Speaker 1: Welcome to the BiggerPockets Money Podcast, show number 306, Finance Friday edition, where we interview Chelsea and Wade and talk about budgeting with variable income.
Speaker 2: So I own my own business because I want to have the flexibility and the autonomy and the freedom to do whatever I want. And that’s sort of my personality anyway, is I don’t really want people to tell me what to do. So having the flexibility to do that is really cool, because I can work three days a week and see the amount, the number of— do the number of sessions that I want, versus somebody telling me, I need you to do 35 sessions a week, and then me just walking around as a burnt-out zombie.
Speaker 1: Hello, hello, hello. My name is Mindy Jensen, and with me as always is my Obi-Wan Kenobi co-host, Scott Trench.
Speaker 3: Ooh, the Force is strong with our recommendations in this episode, Mindy.
Speaker 1: That came from our Facebook group. Somebody suggested that, and I love it. Okay, 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.
Speaker 3: That’s right. Whether you want to retire early and travel the world, go on to make big-time investments in assets like real estate, or start and scale your own business, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.
Speaker 1: Scott, I am super excited to talk to Chelsea and Wade today because they have a problem that a lot of people have. They have variable income, widely variable income, and it can sometimes be difficult to budget when your income is up one month and down one month, or down two months in a row, or down even three months in a row. You can start to feel like, I’m not really doing it right. So today we talked to them and give them some ideas for how to handle their variable income.
Speaker 3: Yep, love it. I think it was a great discussion. They’re doing a lot of things really right, and I hope that it’s an interesting perspective on what life is like in building wealth from a self-employed perspective, with two spouses who are self-employed.
Speaker 1: Yes.
Speaker 3: Terms apply.
Speaker 1: Before we bring them in, let me satisfy my attorney by saying the contents of this podcast are informational in nature and are not legal or tax advice, and neither Scott nor I nor BiggerPockets is engaged in the provision of legal, tax, or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants, regarding the legal, tax, and financial implications of any financial decision you contemplate. I don’t think I would be a very good auctioneer, do you, Scott?
Speaker 3: No, but I think you satisfied our attorney.
Speaker 1: I did. Chelsea and Wade are on the path to financial independence, but they have widely variable monthly income, anywhere between $5,000 a month and $26,000 a month. Coupled with ever-changing monthly expenses, they’ve been having difficulty creating a budget. And on top of that, they’re both self-employed, making insurance another wrinkle to iron out. Wade and Chelsea, welcome to the BiggerPockets Money Podcast. I’m so excited to talk to you guys today.
Speaker 2: Thank you so much for having us. This is a dream come true.
Speaker 1: Well, let’s get into this because we have a lot to unpack. What is your income and where does it go?
Speaker 2: Okay, so we are both self-employed, like you said, and I’m a professional counselor with a private practice. And so my income varies, but it’s more consistent than his. So last year, I brought home $51,000. And that came out to about $4,000 a month.
Speaker 3: And that’s net income after tax?
Speaker 7: Yes.
Speaker 3: Hitting your bank account. Great.
Speaker 4: Yeah.
Speaker 7: And so my income varies a lot more because I’m a filmmaker. And so I do projects where, you know, sometimes I’ll make like $26,000 in a month, and sometimes I will make $0 in a month. And it also gets a little more complicated on the business side, because I have a really high gross income. Last year, my business gross was like $225,000, but that’s because I’m paying lots of contractors. So it may look like I’m making a lot of money, but after expenses and contractors, my net income is much lower.
Speaker 3: Awesome. And what does that kind of come out to annualized?
Speaker 7: Okay, so my net income is $86,000 for my business.
Speaker 3: And that’s again after tax?
Speaker 7: After tax, yes.
Speaker 3: Awesome. Okay, great. So that’s not bad. It’s about $137,000 in total annual income.
Speaker 2: Yep.
Speaker 3: Any other sources of income throughout the year?
Speaker 7: Nope, nope, not right now.
Speaker 3: Great.
Speaker 8: What about expenses?
Speaker 3: Where’s that money going?
Speaker 2: Okay, so we’ll kind of go through everything. Our mortgage, insurance, taxes comes out to $1,684 a month. Utilities range from $250 to $350 a month. Groceries are $850. Eating out, $120. Household products like cleaning stuff, sometimes kids’ stuff is in there too, $300. Gym, $170. Gas, around $300, that varies too. Subscriptions like Netflix, $27. Health insurance, $488. Because we don’t have traditional health insurance, we pay for a lot of extra medical things out of pocket, so that can really vary from like zero to sometimes $700 or more a month. Car insurance is $100. Life insurance is $31. We budget for entertainment around $200 a month. Miscellaneous, $200. Kids’ stuff, $200—these vary a lot. Childcare, we aren’t currently paying for childcare, but we will be in the summer. That’s looking like it’ll be around $850 a month for the summer, but then both our kids will be in school, so we won’t pay during the school year for childcare. We give $500 a month. We save $300 a month for our kids’ college. Then we each have spending money of $50 a month. And then we have a dog, and—
Speaker 7: A dog.
Speaker 2: She requires sometimes, most of the time, very little, but around $45 a month.
Speaker 7: Yeah, so total, that is $6,000.
Speaker 2: It’s kind of—
Speaker 7: Yeah, around $6,000 is our monthly expenses.
Speaker 3: Awesome. And that seems like a super reasonable budget from my seat, with maybe a little room, but not much from a cut perspective. Is that kind of how you’re feeling about it?
Speaker 2: Yeah, absolutely. I have been tracking our spending with Mindy’s recommendations since November or October-ish. So we’ve always kind of had a budget, or more it’s been like an outline of, this is what we’re kind of planning. But because our income is variable and there’s lots going on, it’s sort of like, this is the best guess. And so we just kind of go for it.
Speaker 3: Well, let’s go through your assets and liabilities. Can you walk us through where you’re putting that money?
Speaker 7: Yeah, so Chelsea has a Roth IRA, she’s got $10,000 in there. Her SEP IRA has $26,000. I have a Roth that’s $5,000, and then a SEP that is $7,500. So total retirement savings right now is $48,000. And that’s our retirement. And then you can go through the others.
Speaker 2: And then right now we have two kids. We have a four-year-old and a seven-year-old, and we have about $6,000 saved for college. It’s about $3,000 each right now. We have an emergency fund of $30,000. We have other cash savings in a savings account, just a general savings account, of $34,000. And then we have our current home equity at $140,000. And we also have money in our separate business accounts. That’s for, like, sometimes some of it’s gonna go to pay us, but some of it’s gonna go to the business. So yeah, I don’t know how you want to do that.
Speaker 7: But yeah, it’s mainly business savings, or it’s for cash flow for business, or paying ourselves. Yep.
Speaker 2: Yeah.
Speaker 7: Yep. So our total net worth is around $300,000.
Speaker 3: Awesome. So half of that’s essentially in your home equity, another third is in cash, and the rest is going to be in various retirement accounts. Is that how to think about that?
Speaker 2: Yep.
Speaker 1: Does that $300,000 include the business account money right now?
Speaker 2: Yes.
Speaker 7: Yes, that does. Yeah. And so right now Chelsea has about $11,000 in business savings, and then I have right now about $40,000 in business savings. So that does kind of equal more to the $300,000.
Speaker 6: Yeah.
Speaker 3: And you said you had $225,000 in revenue for your business last year, and then you had like $130,000 in expenses between contractors and taxes?
Speaker 7: Mm-hmm, yep.
Speaker 3: Okay, so yeah, that seems super reasonable there. But what are your goals and how can we help you?
Speaker 2: Yeah, so we just wanted to chat with you guys a little bit about if you had any suggestions on our variable income situation. We have come a long way with that, and we’ve actually gotten the opportunity to achieve a lot of goals while we have been on this journey, because Wade’s income has been variable for most of our marriage, for the last 12 years. And I’ve been in school for a lot of that. So it’s really within the last five years that I finally started making money, which has helped us achieve paying off debt. We paid off $50,000 in student loans.
Speaker 3: Awesome.
Speaker 2: And we saved up a ton of money last year to put a down payment down on a house for us. And so we have a lot of good momentum going, but we just want some help with, kind of, if you have any suggestions on the variable income. And then we’re really long-term looking to be financially independent, and we would like to start moving into real estate, and specifically investing into short-term rental real estate so we can have some residual income.
Speaker 3: How long did you say you’ve been both generating income at this level?
Speaker 2: At this level, probably three years.
Speaker 1: Okay, great.
Speaker 3: So you’re not going to have any problem from a debt perspective. You might have to talk to a couple of lenders who are going to be more comfortable with self-employed folks, but you’ll have enough income history with both of your professions to be able to qualify on that front.
Speaker 4: Exactly.
Speaker 3: Well, just kind of looking at this, great job, you’ve got a great situation. You’ve got a really strong financial foundation. You’ve got $300,000 in net worth. You have no consumer debt, it sounds like, aside from your mortgage, on this. And you’ve got a huge cash position and are beginning to invest, and you know, have a very good start from an investment standpoint in these things. So I love the fact that you have a lot of cash. You may have slightly too much cash, we can think about that. But it makes a lot of sense to do that when you’re self-employed, and to have separate business and personal accounts there. You generate $50,000 or $60,000 or $70,000 per year, although it is lumpy, seasonal, or perhaps periodic—I’m not sure which is the right term to describe your income. This is a great position here. The fundamentals, I think, are all super strong as an outside observer about what you’re currently doing right now.
Speaker 2: Yeah, thank you. I really appreciate that.
Speaker 3: Yeah. So where would you like to start with the next steps here?
Speaker 1: I want to start. I’m going to look at this as Chelsea brings in $4,000 a month and Wade is bringing in on average $7,000 a month. That’s $11,000 a month with approximately a $6,000 a month spend. So that’s a $5,000 a month delta that you have. That’s great. We don’t spend enough time celebrating, so yay, that’s fantastic that you guys are spending so much less than what you are bringing in. But on those months when you’re only bringing in $5,000, it’s not going to feel like that. And if there’s several months like that in a row, it can feel like there’s this huge deficit, and then Wade brings in the boom, here’s $26,000. Yay, you know, that’s great. I would suggest, if I was in this situation, I would have a savings account or a bucket where I put extra money from these $26,000 months, where there’s extra funds over and above what you’re spending, that you know you will need for the lean months, and have money in there available for when there’s not enough. And, you know, go back through your spending and your income statements and look and see, you know, is that three months a year that you have, you know, less income than what you’re spending, or is it more like six months and then you get this one giant month? And that’s, you know, that’s a research opportunity for you guys to look into, where you’re going to feel comfortable having that extra bucket. You do have this $34,000 in other cash savings. Does that have an earmark, or is that just a random bucket for whatever comes up?
Speaker 7: That is our— the money that we’re saving for a short-term rental.
Speaker 1: Okay.
Speaker 7: And so our goal is to basically put as much money into that as possible, so that we can have a down payment for a short-term rental in the next year. That is our goal, to be able to purchase some real estate in the next year. So that is why that number is okay.
Speaker 1: And then the emergency fund—do you, like, on a month where you’re coming in lower than you’re spending, where is that money coming from?
Speaker 7: It’s the emergency fund. I mean, typically that $30,000 savings account is our emergency fund. So if we have a low month, we take money out of that $30,000 to pay for personal expenses. And then when we have a bigger month, we recoup it and then put it back. So it stays at $30,000 as best as we can.
Speaker 1: Okay. And does that feel mentally comfortable, to have that emergency fund ebbing and flowing like that? Or would it feel better mentally to have this bucket where the emergency fund is $30,000, and then the light-income-this-month fund is, you know, $10,000, because you know you’re going to put more in when you need it, but that’s not coming out of your specific emergency fund. A lot of this personal finance stuff is a mental game, where you have to just kind of convince yourself that this is how it’s going to be. And sometimes you can’t, so you have to allow it to be the way that your mind wants it best. I mean, that’s so floofy to say, but, you know, if your mind is having a hard time wrapping around the fact that you can pull from your emergency fund, maybe having an income bucket will allow you to be okay with it. Does that make sense?
Speaker 2: Yeah, absolutely.
Speaker 1: So that’s something to consider. You know, take some out of the emergency fund and put it into your income bucket. Or maybe you’ve got a $26,000-a-month month coming up, and then you can fill up that little extra emergency bucket, because you’re not doing bad at all. You’re doing really great. Number one, you’ve got a great average income, and you’re spending far less than that. But again, three months in a row of less-than-average income is gonna not make it feel like you’re doing all that great. So that’s that mental game that your mind can’t— like, sometimes you can’t see the forest for the trees.
Speaker 3: Yeah, I mean, look, there’s lots of right ways to do your cash. Yours is among the most right I’ve ever seen. I love this. You have a lot of variable expenses in your business account, Wade. So you have $40,000. And Chelsea, you have, it sounds like, probably much less, so you have $11,000 in that business account. Those seem like reasonable numbers. I’m sure you arrived at that through similar logic. You have $30,000 as your number for emergency reserve. You’re probably feeling really uncomfortable if that ever dips below like $15,000, and it probably never does, is what would be my guess. And so you just pull a little bit out, replenish it—that’s exactly how you do it. And then everything else goes into— and you’ve already made your determination, your prioritization is short-term rental. It’s not index funds, it’s not your 401(k)s. You’ve already determined that, and that’s why everything else is going to the investment for that. So I think it’s perfect, and I think your next step— you can fiddle with that if you need to, but it’s a great system. I love it. And now you’ve got the surplus going, ready to be invested into real estate in your short-term rental. So can we hear about what you’re thinking from the short-term side?
Speaker 2: Yeah. So something I wanted to say about that— currently, I am also investing into retirement, and so is Wade. So I feel that we are in our early thirties and we are just starting our quote-unquote traditional retirement savings. And this was something I wanted to ask you guys. We feel like we just started, but, you know, so I’m like, do we need to be— right now I put in about $1,000 a month into either Roth IRA or the SEP IRA. And I don’t know, how much do you put in?
Speaker 7: It depends. Like right now, I’m putting most of my extra money towards the savings for the short-term rental. But when we don’t have a big goal, I do about 20% of my net income will go towards my retirement accounts. That’s kind of what I’ve been doing for the last six months, or I guess last year. So— yeah, what Chelsea’s saying is, like, we’re trying to figure out, do we try to come at this goal of a short-term rental in a more balanced perspective, of still putting money towards our retirement accounts, our index funds essentially, and save up as best as we can for the short-term rental? Or do we go all in and put all of our extra cash towards saving for the short-term rental, so that we can buy it sooner than later?
Speaker 3: Well, I think that as long as you get the money in the calendar year into your retirement vehicles, it’s kind of six of one, half a dozen of the other, as my mom used to say. That’s the same thing. So I think it doesn’t quite matter there. I think it’s whatever you feel is the one that’s going to get you to your goals faster, which my instincts, based on what we’ve talked about just this far, is going to be a short-term rental. So let’s think about it. Over the course of 2022, if things go the same as last year, you’re going to generate $60,000 additional—or let’s call it $45,000, $40,000 additional, because we’re now at the end of April with this. So that’s going to be $74,000 that you can add to your other cash savings to buy the short-term rental. How much do you need from a down payment to buy that property?
Speaker 7: Yeah, we’re still kind of in the research phase right now. We’ve thought about probably a property around $600,000 or $700,000. And so in order to get to like the 10%, we’re going to need, you know, $60,000 to $80,000 in cash. But with closing expenses and all there is with the short-term rental, maybe a little bit more. So maybe like $90,000 is probably more realistic of what we would really want.
Speaker 2: Yeah, and just to clarify, we’re looking to buy a short-term rental in a traditional sort of short-term rental market, like Smoky Mountains or Florida, Joshua Tree. We’re kind of looking at some of these more traditional places, and willing to put quite a bit down so that we can see more residual income every month from it.
Speaker 3: Okay. Well, you are in position to do that right now. Your cash position would allow for that if you were to pull that from these other places. You’re probably uncomfortable with doing that, which I think is great. It’s a great mentality to have with the way you manage your cash. But you have $110,000 in cash right now to buy that short-term rental. And so one way to reframe that would be to bucket all of your cash together into one lump and say, what is the lump amount that would make me feel comfortable with my overall cash position to move towards that? The other option is keep doing what you’re doing and pile on that amount, and you know that you’ll get there within 12 months. You’ll be able to generate about $60,000 and be probably at the minimum threshold to comfortably buy that investment with your outside cash position. I see Mindy shaking her head here.
Speaker 1: That gives me the heebie-jeebies to suggest that, because that’s every single penny that they have thrown into one investment, and then there’s not really a buffer.
Speaker 3: I’m not saying they should do that. I’m saying that they could do that, right? Don’t—it’s their conservative nature that is allowing—that is going to put them in there, probably appropriately to some degree. But it doesn’t have to be a year from now. You could look at your situation and say, it is reasonably responsible for you guys to have $50,000 in cash across all of your cash accounts based on the numbers you provided us, instead of $110,000 in cash, across all of those different accounts, and to run your life out of one big bucket, because there’s nothing preventing you at the end of the day from taking a distribution from your businesses or committing capital back into your business. You literally just move the money from one bank to the next if you want to do it in order to take care of that. So that’s more what I’m saying—you can do that right away, and you can probably still contribute something to your retirement accounts this year because of the surplus cash that you currently have and the cash flow that you’re going to generate. So I don’t think—I think this is one of those cases where you have to prioritize to some degree. You can’t probably max out your contributions to your 401(k), your, I guess, your SEP IRAs and your Roths this year, but you can do some good damage there and still probably accumulate, put yourself in a position to buy that short-term rental by the end of the year, I would think.
Speaker 2: Yeah, that’s kind of what we were thinking too, is by the end of the year.
Speaker 7: Yeah. And I guess another question I have for you guys too is, do you think it’s smart for us to try to purchase a home that’s a little bit more money that has the potential to have higher earnings? Or do we be more conservative and purchase a home maybe in the $400,000 range but has way less earning potential? Is it worth that risk of spending more for more money?
Speaker 3: Well, I think you buy, you invest for ROI, right? And in your case, that’s just a matter of delaying by a few months if you think that to stock up more cash. You just need to save up $400,000 versus $600,000. That’s a third bigger, so you need to save a third more cash in order to put that down to generate that. As long as you’re not going to be crushed by the mortgage payment, which you have to underwrite to. But I like investing for ROI. I’d rather have one investment that produces a great return that’s a little bigger than a smaller investment that produces less net return, less ROI, less IRR.
Speaker 2: Yeah, that was kind of our thought too.
Speaker 1: Yeah, my thought with regards to demand is—I have a really, really big family, like enormously big family, and there aren’t that many properties that we can all fit into comfortably. There’s like 6 in America that can fit us all, and they’re always booked up, because there’s only—like, I’m talking they sleep 60 people, where it’s a huge house that sleeps 60 people, and those are always booked up. And yes, it’s going to cost a lot more than $600,000, but there’s a huge demand because there’s no supply. So that’s something to consider. I mean, obviously not a 60-sleeper, but maybe there’s people that are looking for 14 or 20 sleepers that—you know, a little bit more initially may yield a lot more, a lot less vacancy, because somebody is always looking for that. And they’ll say, oh well, I’ll just reschedule my vacation for when this is available. I know that’s how we scheduled our vacation—when they actually had a weekend that was available for us. So I wouldn’t have thought that there was a lot of demand for that, but I think it’ll 100% vary by market, right?
Speaker 3: So there’s no reason—if you’re interested in investing anywhere in the country, there’s no reason why you can’t find a similar ROI at a $400,000 price point as a $600,000 price point. If there are specific markets that you’re studying and know really well, that may well be the case, and that may sway your decision there. For example, I wonder aloud if right now the best way to generate ROI in Denver, Colorado, would be to buy a million-dollar property with an 800-square-foot ADU and a single-family house on it, and live in the ADU and Airbnb out the single-family house, because you can’t Airbnb a property in Denver unless you live in the property as your primary residence. So probably very few people who can actually purchase a million-dollar single-family residence are willing to do that, and therefore there’s going to be very limited competition and lots of demand for that property. So there may be something like that that gives you an advantage in whatever market you’re in. Per Mindy’s point, bigger, better, nicer property, more amenities. Yeah, I think you’re thinking about it great.
Speaker 1: Another thing to think about is the taxes. You’re looking at Florida, and are the Smoky Mountains in Tennessee or Kentucky? I get those two—
Speaker 7: Tennessee is the area that we’re looking at.
Speaker 1: I get those states confused. And so Florida, Tennessee, and California—not knowing anything about any of these, I know California is going to have super high taxes. I know they’re going to have income taxes. I know they’re going to have—if you do an LLC in California, they’re going to have LLC taxes. That’s going to be, just like, not doing any research at all—that’s going to be at the bottom of my list simply for the taxes. And it doesn’t matter if you live there or not, I believe. So Florida is very tax-friendly. I think they have lower taxes. I know that the Smoky Mountains is the number one most visited national park in the country because it’s so close to like two-thirds of the population of the country or something like that. So that’s a really great market. And they had a fire a few years ago that wiped out everything. So they don’t have a ton of property. They’ve been rebuilding, but their rules are more relaxed, I believe, with regards to rental properties like this.
Speaker 2: Mm-hmm.
Speaker 1: I think it took out a lot of hotels too, but it’s been long enough that I can’t really remember now. So of these 3 areas, I like the Smoky Mountains best. I would reach out to a real estate agent and just ask, what can I expect from a property in this area? What am I looking to pay? What is my vacancy rate going to be? And what are my taxes going to be? If I can make the same amount of money in Florida as I can in the Smoky Mountains, but for half the price, then maybe Florida is looking better. Or if I have less occupancy in Florida, then maybe the Smoky Mountains looks better. I’m sorry to throw California under the bus—I love it.
Speaker 3: Where do you live right now?
Speaker 2: We live in western Colorado.
Speaker 3: What’s the—
Speaker 1: What, what—
Speaker 3: Like, we know you’re in Colorado, so which—Grand Junction? Why not consider the areas local to Grand Junction, like Palisade? Why go out of state?
Speaker 2: We’ve definitely thought about that. We’re just kind of doing—you know, kind of in the beginning of this journey too—with even just reading general things about having a short-term rental. And I just don’t know the market of short-term rentals here very well. But I know that tons of people actually come to Palisade for the wineries, and tons of people come to Fruita for the mountain biking. So there’s definitely need here, I think. But it would be a good—like Mindy says—research opportunity to look into, because that could be a really great route to go, especially maybe for our first property, because it’s local. We maybe have that comfort that we could just zoom over if we needed to, kind of thing.
Speaker 1: Don’t they have world-class fishing and elk hunting over near Fruita and Craig and all that area? I was talking to somebody who was saying that there’s a need for that as well. That’s not my thing, so I don’t know, but somebody else?
Speaker 7: Yeah, I mean, there’s definitely on the Colorado River, there’s lots of fly fishing that’s hugely popular. More towards the mountainous areas, the hunting lodges are super popular for sure. In Fruita, like in the city—like Grand Junction, and then there’s Palisade and Fruita—there’s not a ton of hunting tourists that come to the town. It’s more in Fruita, there’s the bike riders and hikers, outdoorsy people. And then Palisade is the wine—there’s lots of wineries. So there is definitely lots of potential where we live. The hard part is there’s not a whole lot of houses available. It’s just that the market’s super hot right now. Everybody wants to buy stuff. Like when we bought our house last year, we sold our old home, and I think we had 10 offers in a matter of like 24 hours. We got like $30,000 over asking price. So in Colorado in general, it’s just a really hot market. So I think that’s why we’re like, do we want to try to buy in this crazy market right now? But in a sense, it’s kind of like that everywhere.
Speaker 3: Yeah, I think that’s how I would think about it—it’s going to be like the whole nation has got issues around those types of things. And what it comes down to is, I think, in terms of ROI, right? And the major advantage to investing 20 minutes, 30 minutes away from where you live is going to be the ability for you to self-manage the property in the early days and learn a bunch of those things instead of paying that fee to somebody else. And that’s not going to be a 10% management fee—for short-term rental, it’s going to be 18% or more, a significantly higher one. And that’s not including the cleaning fee, by the way.
Speaker 7: Yeah.
Speaker 3: So this is not saying you’re going to go and clean the property, although you can do that as well to save money. But the management costs will be significant for a lot of these short-term rentals. And if you can at least get started with that—by the way, trying to self-manage something in the Rocky Mountains, you don’t know if there’s certain times of year that have actually really high tourist activity in the Rocky Mountains because of some event that happens at this point in the year or whatever. And you do know that for Palisade. You’re going to be able to put in place the right pricing at those times of the year. You’re going to know, oh, this is my heavy demand time where I need to make all my money, and this is the light demand time where I’m going to make less and want to pounce on a long-term renter, someone who wants to stay there for 3 months in this part of the year or whatever that is. So those will be advantages that you’ll get, especially in the early years, I think, from investing locally as a bias, as opposed to somewhere you don’t know as well because you don’t live there. And it all comes down to ROI. So if it’s close, the tie goes, in my opinion, to something that’s highly local to you. If it’s not close, then you go out of state. That would be how I’d bias you to think.
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Speaker 2: Yeah, we also have Moab like an hour away, and a lot of people go to Moab, so there’s a lot of opportunity.
Speaker 1: Yeah, yeah, Moab’s kind of expensive too.
Speaker 3: Who’d we talk to that wanted to build huts next to Moab?
Speaker 1: Oh yeah, I can’t remember.
Speaker 2: We had thought about that. Yeah, like build a tiny house somewhere. Yeah.
Speaker 3: Yeah, so I think there’s a lot of stuff in your backyard that is maybe not—you know, your back door—but I think lots of people around the country are probably thinking, whoa, Colorado is a great place for short-term rentals for a whole bunch of reasons, even as you guys are thinking about going somewhere else. So, right, something to think about. But that would be—I would at least explore it. If it doesn’t work out, go somewhere else. But what I am gathering at the strategic level is you’re still early into this journey, and you probably have 6 more months of research and self-education to do before buying your first property. And so what that might do is you’re probably going to accumulate that cash that’s going to put you in position to buy that within the next 6 to 12 months, regardless of whether you max out your retirement accounts or not. And so if you’re not sure and you’re still in the research phase, maybe you do bias more towards the retirement accounts and those types of things for this year or for the next couple of months, and then get more aggressive about stockpiling the cash when you have much more clarity on what you want to do from a real estate investment standpoint. So that’d be maybe one takeaway from this conversation that might be worth considering.
Speaker 2: Yeah.
Speaker 7: I think that’s good because, like you’re saying, we’re not quite at the point where we have all of our ducks in a row as far as our education. We’ve been researching the Smoky Mountains and Destin, Florida, Emerald Coast area quite a bit, and so we know a lot about that. We’ve looked just online, just looked at properties and what the ROI would be and that kind of stuff. But we have not really looked around us at all. So I think that is a really good suggestion for sure.
Speaker 3: Yeah, yeah. I think there will be—if you’re going to find an inefficiency, or another way of putting that, a good deal—it’s probably going to be local to you as well. So there will be something that, oh, this is exactly what the market needs, and I need to make these changes, and that’s how I’ll do it. That’s going to be a lot harder in Destin for you, unless you’re from there, for example. But yeah, I don’t know that market particularly well for some reason.
Speaker 2: So yeah, cool.
Speaker 3: All right, well, do we have—what’s another—are there any other areas that we want to explore here and talk about?
Speaker 2: Yeah, there was one more area regarding our kids’ college fund. I haven’t really heard a lot of talk about this, so I think this would be a great conversation to have. I’m not sure that our kids will go to college. Times are changing, things are changing. You can do so much now without going to college. Wade didn’t go to college. I went to a ridiculous amount of college, but I think we need to kind of figure out a direction to go with this, because we’ve kind of just been putting some money in a college savings account, thinking, okay, we want to save something for our kids, but we don’t really know what to do. I think ideally I would like to save in an account that’s more flexible than a college account, even if it doesn’t have the super, super tax benefits to it, just so that we can utilize that money how we need to at that point for them. I don’t know, do you guys have any thoughts on this for saving for kids?
Speaker 7: And our kids are 7 and 4.
Speaker 1: Yeah, I have lots of thoughts on this. I have 2 kids—they are 15 and 12, so way closer to college age than yours are. You have saved $6,000 for your kids, and that is $6,000 more than I have saved for my kids for college. And I do believe that my kids are going to go to college, at least the older one. But that’s not for sure, for sure, because you never know what your kids are going to do. And I didn’t want to save in a 529 plan, because if I put in $10,000 and then she doesn’t go to college, but it has grown to $29,000 over the course of her life, I only have $10,000 for me. If I want to pull it back out, all I get is what I put in. I don’t get all those gains. I don’t know where they go, but they don’t go to me, they don’t go to her. I could reallocate that to her little sister if she was going to go, I could give it to a niece or a nephew, but I don’t get them back. Whereas if I put that money into an investment account, all of that money is mine, or I can use it for her college, or I can put her through wedding planner school or film school, or whatever she wants to do. I can use that money how I choose. Or she can say, you know, I’m leaving the house and I’m never going to talk to you again. And then it’s still my money. And that’s a horrible situation to be in, but I don’t want to give that control to somebody else. So because you have $6,000 in there, I would just opt to leave it. If I was in your position, I would opt to leave it, and I would open up an after-tax brokerage account in my name, not in the child’s name, and put money into there for their college, or just put money in there and use it for college when it comes up, or use it however you want, because it’s your money. And then, because it’s an after-tax brokerage account, that’s going to count against your income or assets for FAFSA. But that’s a problem for 10 years down the road.
Speaker 3: Yeah, I completely agree with Mindy. I think at the highest level, in principle. And I’ll add that I speculate that college education costs are going to come down in real dollars relative to inflation over the next 10, 15, 20 years. The reasons why I think that will happen first have to do with the amount of student loan debt out there. Either one political party is going to come in and forgive a large amount of that debt, and after that happens, you’d think that there will be new restrictions on new access to debt to fund college, which will reduce the ease with which people can get loans and therefore bring costs down and demand down. Another party may not do that, and there will be a reform of student loan debt at some point in the future regardless if some of those events happen. So I think there’s going to be a student loan restructuring at some point in the next decade or two that will impact college affordability. We’re also becoming more and more, I think, cognizant as a society about the ROI of college and how it may not be necessary for a lot of things. So I think it will be less of a “you’re going to college” and more of a calculated decision depending on your career field. So I think for those reasons, it may be a risk that folks are oversaving for college—not in the short term, not in 3 to 5 years, but maybe in 10 to 15 years. Perhaps. That’s a speculation. I don’t know if that’s right, but that’s what I’m going to speculate on personally for my family. And then second, I think that if you do want to pay for college, a better way to do that in conjunction with what I just said is just to build wealth in general in real estate or stock accounts or whatever it is that you’re investing in, and then use that wealth to provide benefits for your family—like private school if your kid ever needs that for some reason, for a special reason, or college, or a trip around the world, or tuba lessons if they’re a superstar at that. Whatever it is, I think that’s a better, more beneficial way to just build general flexibility. The 529 plan does not offer that for the most part. So I probably won’t contribute much at all to a 529 plan, with a possible exception—if I know my kid’s going to college, I’m 2 years away from college, I’ve got a pretty good, clear idea of what college is going to cost, I might take advantage of that plan in the short term here, put the money in, and take it right back out for college in a few years. So I might do that at the ending stages if I’m getting really close to college. That would be how I think about the 529 plan and saving for college at a high level.
Speaker 2: Yeah, I really like that.
Speaker 1: And just a couple of weeks ago, we released an episode with Robert Farrington from thecollegeinvestor.com, episode 297, where we talk about paying for college and saving for college in lots of different avenues. I think it was episode 41 or 44 with Zach Gautier where we talked about different ways to pay for college as well. Both of those are really great episodes to listen to. And we had episode 251 with Preston Cooper where he talked about the ROI of a college degree, something to consider before you put yourself or your children through college. And he was just back last week—or a few weeks ago—on episode 293, talking about the ROI of a graduate degree. So, you know, things to consider as you’re getting closer to college age, but that’s not imminent for you. But those are just different ways to save. In both of those episodes, there’s longer-term and shorter-term ways to save for college. Cool.
Speaker 2: I like that.
Speaker 3: It would just be a shame to have a lot of money in the 529 plan and then not use it for that.
Speaker 8: Yeah.
Speaker 3: It’s not the worst problem in the world—there are other ways to deal with it. But I’d just be like, if I’m going to build a couple hundred thousand dollars in wealth over the next 10 years via investment vehicles like short-term rentals, I’d rather just be able to use that for whatever I want, including college, and take a little bit of a tax hit or a less tax-advantaged situation than have it all locked up in there and have to get creative in terms of dealing with it once it’s in the plan.
Speaker 2: Yeah, I agree. Absolutely.
Speaker 1: Is there anything else you wanted to talk about?
Speaker 2: Yeah, I was curious if you guys had any thoughts on the health insurance situation. I know that’s something you mentioned in the intro, Mindy, that maybe you had some ideas about. Currently, we do not have health insurance. We have a medical sharing plan as well as a membership to a general family doctor that we pay for monthly. We have had some health issues actually come up in our family within the last year where it’s looking like we are going to need some sort of traditional ongoing insurance. We have some kids that need speech therapy and occupational therapy and meds and regular therapy and all the things. So it is looking like more of a traditional plan is going to be something we will be moving towards within the next year or two.
Speaker 1: I was going to say, when I first saw this in your notes, I was reminded of a recent bankruptcy by Aliera Healthcare, which was formerly known as Trinity HealthShare. They basically just said, “We can’t afford all of this, so we’re shutting down.” The healthcare system in America is broken and needs to be fixed. But the health sharing—I have friends who really love health shares, and I have friends who have been stuck with big bills because the health sharing plan decided not to pay it. So I don’t love traditional insurance, but I think that’s going to be the best way to go about it. I don’t know if a health savings account and a high-deductible plan is going to be best for you. Somebody listening to the show a few months ago said that in almost every case, a health sharing plan is better than a traditional plan when you take into account the premiums and the deductible, and the fact that the health savings account can grow. So that’s another reason to have an HSA. An HSA, yes, I’m sorry—yeah, health savings account. Yes, thank you, Scott. That’s what I was thinking.
Speaker 3: Yeah, and I’d agree with that. You guys have a great cash position, so there’s no—you don’t want to get crushed by a huge medical bill with that, but you can have a high deductible, I think, given your cash position, and you’ll probably be able to arbitrage that, although that will depend on the specifics of your personal situation. Let me zoom back out for a second here though and say this: why do you guys work in your own businesses instead of one of you taking a job that pays similar? What’s the rationale for that? That could be perfectly reasonable—there are a lot of advantages. I just want to hear you guys think through it.
Speaker 2: Yeah.
Speaker 7: I think that’s a great question. Yeah, for sure. So I’ve run my own business for about 12 years, so I don’t really know what it’s like, honestly, to work for a staff position. I have a lot of benefits to running my own business—I can make my own schedule, I don’t have to answer to somebody. I don’t feel like I have a glass ceiling above me as far as my income goes. And just my personality—I like to work on various projects a lot, and I feel like if I work on the same thing over and over again, I get bored and I don’t put a ton of my creative energy into it. So I would say that for me, I just really like the benefits of having my own business more than having the security of a staff position. That’s for me.
Speaker 6: Yeah.
Speaker 2: So for me, I could easily go out and get a job with the degree that I have for an agency doing mental health counseling. That would be very easy to do. But working in mental health is a very hard job. So I own my own business because I want to have the flexibility and the autonomy and the freedom to do whatever I want. That’s sort of my personality anyway—I don’t really want people to tell me what to do. So having the flexibility to do that is really cool, because I can work 3 days a week and see the number of sessions that I want, versus somebody telling me, “I need you to do 35 sessions a week,” and then me just walking around as a burnt-out zombie. It would be really hard. So that’s kind of why.
Speaker 3: I think it’s great. I will just say that’s another one I’d just challenge you to at least explore, right? Corporate life maybe isn’t so bad as what you’re making it out to be in some of these cases. You might be able to negotiate some benefits, some flexibility, for example, or find a position that gives you some of those benefits. And that would solve your healthcare problem to a large degree if one of you were to consider that. So not a dealbreaker—you clearly are working around that right now—but you will have expensive options from a self-employed perspective, the same challenges that people who are financially free, or full-time real estate investors, or full-time agents, will face from an expense standpoint.
Speaker 2: Yeah, I think that’s a good point to really think about, because even trying to go into real estate, it is harder for us to get a loan because we are self-employed. Even if we do have the years of income to back it up, it’s still a lengthier and more difficult process—at least it was when we were buying our 2 primary residences that we’ve bought before. So that, and then I think looking at the specifics—if I were to make, because it would probably be me, if I were to make a certain amount of money working for somebody else, how much that would be with the healthcare already taken care of in a sense, I know I’d have to pay some, versus how much we’re going to have to pay out of pocket for healthcare.
Speaker 1: Yeah.
Speaker 3: So there could be a decision to make there. And absolutely, you will have to make your employer much more money than you cost—that’s the deal with that. But it could be that it brings in more income, provides similar flexibility, and gives you healthcare options, depending on how that goes. So it could be an option, and it may provide financing opportunities. If those trade-offs are unacceptable from a time perspective, you guys are going to get rich one way or the other—you spend a lot less than you earn and have a really strong position. But just something to think about: maybe revisit that assumption and at least explore it, because it would make a lot of these issues easier in the short run.
Speaker 2: Yeah, absolutely. Yeah, makes sense.
Speaker 1: Yeah, that’s kind of what I was thinking too, Scott. So I’m glad you brought it up, because now you’re the bad guy.
Speaker 3: Yeah, we’re supposed to tell you how to quit your job, right, on the show?
Speaker 1: Yeah, exactly.
Speaker 3: So instead, “go get a job.”
Speaker 2: Yeah, but I wonder if there could be flexibility to that, because just because I work for somebody doesn’t mean I couldn’t also own my own business on the side. The goal for me, actually, is to not be a therapist once our kids graduate from high school, and to move into more of maybe an online business or a coaching-type position, so that there’s even more flexibility. Because I anticipate Wade probably traveling a lot more at that point, once his career starts moving, and he doesn’t have to be home all the time because we have kids.
Speaker 3: So something about—I will tell you, at BiggerPockets, some of our team members work 32 hours a week or 30 hours a week or whatever with that. There’ll be some rules, like if you’re not full-time, we can’t give you the full benefits. There are some legal things and all that stuff. So you’ll have to meet some minimum cutoffs in order to qualify for certain benefits with that. But there may be plenty of flexibility and opportunities out there, depending on what you’re interested in.
Speaker 1: This was a lot of fun. I had a great time talking to you guys. I think you’ve got a lot of opportunities available.
Speaker 3: We want to keep going until you’re feeling good.
Speaker 2: Yeah. Do you have questions?
Speaker 1: No.
Speaker 2: Do you guys have questions for us?
Speaker 3: No. I think we got a great snapshot of your position. It sounds like you had a great journey to get here, and you’ve got a very disciplined budget, consistent income in spite of being self-employed. That speaks to a lot of discipline and hustle over a long period of time. And clearly, it appears to me that you’ve come into this position of having this surplus, and having some of the options to begin exploring more serious investments, I’ll call it, in the very recent past, and you really have all your ducks in a row at this point. Now it’s kind of a directional thing—do I want to go into short-term, do I want to go into long-term investing in my 401(k)? Those types of things. I think there’s an art to that; there’s not really a great answer. And I think we got through a good amount of that. I think the big assumption to challenge is that self-employment is always the right path. It certainly is working for you guys, but it could be reassessed to make it easier. If one of you were to get a job, that would solve some of your problems here, or at least go a long way towards that. And then I think the college savings—we gave our opinion on that, but we don’t really have a right answer. And I love the way you manage your cash, for the most part—I think it’s a really smart way, given your current situation. If one of you were to get a job, that would change, because you would not likely need to have quite as much cash either in your businesses or in your personal reserve.
Speaker 4: But—
Speaker 1: Okay. Well, thank you so much for your time today, Wade and Chelsea, and we will talk to you soon.
Speaker 2: All right.
Speaker 1: Thank you. Okay, that was Chelsea and Wade, and I think they have a lot of things going for them. First of all, we didn’t celebrate enough that they’re literally saving like 50% of their income. It just may not seem like it when they’re in the middle of a month, or 2 or 3 in a row, where they have less than what they’re thinking about spending.
Speaker 3: Yeah. I mean, they’ve crushed it. And this is something we see now fairly frequently on the Money Show, where we’ve got a couple who’s really mastered the basics of money, have a good framework in place, and are just kind of popping up after several years of having paid off debt and built this stable financial position. They’re like, “What do I do now?” And that’s a great thing—it’s exciting, because you’ve paid off that debt, you’ve got the cash position, you’re starting with the retirement accounts, the surplus is there, and now the ocean of opportunities is exploding in front of you and it’s overwhelming. Do I go into real estate? Do I do this with my business? Do I invest in this avenue? Do I invest in this one? Because the path has opened up so much because of the good habits that you’ve put in place. And I think that’s really fun, because it’s kind of hard to see that other side while you’re in the grind of paying off the debt, for example, which it seems like they popped up out of fairly recently—the last couple of years. So that’s exciting and fun. Now it’s about forming a plan and prioritizing that and being comfortable with the choices. And those choices can involve investing in 401(k)s or self-directed IRAs or SEP IRAs, depending on whether you’re self-employed or employed, investing in real estate, investing in stocks, yada yada. It’s just about what you want and how you’re going to back into that.
Speaker 1: I really liked your suggestion to look a little bit more local for their first property. I thought that was a great idea. I think there’s going to be a lot of opportunity that maybe they hadn’t considered, just because it’s so close, you know. Our market is expensive, but it’s also really desirable—there are people coming here all the time to take advantage of what we’ve got here. So, you know, when your property is an hour away, you’re not necessarily going to drive to it all the time, but you could drive to it if you had to. And it’s a lot easier to drive an hour than it is to hop on a plane to go to Florida to check out your property.
Speaker 3: Yeah, my wife and I vacation in Palisade, right, which is kind of right where they go, and we stay at an Airbnb. We spend lots of money there and think it’s a great experience. So it’s just kind of funny to me—like, “Oh great, I’m going to go out of state to the Rocky Mountains.” But I’ve never been to the Rocky Mountains, or the—what was it—the Smoky Mountains, to vacation before. Maybe I’ll go there someday. But it’s just like, “Oh, this is what’s in our backyard.” People come from all over to go hang out where you live, at various times of the year.
Speaker 1: Yeah, I like that idea. I hope they look into it a lot more. Yeah. Okay, Scott, should we get out of here?
Speaker 5: Let’s do it.
Speaker 1: You know what, before we do, I want to invite people to apply to be on the show. If you would like us to review your finances, please apply at biggerpockets.com/finance-review. And if you would like to tell your money story, apply at biggerpockets.com/guest. Okay, now from episode 306 of the BiggerPockets Money Podcast.
Speaker 8: Wisely.
Speaker 1: He is Scott Trench, and I am Mindy Jensen, saying grab your pillow, armadillo.
Speaker 8: I wanted to issue a quick apology and say a quick thank you to one of our Facebook group members, Carly Reichardt. Carly called Mindy and me out, rightly so, for spreading misinformation on last week’s episode of the BiggerPockets Money podcast. We stated that gains in a 529 plan would be forfeited if they’re not used for educational purposes, and that’s simply not true. The gains in a 529 plan are simply subject to tax and/or a 10% penalty when they’re withdrawn and used for things outside of educational expenses or qualified educational expenses. So they can be a powerful and flexible way to build wealth, save for college, pass money on to future generations, and be used for other educational purposes. And there’s lots of other interesting tidbits about 529 plans. They’re a useful tool in the tax-advantaged investment stack for some people. Personally, I don’t use them. I may use them in the future, but I wanted to correct the misinformation that we stated last week. Certainly, the gains are not forfeited. They’re just subject to tax and/or penalty if and only if they’re used for nonqualified expenses. So thank you, Carly, and thank you to the many members of our Facebook group for calling us out. I apologize. We apologize for the misinformation. We have a responsibility to share truth and the correct information on this show, and we appreciate when we do get that feedback.
Speaker 3: So please keep it coming, and we will link to some resources on 529 plans.
Speaker 8: Thank you so much.
