation at 334% in 2020. It goes up by 11%, I guess, by 2021, but in most years, it will go up by that average inflation amount.
What happens is in the early years, you get this huge return just because of the fact that you’re leveraged so high on average. Of course, that can go both ways. You can also lose a lot of money very quickly, or go underwater in some cases. But on average, the paid off house isn’t returning as much for you, and you’re putting all that money into one giant asset that’s not producing a ton of income over time. That’s why I don’t like housing as an investment compared to things like index funds or rental property real estate, where I’m going to continuously use that leverage, capitalize appropriately and run it like a business for that compound annual growth rate.
That’s a trap a lot of folks fall into with the math behind that. If you can imagine a curve that you’re riding down to that 3% level over 30 years on average, you can get there. I’m going way, way in the abstract for the math here, but hopefully that concept is there. That’s what’s happening here, and that math is correct, that it’s probably not the best investment. But in your case, I think it’s an interesting one from a simplicity standpoint, because you’ve already got the pension. You’ve already got the major asset in the room.
If you can just pay off the house, and continue to build the second pension or the secondary asset, you might have so much more income than you need to live on with a paid off housing situation that the game becomes extremely simple and easy conceptually for you, and you have a target there, which is as soon as you pay off the house, game over, and that is more… I’m not able to put this together all on the spot here, but I think I’m seeing a path in my mind to where if you can do that, and in your case, because of the fact that your pension prohibits you from earning more that this could be a great potential strategy.
I’m butchering this right now, but hopefully we can all see the direction that I’m trying to steer the ship in.

Azar:
No, no, I get it. I get it.

Jeffrey:
I totally understood. I mean, I guess it would just create a lot more liquidity for us. Is that what you’re getting at, that we would have just a tremendous amount of flexibility because what we would be putting towards a mortgage would no longer exist, that money now could get reinvested and grow quicker over the long term?

Scott:
Well, no, I’m saying more simply that right now, you spend $4,300 a month. $2,000 of that is just on your house. I’m sorry, $1,600 of that is just on your housing expense, right? With a few tweaks to your spending, your pension covers everything else, so there’s no… The assets minus liabilities, the cashflow minus liabilities, you’ve completed the play with just your pension if you don’t have that mortgage payment. Now, that’s too simple. You have taxes and insurance in there, so you might be on that bubble, but you might be right there with just a few $100 and more passive income if you can eliminate the housing payment, which I think is an interesting nuance for your situation in particular here, and why I’m interested in the housing payoff in your case, and it is because of that pension. Does that make sense?

Jeffrey:
Yep.

Azar:
Totally. Our mortgage is $1,676, about 500 or 550 of it is insurance and taxes, so it’s about $1,000 or $1,100 to principal every month.

Scott:
Great, so that puts you at 3,200 in total other expenses besides that principal and interest piece. To me, that seems like an achievable gap. $400 a month in cashflow seems manageable to achieve during the timeline in which you pay off your house, if you choose to go that route, for example. That’s not a very large amount of cashflow that have to generate on top of what you’re doing there, and you may be able… Anyways, that’s where I’m going with this. We should probably get to the rest of your expenses and all that kind of stuff to see if that’s reasonable, but that’s where my brain jumped in the context here.
We can completely throw that out, and go a different direction with this if-

Azar:
I’m totally open to… I honestly had an… I have thought about it, but then just everything I heard, it was like where we were able to refi at 2.5 for 30 year. I was like, “Oh, we’ll just pay the minimum, and especially where we don’t plan to retire here in this house.”

Scott:
That was a great move. I don’t think that was a bad move to refi the house with that kind of stuff at all. You can still have the option to pay it off early. I think that was a great move.

Jeffrey:
That was one of the reasons was we looked at it as if… My sisters, they all refinance. They did 15 and 20. How come you guys didn’t do that? I felt like, “Well, by reducing just the monthly mortgage, it’s just going to give us that much more security, and if so we decide to really attack the mortgage, we still can do it, but we’re not pigeon holing ourselves,” and I just didn’t want to do that.

Scott:
I love that strategy. I don’t think that was inappropriate at all, but now, we’ve got… Is the goal to just cross the finish line to FI in the most reasonable time period possible without… Is that the goal that you guys have, or is there a different goal?

Azar:
No, that’s absolutely the goal. I’m not embarrassed to say this. We all love being home. I love my summers off. We go camping. We love being outside. We love just the lifestyle of all being home together, and especially with another baby in the picture potentially, definitely, the goal is FI as quickly as reasonably possible.

Scott:
Well, I think there’s two things here, and this is depending on how long you want to live in this house. If this is your forever home, you pay off the mortgage. I think that if you keep going through the budget and reanalyze a few things, you could be there tomorrow after having paid off the mortgage, [inaudible 00:33:34] $1,000, or there’s a chance to potentially rejigger the housing situation in general if that’s something out there, if you like that format with that, if you can figure out a way to… if you have equity in the house, for example, and you can arbitrage that to a different location, but I’m not sure. That’s probably a different conversation. That’s-

Mindy:
Well, actually, let’s talk about that, because I just did some very quick math. Did you say it would be roughly worth 550,000 if you put it on the market today?

Azar:
I think so.

Mindy:
With $293,000 in the mortgage, that means you’ve got 257,000 in equity, which is awesome. Of course, there’s cost to selling a house and blah, blah, blah, but that’s a lot of money in a lot of places. That’s a paid off house in a lot of places, or at least a huge chunk of a paid off house. The way that Scott described his suggestion of paying off the mortgage, I think, is… I thought it was pretty good, but when you don’t have that… Well, you said that you loved it.

Scott:
Thanks, Mindy.

Mindy:
You said you loved it. I would not normally-

Scott:
I wasn’t able to get all my thoughts out, but thank you, Mindy.

Mindy:
Well, let me see what I am hearing you say, Scott. I don’t normally suggest to pay off your mortgage either. When Scott first said that, I’m like, “Really?” Then he explained it, and like, “Oh, okay, so here’s the thing.” The reason I don’t want you to pay off your mortgage early when you’ve got 2.5% interest is because instead of throwing extra money at that, you could put extra money into the stock market and into index funds to save for retirement, but you’ve already got the pension, which is pretty much your entire living expenses when you don’t have the mortgage. If you went to another place, you said, “This isn’t your forever home. Maybe you want to live in Florida. You can get a pretty nice house for $200,000 in Florida, or not.” You can live some place else.

Scott:
[inaudible 00:35:34] Florida.

Azar:
This geo arbitrage idea, we’ve explored it and talked about it. I have this dream of moving to Portugal, and buying a paid for house. It has a super low cost of living and living this whole life. However, he’d be totally cool with geo arbitraging anywhere pretty much. I have parents and two sisters.

Scott:
Except Florida.

Azar:
My parents were immigrants, so my immediate family is the only family that is here. I’m the only one of my two sisters who have children, and I could never ever move us and move the grandchildren away from my parents. Unfortunately, we’re stuck in this area for right now. It’s not because we love it here either. It’s because of family really. I grew up without any extended family around and without any grandparents, and I don’t want to do that to my kids.

Mindy:
That’s a valid feeling. You would stay in this house for a while, throw all the money at this mortgage, throw some extra money, and it looks like there’s extra money in the difference between what you’re making and what you’re just randomly… or not randomly, what you’re regularly spending to start paying off the mortgage faster. Another thing you could do is make the minimum payment on the mortgage, and then start saving aggressively to have the ability to pay off the mortgage without actually paying it off, so you could invest it in other ways.
That’s something that my husband and I did two houses ago. We said, “We don’t want to pay off the mortgage, because it’s such a low rate, but we do want to have the ability to pay it off.” This is before he quit his job. I think we owed 120,000 on it, so we put 120,000 in an account that was specifically for paying off the mortgage, should he decide to quit. Then we went in a different direction completely, but that was something that we did. You still have the low rate, the low payment. Sorry, Scott.

Scott:
I just want to chime in that your FI number… If you can get your lifestyle expense below the 36,000 that appears to be coming in after tax with the pension, that’s game over from this. That might be too late. You might need to add more assets onto that depending on what you guys want, but the paid off house, that’s another asset that just piles on it. Now, great, maybe if I need to pay the housing payment, and that’s 60,000 a year that I need, if I don’t have the housing payments, it is 35. Again, that’s why I just keep coming back to the mortgage in your case, in your specific situation.
In my opinion, I would bet you have less wealth 20, 30 years from now by paying off your house rather than investing in index funds and continuing your retirement strategy according to the philosophy that you have so diligently put together here, but you could also again get to FI by reducing the housing expense there. I think that’s an interesting trade off there. It’s not the right mathematical equation 25 years from now, but it’s game over in the next… I keep using that term, in the next couple of years potentially.

Azar:
That’s what we’re looking for is game over.

Jeffrey:
I think the nice thing is and I keep always telling Azar is that we have choices, and the fact that we have these choices is that in itself, I think, it’s a plus. Many people I think pigeon hole themselves due to the lifestyle choices they make, and then they are stressed to be scrambling constantly. I feel like we’ve done that, and now we’re… Anything that we do would not be to chase any type of lifestyle choice that’s out of scope or anything like that. It would just be to have a sense of security always, to always have that feeling that we can fall back on something that the mortgage being what it is.
It’s less than what you would pay for rent and things of that nature. We’re just always trying to err on the side of caution on so many levels.

Scott:
I love it. I think you guys are in a good spot. I think that the big… I hope that a potential new framework is the idea of thinking about your pension as an asset inside of your net worth equation with that, and how maybe that changes the rules of the game from what most people in the FI community are doing for you guys with that. We haven’t gone through the rest of your expenses. My hunch is that you guys are in pretty good command of your spending overall in order to pay off $83,000 in debt in two and a half years, but do you think that there’s other areas that there’s something interesting to look at inside of the rest of that budget?

Azar:
Fixed expenses, fixed bills, right now, it’s about $2,850. Our variable expenses like groceries, household gas, going out to eat, and then just miscellaneous/entertainment, which we don’t usually spend a ton on, but I’m going to throw clothes, maybe people’s birthdays coming in, in total, I would say around $2,200 a month for variable spending. A big part of that is our groceries. We spend on average, lately, it’s been like $1,200 a month on groceries. I’m just going to reiterate, we have a 16-year-old bottomless pit, who loves to eat super healthy.
He’ll go to the grocery store and buy packages of berries, strawberries. They’re gone the next morning. He stays up till 10:00, 11:00, and he’ll just eat entire containers. I know that’s super high compared to most families.

Scott:
Is he an athlete?

Azar:
That’s where we’re at.

Scott:
Is he an athlete?

Azar:
He works out. I mean, he runs and stuff for school.

Jeffrey:
Cross country and track, and he likes to just do some regular maintenance in a sense.

Scott:
I think that’s awesome. I was a bottomless pit, so thank you, mom and dad, for filling me. I can only imagine what that grocery bill is. I think there’s probably something in that grocery bill then to think about. Can you find ways to buy in bulk and bring that down? Do you feel like you’re doing an efficient job with that shopping, and that it truly is a bottomless pit or that there’s nuance or ways to bring that down by being a little bit more strategic with the shopping there?

Azar:
I mean, I know we could always be more strategic. We buy… I don’t know. I feel like we also buy… My mom-

Jeffrey:
It’s our weak point. We definitely like to just eat good food [crosstalk 00:42:49].

Azar:
Make something quick. We buy seafood. I’ll go to Costco and buy the bags of frozen salmon, and have it in the freezer, and so whenever we want it, we can just throw it in. Certain things we buy organic, not everything, but like fruit, eggs. We slowly drink almond milk. Any sort of meat product, we try to get organic or free range, so I know that that drives it up, but I shop around. We do Costco a lot and things like that. I mean, I know we could maybe try a little harder to buy things that is more from scratch versus the easy like, “Oh, it’s just frozen, and we’ll throw it in in the oven,” not frozen process.
I know we could do a better job, but we’re also picky, and I’ll reiterate, we all like to eat.

Scott:
I am no expert in this category, so I’ll let Mindy.

Mindy:
What I’m hearing you say is… I mean, you guys are eating really healthy, which is fantastic, and that is going to cost more than eating processed junk, but it’s better for you. I wouldn’t apologize for that. I would look at shopping the sales and doing a little bit of meal planning. We had Erin Chase from $5 Dinners on episode three. She said, “What I do is I build my grocery list around what’s on sale.” Chicken breast, when you go to the store, chicken breast can be $1.99. It can be $8.99. Don’t stock up when it’s $8.99. Stock up when it’s $1.99.
I mean, I don’t know if that… That’s probably not the organic price, but watch the prices and pay attention to the prices, and as it is on sale, that’s when you really want to stock up and fill the freezer because you’ve got the bottomless pit. I’ve got two bottomless pits. I feel your pain. I would also attack your grocery list the way that we attack spending in general. Just keep a really detailed list of what you’re buying. Over the course of a month, “Oh, we buy a lot of carrots.” Okay, great. Look for sales on carrots. “We buy a lot of berries. Let’s make sure to stock up when they’re $1.99 a box, and maybe not buy so many when they’re $5 a box.”
I mean, my kids will eat the whole box too. It’s awesome. Like, “I just bought this. Why is this in the recycle bin?” “Oh, I ate those all. Thanks.” Meal planning the dinners is going to help a lot, because then you can make a really big batch of inexpensive chicken dish or whatever, and then direct your son, “Hey, berries are not on sale this week. Let’s eat chicken,” which will keep him filled faster for longer. $1,200 for organic and free range is not horrible. I bet you could get that down to $1,000 pretty easily without having it consume your whole life trying to cut a penny here and $1 there.

Jeffrey:
I think the meal plan, Mindy, is wonderful. I think that that’s something that is always in the back of my mind, but I’ll be honest with you, I’m not a particularly good planner like she is. Every night, she comes home. She usually is the one to whip food up, and I do all the dishes, but I definitely think it would be a good thing for us to talk more about the meal plan. I think that that would be a wonderful way to eat and then also have leftovers, and just to have your week planned out in that sense. I could see how that could definitely make a dent on the grocery budget.

Mindy:
Today’s Wednesday. When we’re done recording, go downstairs and see where… or go upstairs and see what’s in the refrigerator now. What do you have planned for tonight? Do you have all the ingredients? What are you going to make for tomorrow night. Do you have all those ingredients? Eat out of your refrigerator and your pantry. By the way, I talk a good game. I have way too much food in my pantry and in my refrigerator and freezer, so I definitely need to take my own advice with this.

Scott:
I think I am not doing such a good job with this either. But for you guys, it’s very important to do as we say, not as we do kind of thing. But for you guys, why I think this is important is because, again, in the context, if you’re liking what we talked about earlier with eliminating the housing payment and being close to the finish line, the discipline here might be that last piece of the puzzle in completing that. If you can feel good about this at $600 a month with a planning cycle that is relatively regimented, that $6,000 a year, that might be the cost of moving over to the finish line in conjunction with the housing payment elimination, which is why I think that that’s one…
Of course, it is less fun to have to plan out your meals in advance, and drop your grocery bill from $1,100, and not have exactly what you want each day the day that you’re feeling it, but if that’s the price of crossing the finish line, it might be worth it in your case. Again, I’m not trying to be hypocritical in something that I don’t do personally, but if that’s the big bogey, that’s outside of your fixed expenses, it might be worth trying to reset the program there.

Mindy:
If you have favorite meals that, “Oh, I know this meal costs me $8 per person,” great, don’t have that every week. I have a meal. It’s a Japanese curry. I need potatoes, three potatoes, five carrots and an onion, which is, I mean, practically free, and this box of Japanese curry mix, which I’m sure is processed, and that’s okay. It’s delicious. That’s my meal, and everybody in my house will eat it. That’s another thing. Everybody in my house will eat it, so I can have a vegetarian meal. I think this is a $5 meal that makes two servings.
It goes really far, and it’s really cheap. We make a plan to have that every week. Look at what you’re spending on. Is there anything that makes a really cheap meal? Plan to have that every Monday or every Friday or whatever. Make your own pizza. It’s super cheap if you make it yourself.

Azar:
We do that.

Jeffrey:
We do that with naan bread.

Mindy:
It’s fun. It’s super cheap. It’s fun. The kids think it’s great to make all this stuff, and then you pop it in the oven. You’ve got a pizza movie night. We do that every Friday when it’s cool outside, not when it’s 90 outside. I’m not putting the oven on 450 when it’s 90, but I digress. Just attack the grocery budget as you have the rest of your budget, and I think you’re going to see some pretty big gains pretty easily.

Scott:
Any other expenses? I have another area I want to explore really quickly. But before we get there, any other expenses that you think we should be thinking about or that are obstacles or-

Azar:
No. I wrote all this out. Just our income, what was in my retirement accounts, what we have saved cash, our fixed expenses, and our variable expenses, and then the past couple months, so when we paid off our debt and then we refied the house, my thinking was we pay the minimum on the mortgage, because I wasn’t putting anything extra into any retirement accounts while we were in debt pay off. That which I do regret. I’ve been putting 500 a month into my Roth, which only has 3,000 in it right now. I just started.
Ever month, I know it’s not an expense, but I have 500 going into my Roth, $25 going 1529, $100 into my son’s, and then 200 towards Christmas. We have a Christmas sinking fund. That’s pretty much it.

Mindy:
Are those expenses included in the $4,300? Is that amount included in the $4,300 total, the 500 to the Roth?

Azar:
No. It’s $2,850 a month fixed expenses, around $2,200 for variable, and then… What is this? $825 in to sit the various savings.

Mindy:
Okay.

Jeffrey:
Which leaves us with-

Scott:
I think that’s-

Azar:
It leaves us about $1,000 a month leftover.

Scott:
Got it. One of the things that I want to… I think what you’re doing with the money makes a lot of sense. I don’t really have too many tips there, but one big problem in your situation is the fact that you can’t generate income, Jeff, right? That’s challenge, but let me ask you this. Are you guys handy at all?

Jeffrey:
Oh yeah.

Azar:
Well, yeah, that’s pretty much what he does.

Scott:
This might be a really a good case for potential live-in flip over the next two years, Mindy style. Here’s why, it sounds like you don’t want to live in your area for a long period of time. You can’t earn more than $35,000 a year in income. But if you can take a property and fix it up pretty nice over the next two years, maybe your son can help to a certain degree with that, and you can add 200,000 in value to that property over a two-year period. When you sell that property, that’s all tax free, right? As long as you lived there for two years, and sell it within three years after that.
That is all not taxable income. That will not… You have to check within the rules of your pension situation, all that kind of stuff. But if you’re looking for a way to create a lot of value in a way that won’t impair your ability to continue receiving the pension, that might be a really good loophole or trick to play with that, because you can fix up the place, make it look really nice, and then maybe that will turbo charge a lot of what you’re trying to do here over a two to three year period if you can do that.
Mindy has some great before and after pictures of her most recent live-in flip that went really well. Any reaction to that as a framework?

Azar:
I actually hadn’t thought about that. I love that idea. The real estate loophole does exist as far as I read on the website, so he’s capped at around 35,000, but it doesn’t include any real estate earnings. We actually pulled a 75K HELOC on our house, which we haven’t touched. We were thinking about getting into buy and hold rental properties. I don’t know if it’s okay to say this here, but we just signed up for Paula Pant’s course. I also signed up for the BiggerPockets website and everything. We signed up for Paula Pant’s course, which just started yesterday because we’re totally [inaudible 00:54:12].

Scott:
Of course.

Azar:
We just did the first class last night, but that was a strategy we were thinking about, especially where he’s handy. Although it’s too high here, we were thinking if we could find something within a three-hour drive. Maybe he could go up, put a little sweat equity in, get it going and then pass it off to a property manager, and generate income that way.

Scott:
Look, I’m all for rental property investing with BiggerPockets and all that kind of stuff. For me though, I just wonder if a simpler strategy… Again, this is bold, so you feel free to reject it with that, really. Sell the current house you’re living in. Take the proceeds. Fund your emergency reserve a little bit more. Buy a dilapidated jack in the middle of a cornfield nearby, just something that needs a little bit of repair nearby where you live, where that’s where you want to live, and add value there, because you can sell the property for a tax free capital gain after that.
That’s how you can be able to stack 100 or 200 or 250 of just pure after tax. You buy a rental property, and add value, and then sell it. You’re going to pay tax on that. It may not… It’s great that it might not count against the pension income, but tax free is even better. Given your situation, that might be enough to buy that house in cash outright somewhere else or whatever it is, or stack up a couple extra $1,000 in there. That might be too far or too extreme of an example, but there’s a spectrum along there that might be interesting for you guys to think about as a framework because of your situation.

Jeffrey:
I think it’s a really interesting idea. I guess basically, it goes back to what I was… It’s just lifestyle choice. I mean, where we currently live is… The reason we haven’t moved is we can’t replicate our current situation anywhere else. I mean, we live on an acre of land with water behind us that we don’t necessarily have access to, but there’s eagles that fly by. It’s tough to say, “Oh, let me sell this,” and then go buy something and be in this state of limbo for maybe the foreseeable future for a period of time with no real roots. It would be such a…
I don’t know. I think it’s really interesting. I could see how that maybe over a five or 10-year period would be really lucrative, but I think it would be a tough one honestly on my ego. I think that-

Scott:
Fair enough. You don’t need to… That’s an extreme example there. I just-

Jeffrey:
No, I think it’s-

Azar:
I love the idea, and we’re really good about staying off the hedonic treadmill, but we’re not super stoked on the town we live in, but when we walk out this basement door, we have this gorgeous backyard that’s huge and fully private. We always say like, “We’re spoiled. We’re so lucky.” I mean, the sunsets, the sky, all the colors, it would be really hard… We wouldn’t be able to… I think we would have a hard time downgrading not even so much the house. We don’t even care… Our house is just… It’s like a box boring looking colonial.
It’s the yard that we would have a really hard time downgrading that, unfortunately.

Scott:
Well, fair enough. Then it sounds like what you’re more interested in doing is taking a HELOC, buying a rental property, adding value to the rental property, and the free time there, and then figuring out a way to convert that into value downstream from that. Is that what I’m hearing?

Azar:
Yes.

Scott:
For that, I think that’s a great approach. Just one caution with the HELOC, a trap that we’ve seen some listeners fall into in past finance reviews is think about the HELOC as a short-term financing solution, three to five years at most, ideally less. What I mean by that is if you buy… Let’s say you get a $60,000 HELOC at a 5% interest, right? Well, just the principal payment, forget the interest, is $1,000 a month to repay that over a five-year period. If your property only generates $200 or $300 in cash flow, you’re effectively squeezing cash out of your life by getting that HELOC out, or you’re not repaying it in a timely manner by using that to finance the purchase, and then also getting a mortgage on the property.
Does that make sense? I’m probably not explaining it.

Jeffrey:
Totally.

Azar:
No, and so this is… We were planning basically like the cash that we currently had was earmarked for other things, but we were planning to have by fall, maybe end of the year, another 10K in cash that we were going to use to buy a property in a much cheaper area, and then have the HELOC maybe to do any repairs or whatever and then refinance the property. However, this is where the baby-

Scott:
That’s a great use of the HELOC.

Azar:
Now with this baby coming, that original 10K cash that I was… I was planning to use around 10K cash plus the HELOC to get into a single or preferably multifamily in a low cost of living area that was within a two or three-hour drive. However now with this baby situation, I feel like that 10K may have to cover some unpaid maternity leave. I don’t know. This is where all of a sudden, we’re stuck and not sure where to move, or if we should just shelf this real estate investing idea, or what to… I don’t know. This is where… I’m like, “Well, I don’t know where to move forward from here.”

Mindy:
I would say right now, start looking for the market that you think would be a good investment in the two or three-hour drive window. Looking doesn’t mean you have to go buy a house. It just means that you’re checking out the different areas, and when you have found a couple of areas, take a drive up there. Check out the area. Really look at it. Get into houses and smell them and see what other houses are renting at, and see if there’s an opportunity for cash flow. Really explore the markets. Narrow in on a couple of them, and then reassess your situation. That’s not a one-weekend trip.
That is a several month process, and you could be still looking by the time the baby comes. Everything’s fine. You don’t have any unpaid maternity leave. You can go back and continue your job, and everything’s great. Then you invest, or you’ve done your research. This smokin’ hot deal comes up. You’re able to jump on it, because you know it’s going to be a good deal, and then it’s not such a big deal that it might take up some of the $10,000. Maybe it doesn’t take up to $10,000, which is what makes it such a good deal.
I would definitely continue to look at all your options and do some research. Even if now is not the best time to buy, you have narrowed in on a couple of cities, and you can continue to watch the market so that when a good deal pops up, you can snatch it, even if it’s in the future, one or two years down the road. I do like the idea of rental real estate sending you back some… What do they call it? Mailbox cash.

Scott:
I want to chime in in addition to that, and say I’m going to change what I said from earlier, and say that if this is your plan, and you have some uncertainty around the baby and the real estate stuff that you want to do, then I think that your extra cash… I think the Roth is great and some of the IRA stuff, but I think you need to continue buffering up your emergency reserve, because it sounds like you’re thinking about how to get opportunistic and creative about things and entering real estate.
I think you’ll have a lot more confidence to act if that’s bigger. Even though it will be returning zero in the short run, I actually think that you’re going to get a really… You might have a chance of getting really great returns and sleeping a little bit better, and being able to do both, have the emergency reserve for the uncertainties around the baby and go into real estate with that. That to me actually makes me want to revisit that assumption about whether 10,000 is enough, given all the cool things you guys are thinking about doing.

Azar:
So you think just stack the cash for now, hold on to it, and for either baby or real estate investing and not pay down the mortgage?

Scott:
Well, I think that the emergency reserve… I think you have several moving parts of the strategy here and an unusual situation that I think has some really cool options. I don’t know… You’re going to have to make a choice about which direction you want to go, and whether there’s going to be a timeline, or are you just going to shove all the chips towards the mortgage and try to finish out the game really quickly? In that case, you just keep doing what you’re doing, and shove all the chips at the mortgage, right? If you’re going to go into real estate, then I don’t think you’d do that.
I think you have to build up the emergency reserve and capitalize the investment in the real estate appropriately and move into that, and that will change your timeline, but give you more income at the end of it most likely than if you go this route. I think you’ve got to… If you want to say, “Hey, I’m going to forget all this and go on a 15-year timeline and just stack wealth,” then you don’t pay down the mortgage, and you do exactly what you’re doing with the investment approach and pile the money into the Roth and the IRA passively, and find a creative way to add value somewhere else.
You’ve got several different options, but I think you have to frame out your strategy, and it will change how you allocate your excess cash flow.

Jeffrey:
I like that. I actually like that the most, letting the mortgage be what it is because it is so low and it’s fixed, and we’ve got a nice interest rate and just building capital, just saving, saving, saving. Then when we do find that rental property, like Mindy was saying, after doing a lot of research and really going to places and getting a good understanding of where it is we want to buy, we will have a nice nest to basically put down, bring that mortgage way down. Now, when you are renting it, you’re getting good cash flow on a monthly basis, which seems secured. That’s security.

Scott:
Especially if you can add value in a handy world by actually rehabbing the property to a certain degree. That is where I think all the value add is right now, and a lot of the leverage is with that. I think that that can be a really lucrative option for you guys if you’re able to do that, and because that will not translate to taxable income in the short run for you, that there’s a lot of power to that if that’s the way you want to build wealth. But again, I think what’s interesting about you guys is you could just shove all the chips to the mortgage, like we talked about earlier, and pay that down.
You could do this, and you could continue doing what you’re doing with the investment approach. You’re going to win in all three scenarios. You have no bad option here based on the… You’re accumulating $83,000 in cash every two years at this point, or two and a half years at this point. You’re going continue to get wealthier over time. You just have several cool avenues to explore. That I think will change the way that you want to allocate with this. It sounds like real estate’s…
If real estate’s the option, then my belief is that you might be wise to cut back a little bit, maybe continue with the Roth or one or two of those. I always like the Roth, but some of those IRA investments, and put more into the savings account that’s specifically geared toward the real estate, because that will allow you flexibility. You won’t have to finance that with the HELOC the whole way, and have the stress of the leverage there.

Azar:
I just wanted to make a note. My pension, from the research I did, it sucks. They mandatory take 11% out, but just… There’s this whole chart you can go by, and if I’m making… I’m year seven. If I get vested at year 10 and walk away, if I do three more full years and then leave, I can’t pull on it till I’m 60, and it’s only $12,300 a year that I would start getting at 60. Then if I stayed for 30 full years, I would be 63. It’s only 60%. It’s not the full 80%. They changed everything in Massachusetts.
I think it was after 2012, and I started in 2014, so the pension, I don’t even want to rely on because I do not want to… I like my job, but I’m not in love with it, and I definitely have no intention to work there till I’m 63.

Scott:
I agree. Your pension is not nothing, but it might as well be on the moon for the conversation we’re having with regards to your FI journey with this. I think that’s the right way to look at it.

Azar:
Exactly.

Mindy:
$1,200 will feed your… There you go. $12,000 a year is $1,200 a month.

Scott:
That’s a month of-

Mindy:
There’s your groceries. You have one bottomless pit. Well, when the little one who’s two grows up to be 15, she will be a bottomless pit, and then this next one will be a bottomless pit as well. I do want to go back to the live-in flip concept that Scott talked about. People hear my story, and equate me with live-in flipping and think that you have to just take the whole house to the studs, and replace everything. Those are the kinds of flips that I do. I don’t always take it all the way to the studs, but I do a lot of work. You don’t have to do a lot of work to make the house look a lot better.
1992 was not the golden age of kitchen design, so I know what your kitchen looks like. I’ve never seen it before, but I’m envisioning a lot of brass and a lot of oak. That can be changed completely for not that much money. IKEA has some really great cabinets. I’m actually doing an IKEA kitchen right now. There’s cabinets at Home Depot that are considered off the shelf that are still pretty nice cabinets, so there are opportunities to make little changes to your house, or I mean, a kitchen is a big change, don’t get me wrong, but there’s opportunities to make small improvements that can go a long way.
If you’re planning on being in the house for 15 or 20 more years making the changes, right now, maybe don’t do the kitchen because you might have to do it again in 20 years before you move, but fix up the bathroom. Get rid of the pink toilet, and put in a white toilet with a low flush. I don’t think they had pink toilets in the ’90s, but paint the walls the current color scheme. There’s a lot of things you can do. To upgrade a house flooring is huge, if you can get rid of carpets and put in hardwood floors. There’s a lot of things you can do that aren’t as disruptive as it may seem when somebody suggests that you do a live-in flip.
But if you’ve got this gorgeous backyard, making the house as desirable as the backyard will help you sell it faster when you do decide to move, and people will be fighting to buy it from you because it’s so gorgeous inside and out. But again, if you’re going to plan to be there for a long time, you don’t have to jump into everything and strip your house to the studs, and then start rebuilding it. Just something to think about there as well. That’s a great way to build the equity or force appreciation without having to live in a total construction project for the rest of your life, just what I’m doing.

Azar:
We were planning to do the IKEA kitchen, and he was going to do it all himself anyway.

Mindy:
It’s a really easy system to do. I was surprised at how quick the cabinets go in. You gotta put them all together, but they’re not even that hard. I don’t know if you’ve ever put together IKEA furniture. You’re like, “Oh, man, here’s a huge pile of parts that I have to figure out.” With the cabinets, it’s really, really easy, and it’s just repetitive. I’ve got, “Oh, this is how a drawer goes together.” It’s done. The cabinet goes together. It’s really, really a lot easier than regular IKEA furniture. I’ll stop.

Jeffrey:
Nice. I’m excited to do it to tell you the truth.

Mindy:
Well, if you want to learn, you can come visit me and help us with our kitchen.

Scott:
That’s $10,000 to $15,000 in wealth that you generate with activities like that on your house, whether it’s a new one or the one you’re living in. It sounds like you’re going to stay where you’re at for very good reasons with that. What are some other areas here that you want us to touch on or things to think through, either things that have popped into your head as a result of the discussion or areas that we haven’t covered yet? That would be helpful.

Azar:
I think really, my biggest question was moving forward with doing real estate investing, and buy and hold, and in what manner to use the HELOC because on one hand, I’m like, “Oh, we have this 75K HELOC.” It’s variable, but it’s like 3.25% right now. I’m thinking like, “Oh, we could buy a property. We found this town in Vermont,” and there’s some multi families for the low 100s or 150s. I’m like, “Oh, we could use the HELOC to put the down payment, do some repairs, and then refinance it later,” but then I’m a little nervous of being those people that borrowed way too much money and got in over our heads.
I mean, that’s why we’re taking the course too is just because this is all new territory that we’re learning about, but I guess, I’m a little nervous about pulling from that HELOC and in what manner to use it and what’s okay, and what’s not the smartest idea to do.

Scott:
I think that I would just reinforce that the HELOC is you should think of as a short-term debt. It’s a great short-term debt solution. It’s much better than hard money or private money or anything like that, because of the low interest rate, but I would not think of it as equity that can sit in the property for 30 years. If you’re going to do that, this is not my favorite choice, but I would rather cash out refi the house and use that if I’m going to use it as equity in the property than use a HELOC because of the short-term versus long-term nature of that with the interest only thing.
I think it can be a great strategy. Yes, you’re taking leverage and taking risk if you pull out the HELOC and then put it down on a rental property, and put a mortgage on the rental property, and then go to town working on it. If you’re going to do that, you gotta mitigate that risk by operating as efficiently as possible, adding the value as quickly as possible and getting the money, getting the tenant placed and stabilizing the asset as soon as you can to refinance back out. It doesn’t mean it’s not a good strategy, bu there’s a risk, and you can mitigate that risk by operating professionally against that as running a business while you’re doing that project there.
I don’t think it’s necessarily a bad choice, I do think you’ll have a lot more comfort with that choice if you have more straight up liquid cash. It’ll reduce the amount of HELOC you’d need to take, and I think you’ll feel better about it if you have it there rather than having the extra 10K and the IRAs or whatever it is in that if you choose to go the real estate route. That would be my tweak. It’s not a super high stakes tweak, but that would be where my mind jumps.

Azar:
For my retirement accounts, I only have almost 50K in my various fidelity accounts, and then there’s about 50K in my pension account, which I mean, I don’t know… Again, coming back to the baby, I’m not sure if I’ll end up taking a leave of absence or leaving my pension money in there or pulling it out. But in total, I have about 100K in various retirement accounts, and that’s it, except not including his pension that he gets every month. Would you suggest… I’ve been doing the 500 a month to my Roth IRA, keep doing that, and then just stack the rest of the cash in a savings account and going the real estate route or…

Scott:
I think that you got different avenues right, and there’s no wrong answer, like I said earlier. You’re not wrong to just pile all the money in the retirement accounts. You’re going to win with that strategy. It’s just that’s a different approach than buying real estate. If you want to buy real estate, then I think maxing out the Roth every year is great, and then the excess cash goes to the savings account. If you want to pile up the money in the retirement accounts, I think that that just creates a riskier or tougher, more stressful situation for you when you enter into the real estate world if you don’t have liquidity and extra savings there.
If you want to just… If you like the, “Hey, let’s just make this simple,” and it’s not really a math problem anymore about what’s the best returns, we’re just done as soon as you pay off the house, then you have still another avenue to go with just shoving all the cash toward the house payment. There’s no wrong approach there. I just think you have to figure out the strategy, and adjust the accumulation there, but I do like the Roth basically, regardless of which one you go with. I always like the Roth, the max out the Roth to 6,000. I like the Roth.
I had a disagreement with that, actually, about a user via email. We really got into it a few times. I forget the person’s name. There’s some good reasons why the Roth may not be… I like the Roth as part of that strategy.

Jeffrey:
I had a thought. I mean, this might sound a little outlandish, but I was thinking because the retirement on her end isn’t all that robust and at 60% having to work till you’re 60. What if she cashed those out, and then we put that back into the mortgage, reducing the mortgage, possibly maybe refinancing, forgetting about the HELOC, refinancing, pulling equity, $100,000 of equity out of the house? Now you’re back to the 293 or 300, right around where we already are, and then you’re using that equity to then put down on real estate.
Now, you’re basically right… We’re still where we are. She’s just doesn’t have those two retirements that she’s… In the long term, I could see that being more lucrative.

Scott:
I love it. First, I love the strategy turning on with the thoughts and these types of things. I don’t know if we’ll have time to get all the way into that from that, but I think that’s the right type of question. I don’t know if that’s actually going to be good in practice. When you liquidate a 401k, for example, you have to pay income on the 401k, and then you have to pay a penalty for accessing the funds early if you do it incorrectly or in artfully. I don’t know what rules would apply to this pension, if there are similar rules or types of things like that.
There may be lots of gotchas in the process of attempting to do that, but I think that would be one avenue worth exploring. But if you’re going to begin making those kinds of moves, that’s where you really need a CPA to advise you on the specifics of that because you could be making a $10,000 tax mistake, and then a $10,000 penalty mistake, and you’re left with 30,000, instead of what you thought you had there. I think that’s where I would be really cautious, but I love that. What I love is that, “Okay, great. Now, we’ve got a couple of moving pieces, oops, sorry, to play with here to move the strategy forward.”
They’re all right answers, again, because you save so much on a monthly basis. You’re going to win, regardless of which path you choose. You don’t have a wrong one. I just think it’s about playing the game and optimizing, marking the goalpost in the finish line, and marching towards it. Each one of those three, the fourth one might be a good one. There’s tons of right approaches for you, guys.

Jeffrey:
Nice.

Azar:
My concern with paying off the house, though, is it would take us a long time, and it would only wipe out the principal, which is $1,100. That’s still not enough. The goal is I don’t want to… I mean, I don’t mind working per diem, and that’s the beauty of being a nurse. I could quit my job, and work per diem work a day a week, a day a month, whatever I want to do, depending on the job, but it would… I mean, it’s a significant amount, but it would only free up $1,100. My current income now, granted there’s some extra in there, I bring home almost $4,000.
I mean, $1,000 of it’s leftover. Eight something goes to saving. Let’s even say 2,000. It would be a long time to pay it off, I feel like, and it would still be a situation where I would still have to continue doing something. Like I said, I don’t mind, but I feel like it would just take so long to pay it off and it wouldn’t be 100%.

Scott:
It’ll take you about three, four or five years to pay it off, that’s right, with that at your current model, but if you can jack that up by adding value to rental property and selling it or cash out, refing or whatever that is, or doing a live-in flip, that was where I was going with that. I think that what I’m trying to say is if you eliminate the 1,100 in fixed mortgage expense, plus $400 or $500 in the variable component, starting with that food budget, that would be real borderline able to be covered with just the pension was where I was jumping to with my mind.
You’re right. You would need something extra. You either need more income, or you need to fine tune the stuff coming out on the budget, but I was just thinking around that as the asset. Again, your number might just be higher than that, and you might need $4,000 a month, 50,000 a year. In which case, you need to build more assets, and you can either do that through the retirement accounts, stuff that you’re currently doing, or the real estate stuff that you’re considering actively. Both are great options as well.

Mindy:
I think it’s important to not make any sudden changes today, but there’s a lot of things that we’ve talked about that, “Oh, if we go down this avenue, it frees up this amount. If we go down this avenue, it generates this much. If we go down this avenue, we can do these things.” Neither Scott nor I are certified financial planners, so we’re not giving you advice. We’re just opening up your mind to different possibilities. I think that you guys are going to sit down and have a money date for a few weeks coming up and just talking about it and, “Hey, what do you think of this?” “Well, I like this idea, but,” or, “I love this idea. Let’s go to here.”
I’m super excited for the possibilities that you guys have. When I was reading your application, it seemed like you felt you weren’t far enough down the path to financial independence, because you’re getting a late start. You’re doing awesome. You’ve got no debt outside of your mortgage. That’s huge. Do you know how many people who are 39 and 47, and they have a lot of debt and their mortgage, and aren’t making as much money as you, and aren’t saving as much money as you or any?
You guys are doing really well. The part of your fire journey that you’re on right now is the boring part, the, “Okay, I’ve paid off my debt. Why am I not FI?” Well, because now you’re in the building process, and the building process takes a while. It would be awesome to be like, “Now, I’m phi.” But outside of winning the lottery, which I do not suggest you play on a regular basis-

Jeffrey:
I never have.

Mindy:
… it’s just going to go, and it takes a while.

Scott:
Let’s be real about sales. You have this asset in the pension that does have those constraints with that, and that’s earned. That’s something that you built and deserve there. You probably haven’t been thinking about the value of that with that as well. That’s something to be… That’s a part of your wealth that you’ve been building, somehow, over this time that I think you should be proud of and realize as an asset. That changes the equation for you guys, and how you’re approaching your overall financial position.
You’re not worth 100 or a couple $100,000. You guys are close to millionaires, if not more, when you include that asset. I think that that’s a fun thing to, I think, realize or think about in spite of… Obviously, there’s been some tough things that created that as the output there.

Azar:
Also just the health insurance aspect of it, how lucky we are. I see in the groups all the time people are posting questions about, “What do you do for health insurance?” I know that’s something we’re so lucky that… It’s a good insurance too. I mean, I guess as good as it can be here, but I feel very lucky about that, too.

Scott:
Azar and Jeffrey, thank you so much for coming on the show today. We appreciate it. We had a great conversation, really excited for all the options we discussed here. I’ll be really interested to see what you guys end up deciding here.

Azar:
Thank you so much for having us, Scott and Mindy. We’ve really enjoyed it.

Jeffrey:
Thanks, guys. You guys are wonderful. We really look forward to exploring these creative choices you’ve laid out.

Mindy:
I want to come back in and check in with you in a few months or maybe even a year, and see what path you’ve decided on or what levers you’ve decided to pull to see where your financial future is going, because I’m super excited for what your future holds.

Azar:
Thank you. We would love to check back in.

Jeffrey:
Awesome.

Mindy:
Perfect, and I want baby pictures.

Azar:
For sure. For sure.

Jeffrey:
Thanks guys.

Mindy:
We’ll talk to you soon.

Azar:
All right, bye.

Jeffrey:
Bye.

Scott:
Bye-bye.

Azar:
Thank you so much.

Jeffrey:
Have a great day.

Azar:
Bye-bye.

Mindy:
Have a good day.

Jeffrey:
You too. Thank you.

Mindy:
That was Azar and Jeffrey. Scott, what did you think of the show?

Scott:
I thought this was a fun one. If you listen to… You probably saw how much I got going in this. I think it’s really fun when there’s a couple of creative and unusual circumstances and when there’s a variance on the formulaic approach to FI that some people take. If you’re starting from zero and you have a full-time job, you save X amount. You’ve invested in stocks. You maybe layer in a couple of real estate investments, and maybe try a few pot shots and some side hustles. There you go.
But when you have a pension, when you just became debt free, when you’ve got all of the different… When your time is available for certain things, but you can’t earn above a certain level, otherwise, your pension goes away, I mean, what a creative, interesting set of challenges from a financial planning perspective. I think we just had a lot of fun talking about those types of things, and hopefully, some of the ways that the discussion was framed began to… It was interesting or creative or helpful, and maybe you might apply to your situation if you’re listening.

Mindy:
Especially if you have a pension. I didn’t know that you could only make a certain amount of money per year before your pension starts to not pay the entire amount, and that just seems silly, but also, if you know those rules, then you can operate within them. We should congratulate them on becoming debt free because that is huge. Yay. They’re debt free. The debt free scream, it’s more of a debt free hooray. Congratulations on the upcoming new addition. That’s very exciting as well.
I just see amazing things happening for them, and a wide open future. Even with a brand new baby on the road, on the way, they’ve got so much that they are maybe not even with, maybe because of a new baby that they have on the way, they have so much to look forward to and so much fun coming their way. Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
From Episode 196 of the BiggerPockets Money Podcast, he is Scott trench, and I am Mindy Jensen saying make new friends on the sidewalk.