Guest: Welcome to the BiggerPockets Money podcast where we interview Katie Gatti Tassan from the Money with Katie podcast and talk about financial awakening, questioning conventional money wisdom, and also have a good old fashioned pre-tax versus Roth debate. In either case, like having all tax deferred or all tax-free, like both are pigeon holing you into the, you know, in in one case it’s pigeon holing you into now having to figure that out now, whereas like if you went all Roth but like wouldn’t have needed to or then you’re being pigeon holed into like you’ve kind of overpaid probably on your taxes at the time, if you were contributing to a a Roth while you were paying a 37% marginal tax rate. Like that is, that’s cutting out a third of that uh contribution. So, yeah, I would say like having all of either is probably not going to give you the most flexible outcome.
Mindy: Hello, hello, hello. My name is Mindy Jensen and with me as always is my money loving co-host, Scott Trench.
Scott: And great to be here with my 401 okay co-host, Mindy Jensen.
Mindy: Scott and I are here to make financial independence less scary, less just for somebody else. To introduce you to every money story because we truly believe financial freedom is attainable for everyone no matter when or where you’re starting.
Scott: That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business or just have a financial awakening. We’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.
Mindy: Scott, today is a super fun episode. We talked to Katie from Money with Katie the podcast, Money with Katie the blog, Money with Katie the everything. and this is a super, super, super fun episode. I really enjoy talking to her. I enjoy our lively debate at the end, Roth versus traditional 401Ks. Um I enjoy her story of her financial awakening where she discovered that you don’t actually have to spend every dime that comes into your pocket. Who’d have thought?
Scott: Yeah, I I think Katie is a fantastic. as she’s brilliant. She has immersed herself in this world of personal finance, built a philosophy of money that I think is really strong, and she’s done it from the ground up. There’s a lot of familiar concepts in there and there’s a lot of brand new and controversial things or challenges to uh the things that we’re we we take for granted in the in the world of financial independence and early retirement. So I think she’s worth listening to, really enjoyed the conversation and um loved the debates that we had.
Mindy: Today we welcome Katie Gatti Tosan onto the podcast. Katie is the host of Money with Katie, which you probably have heard of as it is screaming up the money charts. Her podcast focuses on building wealth, questioning conventional wisdom and creating a great life. Katie, welcome to the Bigger Pockets Money podcast. I’m so excited to talk to you today.
Guest: Thank you so much, Mindy and Scott. I am honored to be here.
Mindy: This is gonna be so much fun. Let’s learn all about Katie. Katie, where does your journey with money begin?
Guest: Well, uh I should caveat everything that I’m about to say by saying the honest real beginning of my journey with money and how I think about it is the fact that I was born into like a middle class family with two working college educated parents who consistently lived beneath their means and clipped coupons and tracked their spending and you know, drove used cars that were 15 years old. So I think uh it’s it’s impossible to extricate me and my perspectives and my outcomes from that environment in which I was raised. I don’t really think it’s all that surprising that I like grew up to be an adult that tracks everything I do in a spreadsheet because those are the two humans that I like learned how to be a human from. Um and I also think that like the fact that I was never concerned about where my next meal was going to come from or how we were going to pay for my school supplies, like that definitely influenced my kind of fundamental sense of security and confidence around finances. That said, I basically had no inclination to save money whatsoever as like an adolescent or young adult. Any money that came my way, whether it was from birthday or Christmas gifts or from part-time work, it really didn’t matter. It basically just got spent immediately. I had no concept of opportunity cost. So when I was graduating from college, I didn’t have any student debt, which was a huge leg up, I now realize in retrospect. At the time, I didn’t realize it was that big of a deal, but now I see how how impactful that was. But I also had no money. Like I had less than probably $500 to my name when I walked across the graduation stage. And I wasn’t really concerned about it until I started living on my own postgrad and was kind of kicked off that family payroll of like, all right, you have a college degree now and an internship. So here’s the bill for the car insurance, God speed. Um so about like six to 12 months into working full time, I realized like, oh my god, I’m just kind of treading water. I don’t really have a plan. Uh and that didn’t really sit well with me. And I think simultaneously around that time I realized that this idea of working in a cubicle for the next 40 years sounded like moderately terrible to me. So that combination of my own insecurity around like my ability to manage money, the fact that like my paychecks were coming in and then suddenly kind of gone and, okay, cool. Well, when’s the next one going to get here? Because I’m going to use that one to pay off this bill and that whole sentiment didn’t feel great, combined with my fear of never being able to retire, that was mostly what kind of kicked me into gear and got me interested in personal finance and knowledge is power. So it, it all really built from there. But that was probably age 23, I would say, there about.
Scott: And what year is this?
Guest: This would have been like mid 2018 probably.
Scott: Okay, so you graduate college in 2017 and a year later in 2018 at age 23 you’re like, uh I’m out. This is not going to work with from a cubicle, um uh, a cubical job for the next 40 years. I’m going to learn about personal finance.
Guest: Yeah, I didn’t last very long, did I? What was your job?
Guest: I worked in marketing at an airline and uh it’s funny because I had a great job realistically. Like I I worked for you know, one of those employers that’s always on the lists for like being a great employer and I had um a solid income, like my starting salary was like $52,000. So it wasn’t, it wasn’t like I wasn’t making enough money or that I, you know, was working some horrible job with toxic people. I mean, it was a great gig. I think it was just in general that realization of, oh, I mean, I remember like down to the moment when this all kind of hit me like a ton of bricks because I was walking into the building one morning, it was like 8:00 a.m. with like my heels on. I got the lunch bag in one hand and the purse in the other and I’m kind of like teetering along. and it was just kind of this jarring moment of like, oh my God, is this my life for the next 40 years? Like, is this it? And that was really rattling because I don’t know, I think you go through life and you go through school and there’s always something else on the horizon. There’s another semester or another class with the syllabus that tells you exactly how things are going to unfold and there’s very clear benchmarks and I think that kind of endless expanse of a traditional career was a little bit unnerving to me because I was definitely ambitious and motivated, but I didn’t necessarily feel like I was directing that ambition toward the right thing at the time.
Scott: Yeah, I mean and and and this is your story so only chime in about myself for a moment here, but rewind five years. This was exactly that this is you’re in almost eerie detail the same, you know, I didn’t have the heels and the lunch and the purse uh piece, but uh but I I had the same thing. I except I was working at a Fortune 500 company. I was a financial analyst and I remember while and and my company was consistently ranked in the top um of the worst companies to work for in America, uh uh things there. So, I, you know, I guess it took me three months, uh, that that was the difference of three months there instead of six months into the job. Uh, for that. But I I remember I had a similar type of moment and discovered in the weeks following concepts like financial independence and Mr. Money Mustache and changed my, um, my outlook on how I want to pursue my career.
Guest: Yeah, I think that’s everyone has a financial awakening. I think it just depends on how uh I don’t want to use the word self-aware, but I’m kind of tempted to, like how in tune you are with your own happiness and fulfillment and how I guess willing you are to question it and and to really honestly examine it. And I think there was a good Gary V quote about this, not that I want to be like the one that goes around quoting Gary V all the time. But something to the effect of like, if you are living for the weekends, your life is broken and it’s really harsh, but what it’s getting at is kind of this same concept that if you are just putting your head down and grinning and bearing it through 75% of your week, 80% of your week, it’s gonna be a long 40 years and there’s probably a better way through. And I think that that’s why the Mr. Money Mustache and Mad Fientist and kind of that like old guard of of Fi, why their messaging is so impactful and kind of like red pill situation because it’s, oh my God, there is another way. Like I thought I was trapped, but turns out there is this whole subculture that has figured out uh kind of a more optimal path.
Scott: Awesome. So what changes once you have your financial awakening, which I think is a great term that I’m going to steal.
Guest: Yes, my financial awakening, my my baptism and then I turned around and evangelized to everybody I knew. But what changed really was I think the the idea that I had before that, well, what difference does it make if I spend a dollar now or a dollar five years from now? Like it’s a dollar either way. That misalignment kind of corrected because I understood opportunity cost and that, oh no, actually, a dollar I have today is far more valuable than a dollar I have in five years from now because I can invest a dollar that I have today. So that shift in how I viewed the money coming in was certainly powerful psychologically. But I think what I really started to notice once I began listening a lot to shows like BiggerPockets and to Choose FI and some of those kind of, I I consider them like the OG personal finance content. Um, I think I became far more critical of my own unquestioning of just the way things are. Like the fact that almost every day my coworkers would go out to lunch and I’d be like, sure, I’ll join you because you just, you don’t think about it unless someone points at that and says, that’s actually not very like, that’s probably not what you should be doing. Like, you know, you’re going out and spending $15 or $20 a day on lunch and then maybe going home and picking up food on the way home. like those little choices that I never really thought much of before or just kind of considered normal because it’s what was modeled to me as normal, that’s what I started to question. Same with, I would say, some of the more traditional, quote unquote like beauty or like feminine expenses of like always having to have your hair done and your nails done and to have trendy clothes and nice things and things like that, again, that I hadn’t really questioned, I just thought, yeah, I mean, you have to get your highlights and your gel manicures and you have to have, you know, nice makeup on your face where those are also things that I kind of started to look at through a different lens and say, well, actually, how much am I spending on these things? You know, what percentage it turned out, it was like 10% of my take home pay was going toward what I now call the hot girl expenses. And sure, now that I’m earning more, I’ve introduced some of them again. I you know, get my hair done again. But at the time it was kind of like, oh my God, that is kind of inexcusable that I would spend 10% of my take home pay just on the way that I look. But unless someone really shines a flashlight on it for you and kind of points out this is the trajectory that you’re putting yourself on with these choices, it’s very hard to notice or question those things on your own. So, I think it was just that attitude that that shifted. Yeah.
Mindy: Yes, and this is why I think Mr. Money Mustache has been so popular and so in a way that uh uh who’s early retirement extreme hasn’t been is that Pete showed you, you could do it. This is something that’s possible. Here’s a math problem and if you believe in math, which you should because it’s real, if you believe in math, I can show you that this works. Where Jacob is wonderful, but he’s showing you that early retirement can be achieved through extreme measures. Eat rice and beans every single day and live in an RV and he’s happy doing that. Not everybody would be. So so his message misses a lot of people where Pete’s kind of hits a a little bit more and I mean sometimes Pete can be a little bit harsh. So his message misses some people. But
Guest: But he has that chart, Mindy, the it’s like infamous now, the chart that shows you your save rate and then years to retirement where he basically just emphasizes like this is just math. Like if you are saving this much, that means by definition you are spending that much, which tells you it can it can then spit out the number of years you have. So if you think, oh, I’m cool with like a five to 10% save rate and then you look at that and you’re like, oh, I have to work for 48 years, maybe I’m not so cool with that. And it really drives home like the time money equilibrium and like how connected those two concepts are, which I think is an unnatural jump to make on your own. Like I don’t think we often think about those two things as kind of uh equ equivalent like levers in that way.
Mindy: Exactly. And like you said, this is what’s modeled for you. I remember working in corporate America, I was one of like zero other people who brought their lunch to work. You always went out. I didn’t go out because there weren’t that many restaurants around and it was such a hassle to go and get something and I’m super cheap. Spoiler. Everybody who listens already knows that. But it was so much easier just to make lunch and bring it and every once in a while I’d forget and I’m like, man, my entire lunch hour is wasted going out and finding something to bring back and then I have to eat it at my desk anyway, I might as well just eat at my desk and like surf the internet or just get more work done. You know, it just, it seemed like such a waste of time. But when you see everybody else doing this same thing, it’s part of like fitting in with your co-workers. It’s part of, you know, just life and it’s fun to go out to lunch. So it’s super easy to just do that every single day. And
Guest: You you hit on something like so interesting about the timing and how I think there is a bit of a this misconception, not to not to like drill down too deeply on this one example, but that going out to eat is easier. And in reality, what I kind of realized about a lot of these things, going out to eat, going to the gel manicure appointments, going to get your hair done every six weeks. like all of these things do not just take money but they take time and planning and mental energy and brain bandwidth and that’s kind of why finding the financial independence philosophy was like a release valve for me because it just totally gave me the freedom to like wash my hands of all of it and be like, I’m out. I’m just going to I’m going to embrace simplicity and like try this and I was kind of shocked to find that like, oh, my life is so much easier now. Like it’s not harder, it’s actually easier and like I don’t really miss many of those things.
Scott: So what happens what what happens next in your financial position? You’ve you’ve embraced this this mentality, you’re obviously not working at the same job now, how how do things progress for your story?
Guest: Rapidfire. Yeah, very quickly. Um, so I did stay at that same job until 2021. Yeah, last year. So I continued to work there for a while, but the key kind of differences that change things. So the spending definitely got reined in. I instituted a far more strategic and kind of austere plan for myself. So like we had said, the first six to 12 months that were kind of like loosey goosey or like I’ve jokingly called them like the free love period of my personal finance journey where I was just like, whatever, lunch every day. It doesn’t matter. Um, it that period, in that time on that $52,000 a year and like keep in mind relatively low structural expenses. So like the fact that there wasn’t much money left over meant I really was finding, you know, a thousand different paper cut ways to like spend it. I had saved 10 to 15,000 that year. Kind of on accident. Like kind of just like that was the money that was left over every month that kind of accumulated in savings with no real plan. So it took me a year to save 10 to 15K. Without my income really changing at all, but with this new strategic spending plan, it took me, I would say 18 to 24 more months to get up to 100,000. So it was kind of like once we really like got things written and tight, we were off to the races. I also got a side hustle teaching group fitness, and that added another incremental like $500-ish per month in income, which pretty much entirely just got saved and invested too. So, we’re not talking about life changing amounts of money, but as a proportion of like the take home pay I had at the time, it was relatively substantial, and it kind of gave me that ability to kick it into high gear. So,
Scott: And are we talking about $100,000 in personal net worth or $100,000 in cash here?
Guest: And if if a Oh, personal like investments.
Scott: Awesome. And where were you putting that money during this period?
Guest: It would have been 401k, Roth IRA and I did have a taxable brokerage account as well that I was contributing to.
Scott: Awesome. How’d you think about uh cash in in your savings account?
Guest: I think at that point I had my emergency fund in a CD and it was, I want to say like $15,000 in that CD. At the time you could get like a 3% rate on a CD, so that was, I was like, all right, that’ll be that’s fine. Um, and like I said, because my this is pre-pandemic, so I was a little bit naive about like how easily someone could be furload. But I because my expenses were so much lower than my income and I had like a lot of margin every month. I never really ran into cash flow issues. Like I it was kind of just because I was just naturally living beneath my means and uh investing the extra every month. I felt pretty confident with like the amount of money coming in, uh the the emergency fund in that CD and and in that, you know, two year period, fortunately, I didn’t really ever run into any uh issues. I don’t know that’s necessarily like recommendable, but, you know, for me it ended up working out okay.
Scott: I I think it’s a paradox, right? If you if you spend more, you need a larger emergency reserve because you don’t have any margin. If you spend less, you need a lower um emergency reserve because you spend less and you you’ll be able to to replenish it very quickly. So it’s kind of a paradox and it just it’s a huge multiplier. Going back to what you’re talking about earlier with Mr. Money Mustache, that post for you’re referring to is called the shockingly simple math behind early retirement, which I think everyone should check out and it just it it compounds on that. The less you spend, the less you, the more you accumulate, the less you need long term to generate from a passive income perspective. It’s more tax it’s just it’s way, it’s just there’s so many different benefits that come from that one single lever and starting your your your your um wealth building journey here.
Guest: Yeah, so that was um let’s see, I think where things really took a turn for the better, I would say, like where things really shifted. Uh that would have been like late 2021 because at that point, I had been writing Money with Katie and kind of building up money with Katie as a side project, turned inadvertently into a business. um, for about a year. So we had kind of picked up some steam and we were starting to see, I’m saying we as if there was more than just me, it was me. I was starting to see some some really like impressive revenue months that gave me a lot of like confidence about there might actually be something here. Like this might be worth, you know, going all in on. And I had also changed companies to go work for a tech company and effectively doubled my compensation, like kind of overnight. So that was the point at which it was like, even just a year earlier, my financial position was like unrecognizable. Um, so I think it’s, it kind of gives off that aura. Now I realize I’m saying it of like, oh, overnight success. It wasn’t really like that. There were, there was a lot of ground work that had been laid over the last 18 to 24 months to get to that point, but it did in for me, feel as though things were all kind of culminating at the same time and kind of paying off in spades at the same time. So, that was really cool because for me, it was like I went from being a relatively average earner, you know, if we’re talking like literal averages for like the the national scale average earner to being like an objectively high earner and realizing, oh wow, there’s a lot more you can do when you have so much more investible income to work with. So that was a very fortunate uh lucky break and that has been kind of the the last, I would say, how the last year or so has been. So not a, not exactly like a long term thing so far yet. Working on making it a long-term thing, but it’s, it’s played out really well, I would say over the last like 12 to 18 months.
Scott: Awesome. How during this three-year period leading up to 2021? How much self- education would you say that you conducted in terms of hours? Is it, is it 10 hours of reading? Is it 100? Is it 1000? What, what’s the order of magnitude here?
Guest: I would say we’re in the thousands by this point. Because I, I mean, I was reading every personal finance book I could get my hands on. I was listening to all the podcasts. It, it kind of went from being like, oh, this is something that I should know about to be an adult to like I’m now obsessed with this and it has become like a hobby in and of itself to learn about it. And I, I to this day, I’m not really sure why, like I’m not sure why it gripped me or it continues to grip me as much as it does because growing up, I never really cared. Like even as a young adult, it was not interesting to me and I would say I was just as kind of intimidated and avoidant about it as, as a lot of people are. So I don’t know why like once I kind of got into the weeds, I was like, oh my God, I want to know everything. I want to spend all of my time learning about these things, and not only do I want to read about them, I want to write about them too, and like put my own opinions out onto the internet. So, yeah, I mean, definitely, I think in the thousands by that point.
Scott: Yeah, I I can completely empathize with this. This is it’s just like, oh, I’ve equated money with freedom and control over my life. and now I’m going to spend thousands of hours mastering the subject because it, because that is the amount of importance I place on it. And then it transform for me it it it is transformed into like a passion for doing this um with my day job, uh in in over a long period of time. So I it’s perhaps similar in your situation.
Guest: That was a far more succinct and beautiful way to put it, Scott. Yes, that’s exactly correct.
Mindy: So, Katie, you pride yourself on questioning conventional wisdom with regards to, you know, traditional money concepts. What are some of the big financial truths that you’ve discovered are actually wrong or being preached and there are alternatives that you uh that you prefer?
Guest: Yeah, it’s funny because I I think that almost to answer this, you have to kind of like, I have to contextualize a little bit because I think that there are quote unquote truths out in like the broad, in broader society that like, when you compare that to the financial independence world, it’s like, oh, well, that all of that is wrong and this is right. Like for sure. But I think with in the financial independence world and kind of the things that we teach ourselves and learn about and kind of believe and prescribe to others, I think there are things that maybe lack nuance or miss the mark a little bit. So like a classic one that I had to reckon with personally was, you know, this idea of DIYing everything and, you know, if something breaks, you figure out how to fix it. Like basically if you can, if there is even like a chance that you can do something yourself, you should do it yourself. You should not be paying somebody else to do it. And I think that that makes sense up to a certain point. Like if you are me, circa 2018 and you’re making $52,000 a year, yeah, you should probably be making your own lunch. You should probably be cleaning your own apartment. Like you’re not, you’re not there yet. But there, but there did come a point where I was working so much because I was working this new tech job and I was trying to build money with Katie nights and weekends and the kind of ROI on my time that I was getting for spending an hour or two working on a product launch or, you know, impressing my boss at work, the ROI on that time was far higher than the ROI that I was getting from vacuuming my house and mopping my floors. So it got to a point where I thought, all right, I can actually pay somebody else to do this for me. I can buy back my own time that way because now I’ve reached this point in my life where I actually have more money than I do time. I have more income than I do expendable hours in a week because of the expectations and the workload that I have. So I need to actually give back some money to buy back some time, get those two things a little bit more in equilibrium. And for me, like the economic output equivalent was that my income continued to go up and went up at a rate faster than, you know, the incremental spend that I had on some of those services, goods and services that I was paying for to like buy back that time in my own day. I will say that the flip side of this or the kind of the watch out is that it can become very easy to start to see everything through that math equation and to say, well, I’m gonna outsource everything. I’m not going to do a damn thing for myself. All I’m going to do is work. And then you kind of only be like, it it kind of flattens your life into this one dimension. So I don’t always recommend that people like take that approach and fully run with it. Um because it yeah, it can kind of mess with like, you know, what if I don’t have to cook, if I don’t have to clean, if I don’t have to watch my own kids, well, now I can sit at a desk for 14 hours a day and you kind of get to the point where you’re like, but is that really like the lifestyle that I wanted when I set out on this path. Is that actually like the best way to structure a day? So I think it it’s, you know, as with all things not black and white, but I do think that there’s there does come a time when it makes sense to start exchanging a little bit of money for time.
Mindy: Yeah, that first part I feel a little uh targeted isn’t the right word, but definitely seen. Attacked isn’t the right word, although, you know, not the wrong word either. Uh I I struggle with that though because on the one hand, I want to do it myself because I don’t, I don’t identify with my current bank balance, my current investment balance. Yeah, yeah. I am still the kid that has to shop at the thrift store, not wants to shop at the thrift store but has to shop at the thrift store. I’m still the kid that brings lunch from home because that’s the only option there is. If you want, you don’t buy lunch at school because that’s more expensive. You bring it from home because that’s what we can afford. And getting over that is really hard. And when you can do it yourself, why would you hire it out? Also, can you talk to my husband because he won’t stop DIYing stuff and. Good for him. I’m I where I what I thought you were gonna say is that like all of these things fall on you, which is traditionally how it works in heterosexual couples, particularly if like one person is working from home or or whatever, that like you just kind of, oh, it’s odd like, I do tend to be the one that does all the laundry and cooks the meals and then cleans up after. like you just kind of, I don’t know, every single time I talk to a woman that’s married to a man, this is like this I hear the exact same thing. So I’m like, I don’t think this is just me, but um that I think is the other reason why I’m kind of a fan of this because I think it it helps to assign some economic value to these tasks and, you know, someone should be getting, if someone else isn’t going to come in and get paid to clean the house, I should be getting paid to clean the house because it’s labor, like I don’t, it’s my unpaid labor at this point. Um, but no, that makes sense. I mean, I think that’s totally fair. Like we definitely I think inherit and internalize that the those types of uh money scripts like very early in life. And yeah, I I don’t think that that’s unusual at all to find that like your behavior or your feelings about money are not necessarily representative or correlated with the amount of money that you have.
Scott: I I I think that this is a fantastic uh framework to think through and a toolkit I would offer up here is to just value your time on a per hour basis and use that to make a number of decisions about this, right? I mean, and and and because, you know, we can’t resist bringing rent, you know, real estate investing into all of the stuff. I I’ll use a rental property example, right? where where when I first started real estate investing, I self managed my property and I would fix up everything myself. And then as my income went from $48,000 a year to $75 or $80,000 a year, you you need to start hiring out some of those tasks and doing others DIY. and then as income grows and grows and grows um over time, um and and and you’re building wealth and investing in those types of things, then you move on and outsource more and more of that. But you can’t, but I I think the vast majority of folks are going to be in this kind of gray zone for much of their lives if you’re if you’re building wealth and you’re going to be constantly having to make those tradeoffs bit by bit and the general tendency of of stopping doing low value work, whether that’s at work in your business or at home, um, and do the things that make you happy, do more of the things that make you happy or that are higher value and that’s an art and a science to your point, but at least a good toolkit is valuing your time after tax and saying, I’m not going to pay somebody twice my hourly rate at work to do a task I’m capable of doing. And I’m also not going to do a task that I can pay someone half of my hourly rate at work um when I don’t like doing that. So and and and knowing those extreme and avoiding those extremes can be a really good way to solve for this. But I think it’s a great framework.
Guest: I love that. Well, Katie,
Scott: let’s let’s talk about more of your, you you’ve put together I think a really robust philosophy about money in a general sense and you’ve, you know, out of those thousands of hours of self- education and writing and and creating stuff. I’d love to go into a couple of uh of of areas that I think are really interesting that you’ve come up with. And the first one I think is the Roth versus 401K debate. Can you, can you give us your your thoughts on this? You have a very strong stance, I believe, and I love that. I do.
Guest: As with most things, come out of the gate with a strong opinion. No, I think um my, I’m going to try to say this as concisely as possible. I’m going to take a page out of the Scott playbook and try to be like really tight with this answer. But I um, my approach is that I think a very optimal combination is taking full advantage of the traditional 401k because it has the highest kind of uh highest contribution limit really of any qualified account that you’re going to have access to for the most part, um, to get enough of an upfront tax break every year, to then turn around and create more investible income than you would have had otherwise. So, in order to determine how much you are going to save personally by contributing $20,500 to a traditional 401k, you just look at what your marginal tax rate is and multiply that by 20,500. So if I make, you know, somewhere in the 24% bracket and I contribute the full 20,500, then I’m going to save almost $5,000 on my taxes and that’s money that like theoretically is staying on my balance sheet because it’s not being turned over to the IRS, right? So I can then turn around and take that $5,000 theoretically and invest it in a Roth IRA. So I think for me it just comes down to doing more with less and trying to kind of create the most optimal uh you know, upfront investment to get the most money into the accounts. and then, you know, you play this out 40 years down the road, you can actually use some pretty, I would consider them relatively simple, they think they sound kind of complex on their faces, but I think in reality they’re relatively simple uh methods of then strategically withdrawing money from these various accounts in such a way that you are minimizing your tax liability on the back end too. So, it’s, I don’t think it’s for everybody, but I do think that to suggest that like everyone should just be doing an entirely Roth strategy kind of ignores like a big piece of the puzzle in that upfront tax break and, you know, if you’re putting in 20,500 and getting 5,000 back on your taxes as a result of that, that’s what an upfront 25% ROI like right there. So I I don’t know why we like tend to kind of just discount or ignore that.
Scott: I love it. Now, now, um, let me I’m a big proponent of the Roth IRA as a uh a significant component. So I I have a slightly different view on this, but I want to I want to see if I can summarize your position and then give you even more supporting ammunition um for the for the argument including what you said there. So, first, I think that the uh the argument that you’re positing is you can have both, but if you’re all in a Roth IRA and have no 401k, you’re missing out on potential tax advantages today and optionality down the line that can only be done from a 401k to a roth because you can’t go back the other way from a roth to a 401k. Is that, is that correct?
Guest: That is correct. And I would also say that some people will say go do full Roth 401k and Roth IRA. And again, that’s that’s making the bet that your tax rate in retirement is going to be your effective tax rate in retirement is going to be higher than your marginal tax rate now. And in order to make that happen, you got to be spending a lot of money in retirement or not earning very much now. And that I don’t think is very representative of how like most people, like most people, in order to actually like have enough money in retirement to be like spending that much money in retirement, you’d have to be earning a lot, right? So I think that’s where the the logic kind of breaks down.
Mindy: Now who’s feeling seen, Scott?
Scott: I know, I I love it. I think I think it’s a great argument. and I think, I think that I agree with the premise that having no 401K contributions, no no tax deferred retirements and 100% roth over the course of an entire career is is a mistake. I think you’re missing out on on those advantages because there there should be over the course of 40 years of a of of a career working or not working, there will be years when your income is very low or you have a large taxable loss. For example, you’re a real estate investor and prices go down or you you had end up doing a lot of acquisitions one year, that will be a loss and and you can use that loss to move the money from a tax deferred account like a 401k to something like a Roth IRA. The end goal, however, is to get all the money into a Roth IRA when it’s time to withdraw, right? And so that’s that’s where we want to start with and for a lot of people, the most efficient way to do that will be to start with most of the contributions in the Roth and then put enough into the 401k um, to to harvest some of these tax advantages as they come up. Now, I personally put the vast majority of my stuff into a Roth 401K and then into the the Roth IRA as well. and the reason I do that is because I’m so arrogant about my financial profile over the course of my career and no, literally, that I believe that I will be in a high income bracket today and an even higher income bracket in retirement because I plan to build businesses and own assets that will have pass through uh income on my tax return at that point in time. Interesting.
Guest: Okay. But there’s, there’s I what I would highlight though there is that that strategy is a conscious choice and a plan based on kind of your track record of being a successful, you know, business person and real estate investor, where you have reason to believe that your income in retirement, that you actually may be able to live quite large in retirement if you have a crap ton of income coming in that you want to be spending, right? And I think, um, so I would I would really find no fault in that approach. I think where I do find fault is people that do not have that plan and say, I don’t need the 401K. I’d rather just take the money now or like, oh, I’m put it in. It’s like, you don’t really don’t want the up front tax break? Are you sure? Like, it’s 5,000 that’s like not insignificant. Um, yeah, and I think like by and large for most people, like their their spending in retirement will probably be lower than their highest earning years.
Scott: So I I think that’s great. I think, um, one other question I wanted to ask you about this is, uh, you’re not really, you’re keeping the $5,000 in your example on your balance sheet. Yes. But you’re not really doing that unless you have a plan to arbitrage that with using a loss or a low income year to move that money from the 401k, you’re just deferring the tax and paying it later. And I think one of your arguments that I think is really interesting is that you don’t think it’s necessarily a good bet to bet on in on income tax brackets increasing over the over the course of a career. If if I, I think I remember that correctly. if I remember that correctly from one of your your posts on that.
Guest: Like not thinking that the marginal rates are going to go up. Is that what you’re referring to? Because that’s another big reason why why I also contribute to the Roth is because I I figure oh, tax brackets have to be higher in 30 years. Now that’s anybody’s guess. But that that to me seems unchallengeable until you challenged it and I love it. Well,
Guest: I think the reason that I challenged it that two, I say there’s two reasons I challenged it. The first reason is because politically it’s very unpopular to raise tax brackets, marginal rates for the middle class and lower. Um, obviously this country has an issue with figuring out how to tax billionaires. We haven’t really got that straightened out yet, but when you look at like even the the the numbers that they’re like jockeying back and forth, we’re usually talking about, should the top marginal rate be 37% or 39%? Like we’re not often being like, okay, that 10% bracket, now it’s 20. Like we’re not really changing those lower ones measurably. So I would point to that just like kind of the political incentive to keep taxes low in the popular brackets. The other thing I would point to comes back to that marginal tax rate versus effective tax rate, because your income today and the income that you are putting into the Roth account is being taxed at your highest marginal tax rate. and the income that you’re going to be spending in retirement is filtered through the low like bottom up, right? So you’re going to be looking at your effective tax rate. So you the marginal rates would actually have to rise quite substantially for your effective rate later that is bottom up to be competitive with top, you know, your personal top marginal rate now when you’re being taxed top down. So that’s kind of the other I guess piece of this that I think we, it’s really not apples to apples, I think in the same way that that it would appear on its face.
Scott: Okay, final final question on this, um, for from that because I think I think that’s another good argument. If you are, if you, if you are middle class today, middle or upper middle class today, and you plan on having a portfolio that allows you to live a middle or upper middle class lifestyle at retirement, then it’s reasonable. I mean, I can give you a very good argument that you should not, um, that that there’s a good chance that tax brackets won’t be materially different inflation adjusted at that point in time, because tax brackets do change with inflation as well. Um, now, what the the one question I would ask is, you know, if you’re 30 years old and you spend your free time, your commute to work, listening to Money with Katie or BiggerPockets Money or Choose If, or these other things, um, and you’re doing that for a long period of time, is it reasonable to assume that at retirement you won’t be uh having a middle class level of wealth because you’re going to become financially free fairly early in life, and that financial freedom, we find nobody actually starts withdrawing their portfolio when they become financially free. They all find other creative ways to cover their expenses and then some, many go on to make even more, uh, even more money. and they have multiple decades of wealth growing. And then therefore will be had it will have to withdraw more money from their 401K. Oh,
Guest: like from an RMD perspective? From an RMD perspective. So I would love your thoughts on on that particular last point. You’re like, so figure that one out.
Guest: Um I think so. Okay. I guess for this one, I I will kind of use myself as the guinea pig because I am max out that 401k. I’m like, let me let me get as much pre- tax money in these buckets as I can to try to lower my tax rate this year and pay less in taxes this year. My kind of grand scheme here is that at some point in my, call it early 50s, we’ll say, uh I would want to start to, you know, assuming things are going as well as you’re describing and like yeah, I got more money than I know what to do with. I’ve spent the the bulk of my life earning and and, you know, creatively, whatever. Now, I’m not sure how, you know, having a substantial real estate portfolio would change this. So I I don’t want to, you know, go as far as to say that this would apply to everybody. But my hope would then to be in a position in my early 50s where I’m sitting on several million dollars, like, you know, hopefully we’re looking at like 8, 9, 10, like a lot of money, right? And at that point, I would want to start doing those RMDs and realistically speaking, uh not RMDs, I’m sorry, conversions. getting getting the money out of the 401k into the Roth IRA, you know, using that standard deduction, using uh kind of those those lower tax brackets if you will, to start making those roth conversions at a time when I have more control over the tax bracket because maybe I am living off of, you know, income from a taxable brokerage account, this is assuming the 0% capital gains tax bracket sticks around and I’m able to really spend quite a bit of money, you know, up to 80 something,000 this year as a married couple, uh completely tax-free. If I want to spend up to 400,000, I’m paying what, 15%? But but really being able to leverage uh the the amount of control that I would have in those years to make those Roth conversions and to start chipping away at that 401k balance. Now, sure, if you assume that someone is putting in the max for 40 years, yeah, they’re probably not going to be able to like fully empty or convert away that entire balance by the time they’re 72 and a half. But I do think that at that point, like the problems, I’m going to put problems in air quotes. they’re like the tiny violin problems of like, oh no, I’m gonna have to pay a little bit of money on this RMD out of my $8 million net worth. like dang. So I think it’s, it’s obviously like you’re hedging your bets and I think for me, um, having money across the different tax statuses, taxable, tax-free and tax deferred, creates the most uh optimal mix for flexibility later and isn’t placing too big of a bet on any one outcome.
Mindy: Okay, so I hear what you’re saying. I love all of what you’re saying. I am a couple of months older than you and I find myself in a similar position to what you just described. And for you. I’m thrilled to hear that. Yeah. Yeah. Oh my God, this horrible problem. like I am in a position that when I turn 72 and a half, I will have to take RMDs in like, I don’t know what they’re going to be, but they’re going to be a lot, and I don’t want to. I want to leave them in my retirement accounts because that’s where I want them to be, but the government says that they know better than me and I can’t argue with them. But anyway, I digress. When I chip away, like whenever I stop working, I have a W two. I’m a real estate agent, so I have income from there. And I’m currently doing pretax 401k. It’s a self-directed solo 401k, so I can contribute way more. A lot. Um, yeah, my company contributes and I’ve reduced my taxable income by as much as I can. Uh, but there’s, there’s a big balance that I am going to have to chip away at. And I mean you can, you can chip away like you can convert the whole thing at once. You’re just paying a boatload of taxes on it. If you’re chipping away, there’s there’s a lot less that you can, like in order to, to, let’s see, tax advantageously do it. you’re you’re essentially like converting what, $100,000 a year, and when you’ve got a million dollar portfolio, that’s 10 years that you can Roth ladder conversion over and then you’ve taken it all out. But when you’ve got multiple millions, then that’s multiples of 10 and maybe you don’t have that much. Like it’s, if I could go back in time, I would do what you’re doing with the Roth 401k and the traditional 401k or what’s what Scott is doing with. I would split it because I’m all traditional 401k.
Guest: When did the Roth 401k come out? Because I don’t know that I’ve had the option for a Roth 401k.
Guest: I think like early 2000s.
Scott: Bigger Pockets offers a Roth 401k, so you know, you should check with your HR team about that following this call.
Guest: Yeah. Oh, He’s like, what I’m trying to do is go back in time, Scott. So unless you’ve got a time machine. There’s still time this year. Well, no, I already maxed out my self-directed solo 401k and then you can only do one.
Guest: You can actually, wait, can can I say something about that? You can you could put Mindy $61,000 into your solo 401k as the employer and make no employee contributions because you know, you’re both you’re like employer, employee, like, right? because you’re self-directed and then you can you can put 20,500 into your work 401k as the employee because they’re two different sources of income. So that’s just like a little loophole um to keep in your back pocket is that as long as your contributions, you may be able to switch them over too, if you’ve already made them is like employee contributions. You could just say, yo, I’ve got what is 60, 61,000 would have to be your uh 20% of your net business income. So as long as you’ve got like $300,000 of net business income, you could go, yo, putting 20% in 61k as the employer, that’s it, no employee contribution, turn around, go to Bigger Pockets, put $20,500 in. Oh.
Scott: Mindy’s got open mouthed uh shocked at this advice, which is fantastic. I love it. But I I do want to call out Katie’s point here that if you are a business owner and you have high, very high income, then the roth argument goes out the window because you have incredible, you can put incredible amounts of money into the tax deferred plans through this where you should, you should be taking advantage of those and those are the match that, that uh, the plan that Katie just described, there are profit sharing plans when you have employees, it actually gets even better, um, because you can, you can put even more. Oh,
Guest: that’s good to know. More into that because you can put your spouse for example on the plan, um with those as well, um and you both of you can max that out and you can do that through profit sharing, um things. So talk to uh financial planners and those types of folks when you get into that level. Yeah.
Mindy: I have to call up my uh my plan administrator and see if I can see if my plan allows for that or what I have to do to make my plan allow for that because when you’re the boss of your plan, you can change the rules. It’s really nice.
Scott: We we are being told that we’re coming up on our time limit here which is unfortunate because we’re having a wonderful conversation here. Um, so Katie, we’re not going to get a chance to debate another issue here. Can you just bring up one and leave us dangling with your thoughts there and we can discuss that uh next time you we have you back on.
Guest: Oh, would love to. All right. Dangle away people. Um I’m gonna go out on a limb and say that all the advice that says that you should never allow any lifestyle creep is it’s it’s sad and depressing. And I think that you you should intentionally and as you earn more money, you should allow yourself to live a slightly nicer, more comfortable life as a result of that. As long as you’re still living beneath your means, right? Like let’s not go crazy. But I do think that there’s a difference between the lifestyle creep that we hear about where like, oh, mid-level manager gets a increase in pay and then suddenly like finds new ways to spend that money and like is like somehow is still not saving very much. I think there’s a difference between that and being like, okay, my increase in income was 20%. I’m going to increase my spending by 5% and invest the rest. Like I do think that there’s something very motivating uh about kind of like treating yourself in that way and and intentionally uh scaling up a little bit just as long as you know, you’re proportionally still in a good spot. That’s that’s my cliffhanger.
Scott: Interesting. Next week, we’ll bring on a guest who is adamant that you should not do that to of Katie’s point. Katie,
Scott: this has been wonderful. We really appreciate you coming on. I think you shared a lot of wisdom. Your journey is is really fun and the debate is really fun. So where can people find out more about you?
Guest: So If you like podcast, definitely check out the Money with Katie show. Um if you go to moneywithkaty.com, I have hundreds of blog posts that uh you’ll probably enjoy free resources, downloadables, things of that nature. And I’m Money with Katie on Instagram and Twitter, which are the two platforms where I’m the most active. So come follow along for the unhinged fun.
Scott: And Katie, because 500,000 people uh viewed it and gave you 1,000,000,000 likes on all that, can you just share your biggest financial mistake with us before you depart?
Guest: My biggest financial mistake was being an eighth grade in 2009 when I should have been buying foreclosures.
Scott: I don’t know how you how you, how you can live with yourself after making that mistake, right?
Guest: How can you call yourself qualified to give financial advice with mistakes that big, Katie.
Guest: You know what, we’re just going to scrap this whole show. Never mind. I know You don’t know Katie,
Guest: this has been so much fun. Thank you so so, so much for your time today and we will talk to you soon.
Guest: Thank you.
Mindy: Okay, Scott, that was Katie. I love her even more because she is challenging you. She is challenging me. Uh I think we both felt a little seen during her conversation today and I think that’s awesome.
Scott: Yeah, I I I think she’s got really good, smart challenges to um a lot of these things that are are taken for granted in the in the financial independence community. And I think that a lot of things that you might that that Mindy and I and that perhaps other other folks that you hear talking about personal finance, uh take for granted are really art decisions, not science. There’s a lot of there’s things that have been um in that have been generated or thought through that are, hey, I’m going to make a long-term bet about where tax brackets are going to be 30 years from now. and oh, that’s what I accept as as my my reality. And I’ve done that for the roth uh versus 401K um debate. And that’s a complete guess. There’s no right answer there. That’s a complete guess. I’ve just I’ve just made that guess long ago um and settled on it and I just treat it as my my stance on a go forward basis. But it’s good to have those things regularly challenged, um, because there is no right answer and no one can know the right answers to to questions like that.
Mindy: Yeah, I really don’t hear that a lot. Question conventional financial wisdom. Do it. Maybe you’ll discover that what people are saying is right. Maybe you’ll discover that what people are saying isn’t right for you. But how many times have I said personal finance is personal? This is a choose your own adventure scenario and find what works best for you and maybe what I’m saying doesn’t work best for you. Maybe you identify more with Scott, maybe you identify more with Katie or maybe you identify with somebody who has yet to be on the show, but find what works for you and put that into play because that’s what’s going to help you on your path to financial independence. But yeah, absolutely question what people are saying and make sure that it’s going to work best for where you are at, what your financial, what your idea of financial independence looks like and how you’re going to get there. Okay, Scott, should we get out of here?
Scott: Let’s do it.
Mindy: This is the end of this episode of the Bigger Pockets Money podcast. He is Scott French and I am Mindy Jensen, saying, share your power, you bright little flower.Speaker 1: That’s right. That’s right. That’s right.
