Mindy Jensen: Welcome to the BiggerPockets Money Podcast, show number 314, Finance Friday edition, where we interview Rebecca and talk about tracking actual spending, generating income outside a traditional 9-to-5, and finding your true monthly needs.
Rebecca: I’ve learned that the money’s out there. You can get it. It just— I’ve changed this job that I’ve had for 3 and a half years. It’s the first time I’m ever doing it. When I walked in the door 3 and a half years ago, I had no idea. I didn’t even have a background in it. So it’s just like, but up until this point, I was just kind of throwing all this money away. I didn’t know what to do with it. So now that I’m on this track, now that I’m thinking about it in a different way—10 years ago, if you would’ve said that, I’d have been like, eh, that’s too far in the future. Hello.
Mindy Jensen: Hello. Hello. My name is Mindy Jensen. And with me as always is my goal-reframing co-host, Scott Trench.
Scott Trench: That’s right. If the goal’s too far away, just move those goalposts closer to you.
Mindy Jensen: 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 are starting.
Scott Trench: That’s right. Whether you want to retire early and travel the world, go on to make big-time investments in assets like real estate, start your own business, or simply establish clear goals that give you more flexibility, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.
Mindy Jensen: Scott, I love today’s guest. She is in a great position financially. She just wants to speed up retirement. So we have a lot of fun talking to her about her different options today.
Scott Trench: Yeah, I mean, we’ve had a number of guests recently who kind of all have a similar profile in the sense— and there’s a ton of differences, so I think we had a really unique show today—but the similarity or the theme that I keep harping on is this concept of: you can’t have all your wealth in retirement accounts and home equity if you want flexibility before traditional retirement age. You must do something different there. And that means hard choices of capital allocation that are not going through this 401 and IRA ladder and to your home mortgage payment. It means an intentional shift to putting that money elsewhere and/or redeploying what is likely to be a massive amount of home equity for a lot of listeners into something that can deliver that flexibility. So, hard choices, but I think you have to confront that problem, frame your goal very clearly, and say, what do I want? And then begin actually making those actions towards it, even at the cost of perhaps some more tax-advantaged wealth at the end of the journey, 25 years from now.
Mindy Jensen: It’s all personal. All these options are personal to your journey and your specific position, but there are a lot of suggestions here, Scott, today. I specifically like your reframing goals conversation that you had with her. You took her $7,200 monthly passive income goal down to $4,000 in about 45 seconds. And that was, I think, hugely helpful to her. I think it’ll be hugely helpful to other people that are listening to this show who may not realize why they have chosen their specific monthly goal. “Oh, I need this much money in income.” Why? Follow Scott’s steps. And when he was talking to Rebecca today, follow his suggestions and see if you can’t reframe and cut down your goal, and, you know, get where you really need to be.
Scott Trench: Yeah, you know, it’s this paradox, I think, where if you can cut the goal dramatically— you know, if you can spend $2,000 a month, which was something that I was able to do when I was starting out because I was house hacking, right? And I had a paid-off car and, you know, all this other stuff, so I’m spending very little on my lifestyle. And now I’m financially free in some very lean sense. Well, now you can begin piling assets on top of that. And then things begin to expand. You have the option to work or not work or do all these other different types of things. But you can also just pile assets on top of your position. And then if you want to spend $3,000, $4,000, $5,000, $10,000 a month, you just wait until your asset base grows large enough to be able to do that. But if you can make the sacrifice now or reframe the rules of the game by house hacking or whatever it is, to lower your expenses, achieve financial freedom, realize those benefits, and then pile on the assets from there, you might be able to get some huge benefits at the cost—you can’t have everything. You can’t spend $7,000, $8,000 a month and get to financial freedom in 15 years and have it be totally passive in Rebecca’s situation. But you can reframe the goal, make a huge amount of progress in one year, dramatically jumpstart your savings rate, introduce a lot of flexibility, and then begin piling assets on top of that that give you more and more optionality each passing year. That’s an achievable goal. And I think that folks kind of struggle to see that if they can make those changes that are unusual, like the house hack, in the short run, and then use that to leverage a lot of wealth later on, you can have essentially all of the things—the huge amount of passive income and the life flexibility and not have to work down the line. You just can’t have it all up front. So you’ve got to prioritize.
Mindy Jensen: Yes. Oh, I could not have said that better myself, so I’m not even going to try. And now let’s make our attorney happy by saying the contents of this podcast are informational in nature and are not legal or tax advice. 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. Also, let’s bring in Rebecca. Rebecca and her boyfriend make more money than they spend, even after contributing to retirement accounts and brokerage accounts. So that’s good, right? They also have a big challenge, and I quote, “We spend a ridiculous amount on unbudgeted things. As of right now, spending is trending downwards this year, but last year we spent almost $40,000 on groceries, Amazon, eating out, Amazon, travel, Amazon, pet care.” Did I say Amazon? So, Rebecca, I think I see an area to work on even before we start talking. But welcome to the BiggerPockets Money Podcast. I’m very excited to talk to you today.
Rebecca: Thank you so much for having me.
Mindy Jensen: Okay, first off, yes, Amazon. Everybody should cancel their Amazon Prime account because it is way too easy to click buy. I mean, they set it up on purpose to make it so easy to buy so you would continue to buy. However, it’s so easy—I don’t have to go out, it’s so easy to just buy—so it’s hard to cancel that. I understand where you’re coming from. I don’t want to see how much I spend on Amazon, so I just don’t look at it.
Rebecca: I try not to.
Mindy Jensen: What a great plan. No, it’s a terrible plan, because I have no idea how much I spend on Amazon. So I am going to give myself a research opportunity, which is going to make my heart break, and look and see how much I am spending on my Amazon purchases. I’m going to ask people in our Facebook group, which you can join at facebook.com/groups/bpmoney, to ask. I’m going to challenge them to look and see how much they spend in their Amazon accounts as well. And I’m an Amazon shareholder, so I don’t want anybody to cancel their account, but also I care about people more than the bottom line. So if you’re spending a lot on Amazon, a really great way to stop is to cancel your Prime account, because there’s this thing in your head—you’re like, “Oh, it’s free shipping, I can just click buy.” But if I have to pay for shipping, I’m going to say, “Hmm, maybe I don’t need it that much.” So I don’t know, maybe other people have that same barrier, maybe they don’t, but maybe I’m just cheap, but I don’t want to pay for shipping. And Amazon Prime makes it super easy. So I will let everybody know when this show airs, I will let you know how much I am spending on my Amazon Prime. I now have a little bit of heart palpitations saying that, because I’ve got to go look that up. Okay, this is not about me. This is about you.
Rebecca: Let’s start over.
Mindy Jensen: Rebecca, welcome to the BiggerPockets Money Podcast. How are you today?
Rebecca: I’m doing so good. So good.
Mindy Jensen: Let’s jump into your finances, not mine, and let’s look at your income and where it’s going.
Rebecca: Okay, so I make about $100,000 a year as a salary, W-2 income from my job. I work in local government. My income—I also have a second job as a contract technical writer, and that income varies significantly between $35,000 a year and $100,000 a year. Now, something that I may have a question about later on is, I don’t budget for that income. Everything, all my expenses, are covered by my first W-2 salary job.
Mindy Jensen: What do you do with that income, the contract income?
Rebecca: Well, with my local government job, I have a 457 plan that I’m able to max out. With the second job, I have a 401(k), and I also maxed that out. I actually just maxed it out on Friday. It was our final payday for— yay!
Scott Trench: Yay!
Rebecca: So up until this point, those paychecks have been, I want to say, relatively small. But going forward, they’ll be bigger. And usually I take about 75% of that and stick it into our brokerage account. And then I’ll use the rest for unbudgeted, I guess, sinking funds—like we need a bathroom remodel, I need new sliding doors on the back porch, stuff like that that I just don’t want to finance—then I’ll just have the cash laying around, magically.
Scott Trench: After working your second job.
Rebecca: Yeah, exactly.
Scott Trench: Magically more money appears. I love it. Awesome. Any other sources of income?
Rebecca: Yes, my boyfriend does also have a job with local government, and that brings in about $30,000 a year.
Scott Trench: Awesome. So what’s coming in after tax?
Rebecca: After tax, let’s see, and after my 457 plan, I bring home about $4,430 a month. And then he brings in about $1,880 a month. So total, about $6,310.
Scott Trench: Awesome. Plus about, let’s call it, $40,000 in after-tax income from your second job.
Rebecca: Yeah, we can call it that.
Scott Trench: And which varies considerably.
Rebecca: Yes.
Scott Trench: Awesome. And where does that money go? What are you spending it on besides Amazon?
Rebecca: Right. Well, budgeted things go to car insurance—that’s about $120 a month. We do have a Wyndham timeshare I got roped into about 10 years ago, and it’s about $50 a month.
Scott Trench: Nice.
Rebecca: Mortgage currently is $1,400 a month. I suspect that will go down a little bit next year because, as I mentioned before, my homeowner’s insurance went up—it doubled. So not only did I have to pay for what’s coming up, but I had to make up for that shortage. So I would guess it’ll go down a couple hundred bucks next year, but not significant. Utilities, which I would include water, trash, electric, internet, and then things like Netflix, Hulu, and Amazon, are about $475 a month. Cell phones, $125 a month. And then what I call luxury items, which are—we have a house cleaner that comes twice a week, lawn care, and a pool guy—and that’s about $325 a month. And then we have the big expense of groceries, eating out, gas, and then what we like to call fun money, and that’s $1,800 a month. And those are, I guess, our lifestyle expenses. And then I have my monthly investments that come out after tax, which is $500 in an IRA for both of us, so $1,000 a month, and then a brokerage, $500 a month. And then I also budgeted $100 a month for crypto. Sometimes I do it, sometimes I don’t. If I don’t, it goes into the brokerage. Awesome!
Scott Trench: So if I’m doing the math here, we’ve got $6,300 in income between you and your boyfriend each month, and $4,300 going out every month on average—obviously with big fluctuations in the variable expenses being a major part of that. And that leaves you with a $2,000 surplus, which generally gets invested in a combination of brokerages, IRA, etc. Not to mention that pre-tax, you’re also contributing to your 457 plan. Is that a good synopsis of the situation?
Rebecca: Yes.
Scott Trench: Awesome. And then on top of that, we’ve got an unknown factor about the tens of thousands of dollars you’re bringing in after-tax from your second job.
Rebecca: Correct.
Scott Trench: So we have a really strong cash generation situation here. If we factor out all those investments, we’ve got $2,000 a month coming in steady state after tax and 457 contribution. So that’s $24,000 a year. And we’ve also got about $30,000 to $40,000—I’m calling it $40,000—in additional cash coming in from your second job. So that’s $64,000, $65,000 per year that we’ve got to play with in order to build wealth.
Rebecca: Yes, that sounds great.
Mindy Jensen: Okay, so I’m seeing that she’s got all this income. I think that her expenses, or her spending, has some leaking in it. If you’re not seeing this giant surplus every month, where’s it going? And there is $500—what is this, $500 to the IRAs and $500 to the brokerage, so that’s $1,500—and then an additional $100. But I think that there’s more money available that is just kind of—
Rebecca: Yes.
Mindy Jensen: —not being accounted for. So—
Rebecca: So, with that second job that I have, I, as I mentioned, it does have a 401(k). So up until about this point, about 50% of my money has been going into that as well. And now—I mean, you also made a great point—up until this point, I’ve been having about $2,400 a month extra coming in, but I haven’t been saving it. I really am not sure where it’s going.
Mindy Jensen: Okay, so the first research opportunity is to find out where that’s going.
Scott Trench: Well, it’s going to the IRAs and the brokerage accounts.
Rebecca: No, this is on top of that.
Mindy Jensen: That’s on top of that.
Rebecca: Yeah.
Mindy Jensen: So, what I find—remember that word that I said in the beginning of the show in my little diatribe, or my very lengthy diatribe, “I really don’t want to see how much I spend on Amazon every month, every year”—I think that you would be surprised at how much is still going there even when you’re conscious of it. I started tracking my spending, and you can follow along at biggerpockets.com/mindysbudget, and you can watch me really not be doing it right, because everything is a guess. I mean, all of this, even with all of my years of financial experience, it’s still just a guess where my money’s going. And what I have found over the month of May—I actually wasn’t writing down all of my expenses, so now at the end of May, I have to go back and enter them into the spreadsheet. I have no idea how much I was spending. But when I wasn’t tracking it every single time I made a purchase, I didn’t even have a vague running total in my head. I was swiping my card a whole lot more in the month of May than in previous months, when I was far more conscious of having to type in the amount that I’m spending. So on the one hand, it’s super tedious to sit there and track your expenses so granularly, like I do. But on the other hand, it’s so eye-opening when you do it. Halfway through the month, you’re like, “I’m already in the red in 9 of my 10 categories. What is going on with me? I know I want to spend less.” I have to make a conscious decision to spend less, but it’s a work in progress too. Some of them, I just—I’m budgeted too low, and I need to realize that I’m spending more money. If you do enjoy going out to eat, then don’t cut that—you have the money to do that. But every dollar you spend going out to eat is a dollar that you can’t put into your house, or save for a down payment on a new house, or spend in a different way. You can only spend a dollar once. And I don’t want anybody to send me an email about how you can borrow and spend it multiple times and send that to Scott—he loves it, he’s a BiggerPockets suck-up. You just have to be conscious of that. And I think a lot of people, when you’re not tracking every penny, it’s very easy for lots of those pennies to just leave your wallet.
Scott Trench: Well, let’s keep rolling for a second here and go through net worth and then your goals. And that will lead us to what we can do about this situation. It could be that your spending is where we need to focus. It could be that there are other areas we need to focus more on. My guess is spending, and getting control of your dollars and having a very clear understanding of what’s coming in, where’s it going, how’s it flowing through your system, is going to be the 80/20, at least in the short term here. But let’s press on and make sure that’s the case before going there. Where’s your net worth, and where does that money go?
Rebecca: All right, let’s see, I’ve got a little list here. We’ve got about $20,000—I guess I’ll just give you number figures. We’ve got about $24,500 in a joint brokerage account, $7,000 in a regular savings, and that’s just for—I guess I’m not sure what that’s for. But then I have $10,000 in a high-yield savings account as a designated emergency fund. My boyfriend has an inherited IRA at $135,000. And he’s also got the FRS investment plan, which is a defined contribution plan, and it’s locked at 3%. There’s about $5,500 in there. My 401(k) has $56,000, about $3,000 in crypto. His IRA has $13,000, and that’s a Roth. My Roth has $16,000. My traditional has $1,500, and then my 457 plan has $34,500. So that’s about $306,000.
Scott Trench: And then, so of my $306,000, I’m counting that about $40,000 of that is not in an IRA or similar type of vehicle. Is that right?
Rebecca: Yes, you’re talking like savings and brokerage type?
Scott Trench: Yes.
Rebecca: Yeah, you’re correct.
Scott Trench: Okay, great. So we have $300,000 in net worth in these investment accounts, $40,000 of which is either cash or after-tax brokerage, and $260,000 of which is in various retirement accounts.
Rebecca: Yes.
Scott Trench: And you consider your finances to be joint with your boyfriend?
Rebecca: And then I have home equity—it’s about $174,000. So I guess that brings us to $480,000.
Scott Trench: Okay, and what are your goals? What can we help you with today?
Rebecca: I would like to—just a short-term, quick, short-term goal would be to save $80,000 this year. I think we’re right around $37,000 so far. But my ultimate goal is to have some passive income of about $7,200 a month. So I guess one of my questions is, can I do this without real estate? Do I need to start thinking about that? But mostly, I just need a real fresh set of eyes on this—you know, “Why aren’t you doing this? It looks like you’d do well to do A or B.”
Scott Trench: Awesome. So you want $7,200 per month in passive income as soon as possible, and you want to save $80,000 this year?
Rebecca: Yes.
Scott Trench: That’s what we got. Can I ask how old you are?
Rebecca: 39.
Scott Trench: And your boyfriend’s around the same age?
Rebecca: He’s a little younger, 35.
Scott Trench: Okay, awesome. Well, great. I think we can certainly work with that and begin going there. Let me— with the passive income, what’s the goal? What would you do if you had the $7,200?
Rebecca: Would not work anymore. That would be our FI income.
Scott Trench: Okay, so you want to retire essentially as soon as possible from work.
Rebecca: Love it.
Scott Trench: Let’s think through this. I want to make an observation before we even get to spending. And you may have heard me say this before, but of your $480,000 in wealth, $40,000 of that is accessible and relevant to your goal here of achieving financial freedom. The other $440,000 is in retirement accounts and home equity, which is not going to help you generate that passive income until you reach retirement age. And from the way you phrased your goals, I can infer that you’re not looking to wait until retirement age to retire. You want to retire much earlier than that.
Rebecca: Correct, yes.
Scott Trench: So I would noodle on that and say, let’s start with this. What does a portfolio that generates $7,200 per month in passive income look like at the end of the day? What does that mean to you?
Rebecca: I guess I’m not sure. Just something that I don’t really have to work for. It just kind of shows up. That makes sense.
Mindy Jensen: Well, that’s the definition of passive income.
Rebecca: Right.
Mindy Jensen: I want to look at your second job. How much time does it take you to generate that $35,000 to $100,000 a year?
Rebecca: It depends on the contract. So right now I’m doing a contract. I make $100 an hour, but I am capped at 20 hours a week. And I don’t mind. I love the work. A lot of people are like, how can you work 60, 70 hours a week? And I’m like, well, I work my government job, and then I come home, and the second job is kind of what I do to unwind. So that works out well for me.
Mindy Jensen: Could you continue to do that to generate a portion of this income? It’s a lot easier to work when you like what you’re doing.
Rebecca: Yes. Yeah, I have talked about that. I think I would actually prefer to do that.
Mindy Jensen: Okay.
Rebecca: I mean, I know I said I would want passive, but this— I mean, I would realistically, if I know myself, I would keep doing it.
Mindy Jensen: Okay. So if you are in a position where you’re generating, let’s see, $100 an hour on this contract, can you take multiple contracts at a time?
Rebecca: No, because it is a W-2 position and they kind of control what I do. Now, I could, you know, go out into what they call the contractor pool and take on multiple projects, but I’m not sure I would really have fun doing that. But okay, I could try.
Scott Trench: I want to stay focused on the goal here because I think you’ve created a number there and don’t really have a good framework for how to achieve that. And so because of that, I think we have an opportunity, with your permission, to reframe that goal to something that is more tangible and that can be achieved in a 3 to 5 year period that gives you more optionality. If you’re going to go by the 4% rule and you want to achieve $86,000 in passive income per year, then that says you need to build a net worth of $2.1 million. That is a far way off even saving $80,000 per year. But we can get to something that achieves the result of life flexibility and the ability for you to leave your job and have optionality far earlier than that if we back into a reframing of that goal, and we think about how to access more of your net worth in the near term than what would currently be allowed with it all being trapped in retirement accounts and home equity here. So first of all, if we go back to spending— why do you need $7,200 a month? How’d you come up with that number?
Rebecca: You know, I kind of just took what we spend now on, I guess, a normal month, including all of my extras, and it’s between $6,000 and $9,000. And I was like, okay, I don’t need to be buying you know, all this ridiculous stuff. So I just settled on $7,200 as like a happy medium in there. There’s no real science behind that number.
Scott Trench: Okay. You didn’t list any car payments. You have paid off cars?
Rebecca: Yeah, we have one vehicle. It’s a 2015 Mazda. It’s paid off. And then with my job in local government, I actually have— they provide me with a vehicle and gas. So kind of lucky there.
Scott Trench: Okay. So, and we will, I think, spend a large amount of time tackling the variable expenses. But let’s go back to housing, which for you is $1,400 a month. It might vary when you get your payment reset from the insurance thing, and we’ve got the utilities bill. So that’s $1,800 a month. If we were able to drastically eliminate those, for example, now you don’t need $7,200 anymore. And if you’re able to cut out a bunch of that variable spending from Amazon and get that down, I mean, you could conceivably get your spending down to $3,000, $4,000 a month if we were able to pull those numbers down. Is that right?
Rebecca: Yeah, it seems to be that way.
Scott Trench: Okay, so now you don’t need $7,200 in income. Now you need $4,000 in income per month, or $5,000. Maybe you need $2,000 in passive income and you’re like, okay, I cannot retire, but I can leave the main job and just do the side hustle, and that will more than cover my expenses. So this is, I think, the power of reframing the goals around what I’m hearing is flexibility. You want the option to leave your job at an early time period, and you want passive income and flexibility to enable that to happen as rapidly as possible, and give yourself lots of options downstream. Is that right?
Rebecca: Yes, that sounds great.
Scott Trench: Let’s start with what I call financial runway. Right now you have $17,000 in cash. Is that right?
Rebecca: Yes.
Scott Trench: So what happens if you leave your job right now? How long do you run before you run out of cash?
Rebecca: It depends. If I lost both jobs, then about 3 months.
Scott Trench: Yeah, I think that’s where I would start. I think you’d feel a lot better if you had closer to 6 to 12 months in emergency reserve. You earn more money per hour at your side hustle than your main job. That’s exciting. Something’s there. And I think that building up that cash towards, let’s call it, $30,000, $40,000 in that emergency reserve is going to be really powerful for you, because you have the side hustle opportunity, and because it sounds like you’re doing a lot of home improvement projects as well with that. So I don’t think you have enough cash on hand given the opportunities that I’m beginning to smell in your circumstance. What do you think about that?
Rebecca: I agree with that 100%. Definitely the $10,000 in the emergency fund doesn’t make me feel warm and fuzzy. I would feel better with the emergency fund closer to $15,000 or $20,000, and then maybe having an additional $15,000, $20,000 in something else. Yeah.
Scott Trench: I would think about how big does that emergency fund have to be for me to feel comfortable leaving my full-time job for 6 months to a year to pursue this side hustle? You don’t actually have to do it, but I think if you build your position and concentrate the next $40,000 in cash that you’re generating primarily going towards that goal, then things will light up for you in a way that they wouldn’t for somebody— I would not be giving the same thought process and guidance to somebody who did not have a big side hustle that was so lucrative. But I think in your situation, it’s going to be really powerful.
Rebecca: Okay, so that’s a great, great plan.
Scott Trench: Okay. So second, let’s talk about your home equity. And by the way, that will come at the expense of continuing to stuff dollars into these IRAs. You’re doing this approach where you put a little bit in this one, a little bit in this one, a little bit in this one, a little bit in this one, and then you have very little cash and everything else is going into the mortgage payment and these other expenses. Instead, I think you need to prioritize what you think the best opportunity is. And so far we have lots of discussion left, but so far it sounds like we’re thinking maybe stuff it into the savings account or the emergency reserve and be willing to use that for some sort of opportunity downstream. So that means you’re going to have to not contribute to all these other areas and prioritize that one until you get to your first goal. But I think that will open up flexibility and options for you, so I would consider that. Second thing, let’s talk about home equity. Where do you live and how much do you like your house?
Rebecca: I live in south central Florida. I like the house. It’s small. It’s a little small for us. I don’t know, I’m open to moving, that’s for sure.
Scott Trench: So you have $174,000 in home equity right now, and that’s costing you $1,400 a month to maintain. I would consider— I would put in there the house hack, right? Is there a duplex? Is there a place that you could live with— we just interviewed a couple, where were Andrew and Haley from, Mindy?
Mindy Jensen: The East Coast?
Scott Trench: Well, they’re from Florida as well, and they’re on— I think they’re on the West Coast of Florida, if that makes sense. So they’re in a town where homes are $300,000-ish, and they’re able to buy properties with excess units and Airbnb them, and that is more than covering all of their housing costs while they live in a fairly nice unit and rent out the other units. And I think you could either consider that long-term or short-term. That’s super powerful. And if you want to get lots of flexibility very quickly, you can take that $175,000 in home equity, cash out a ton of that, use that to beef up your emergency reserve, for example, buy one of these properties, maybe even a second rental property within 6 months or a year following that. And now you’ve got a potential way to live for much cheaper on average. You’re going to have to do some work managing the Airbnb or the tenants on the side, but that might be a way to jumpstart your rental property portfolio if you’re interested in doing that. You may also find that you’re able to live a very comparable living arrangement depending on how you want to do it. You obviously would generate less income or have less of an advantage if you buy a really nice place and live in the nice unit versus if you buy a place that has more income potential and live in the garage, depending on your preference there. But I would put that bug in your ear and think about— hey, that’s a big lever in your situation, because right now we don’t have much to play with in the form of cash or your IRAs. I can’t do much with those, but we can do something with the home equity. That’s a strategic move you could make in the next 6 to 12 months to redeploy what you do have.
Rebecca: Yeah, it’s definitely something to think about. I’ve been in the landlord business before. I’m not opposed to getting back into it. I guess I hadn’t really thought about it too much just because of where the housing market is right now. But that’s pretty much the only reason.
Scott Trench: You’re already exposed to the housing market in a big way with your current property, right? So the disadvantage to what I just said is you’re going to trade your current interest rate for a higher one. So it’s up to you to determine, is that trade-off worth it because of the income potential I can generate from these properties? But you’ll have the same amount of wealth in the housing market before and after the transaction if you buy a property that’s around the same value as your current home, for example.
Rebecca: Okay. Yeah, that makes sense.
Scott Trench: So the risk profile is the same except for the higher interest rate, which you’ll have to grapple with. That’s the challenge for everyone.
Mindy Jensen: And I want to make a comment about passive income. There is this idea that passive income means absolutely no work on your part whatsoever. But if you had nothing to do all day— you have 2 jobs. If you had nothing to do all day, you would be bored. Sitting here for 25 minutes talking to you, I already know this. I just got back from a weekend retreat called Camp Mustache, and all of those people are on their path to financial independence or have gotten to financial independence, and none of them sit around doing nothing all day long.
Rebecca: That’s a good point.
Mindy Jensen: That’s just not what they want to do. If you enjoy this technical writing at $100 an hour, that just seems kind of like a no-brainer. No, it’s not passive income, but you’re also limited to 20 hours a week. That’s a couple of really long days, and then you’ve got the whole rest of the week to just lay on the beach and do nothing.
Rebecca: Yeah, that’s exactly true.
Mindy Jensen: Or would you find other ways to fill your day? You know, having an Airbnb where you are the turnover— that is hands down the hardest part of an Airbnb, finding somebody to consistently clean to your standards. People who rent Airbnbs really expect absolutely pristine, and it can be difficult to leave that up to somebody else, especially if you’re a control freak like some of us on this call. So, but it also doesn’t take a ton of time. You’re not doing it every single day. Even if you had a property that didn’t have a minimum, you would still have people who come and stay for 3 or 4 nights, and then maybe you would turn it over once or twice a week. That’s something for you to do. You’re going to be working and filling your days with things. I think— and I’m not saying this to you, Rebecca, I’m saying this to anybody listening— I think it’s a little bit disingenuous to think that once you reach financial independence, you are only going to have passive income. You’re never going to do anything else. And you don’t get to this place and then just be like, mm, I’m just going to do nothing for the rest.
Rebecca: That’s a good point.
Mindy Jensen: Your drive, your body, your mentality, your makeup is not going to allow you to just sit around and do nothing. So if you like doing this technical writing and it pays super well, pick and choose the jobs that you want to do. It sounds like $100 an hour is the going rate that you make— and you’re capped at 20 hours for all contracts, or just the one that you’re currently working on?
Rebecca: The one I’m currently working on is $100 an hour because it’s California money. But it is capped at 20 hours a week. If I were to say leave this company and go out on my own, I could probably charge in general $50 to $75 an hour outside of California.
Mindy Jensen: Okay, so step number 1 is focus on California jobs.
Rebecca: Yes.
Mindy Jensen: Step number 2 is double up on those California jobs. Go out on your own and get those California jobs. I like what Scott did. He took your desired amount monthly and reframed it and cut it in half for you in like 45 seconds. So good job, Scott.
Rebecca: Thanks, that was pretty awesome.
Scott Trench: Yeah, well, I think that if you say, great, I can move to a location that I want to move to and buy the same amount of house and get income for it, you might have a lifestyle, a similar lifestyle, or even an improvement depending on how you do it. And now you’ve knocked that down by $1,400 if you could live for free, for example, with an Airbnb. And that just dramatically accelerates this position. So I think that’s where you can say, what do I really want here? I don’t think you want $7,200 in income. You want optionality to leave your job as soon as possible, and then you want as much passive income as you can possibly generate over time with that. But there’s a minimum goal here that can be achieved in 3 to 5 years with creativity and a little bit of luck, versus what you stated at the beginning of this— if you save $80,000 a year and you want $7,200 in passive income, and you want to do that through passively managed real estate, long-term rentals, or stocks, you’re looking at building $2 million in wealth, which is going to take you 10, 15 years. That’s really long to get to what you want, what you really want, I think. And I think there’s other ways to hack around that that are faster.
Rebecca: Okay.
Scott Trench: So that’s how I’d frame that. And the less you spend, the less passive income you need to generate. So one way to think about it is if you go the passive stock bond route, every dollar you spend per year, you’ve got to generate $25 in wealth in order to have the passive income to cover it. That’s really hard. So every dollar you cut reduces that. Every $1,000 per month you cut in spending is $12,000 per year, times 25 is— what’s 12 times 25? $300,000 in wealth that you need less. So if you can cut $1,000 a month out of your budget, you reduce your journey to financial independence by $300,000 in total wealth.
Mindy Jensen: So I’m gonna tag on Scott’s rant before we change topics and challenge you to use my spending tracker, emulate my spending tracker, which I got from Waffles on Wednesday. So if you Google “Waffles on Wednesday mobile spending tracker,” Mr. Wow detailed how to do it. If you’re a technical writer, you probably can figure that out yourself. But it’s very easy. You put it on your phone, and it’s really hard to get in the habit of tracking every time you spend, but it will soon become a habit. It’s so beneficial. And almost instantly you will discover, oh, I am spending on Amazon every single day, and I am going to the grocery store every single day. And that was my big one. And whatever it is you’re doing, challenge yourself. If you’re going out to eat six nights a week, see if you can do it at five nights a week. Don’t go from six to zero, because you’re gonna be like, wow, my life sucks. Go from six to five, and then if that’s okay, go from five to four, and if that’s okay, then go from four to three. Ooh, you know what? Four is really where I want to be. You’re making good money, but know that every time you go out to dinner, it’s more expensive than cooking at home. And there’s just—there’s all these trade-offs. So it’s not that you’re spending too much money. You’re generating a lot of income. You have this money to spend. You’re not going into debt with the spending that you’re having. But you could live far more frugally and rack up your savings faster by making different choices. And having the information in front of you helps you make those choices a lot easier. And you don’t have to give up everything. Scott still goes out for beers and wings.
Scott Trench: I think that’s right. And I think that’s where we’ve now talked about, I think, the biggest levers in getting you toward flexibility, which is, one, emergency reserve. And an emergency reserve—I would even relabel it financial runway. And I think you need six months plus in your situation, because I think there are going to be lots of opportunities that are going to light up in front of you when you’re sitting in a really strong, flexible financial position that you’re going to take advantage of. The second is home equity and getting the fixed expenses down as low as possible. You’ve done a great job by having one car that’s paid off. You don’t have that in your life—you just have the car insurance payment and then gas for that. And then the next is the mortgage payment. Your cell phones, I assume you don’t want to cut those plans, although you could try the Mint Mobile plan, which I think a lot of people find really powerful. Now we get to the luxury—what you call the luxury spending—which includes all of those other items. So great, now we can attack some of those and think through how we want to handle that. And let’s go through them line by line. Before we get to Amazon, I want to talk about house cleaning, lawn care, and pool guy, which you said is $325 a month.
Rebecca: Yes, for all three.
Scott Trench: Awesome. I like those, and I’d keep them in your spending plan right now. But when we— I would get into a point where I can track my total expenses and I know how much is going to those areas. The reason I’d keep those right now is because your time is worth $100 an hour—$50 to $100 an hour. So you can hire out, I imagine, those services at a lower rate than you currently work for. And you work a full-time job and then some. So your time is valuable. And I don’t think that it makes sense to take those into your—into your ballpark right now. If you want flexibility and you want to leave your job, for example, then the value of your time is going to come cratering down to a large degree. And that would be a time to cut those expenses—at that point, if you said, you know what, I can take care of those things in exchange for not having to work anymore. But you can begin to say, okay, that’s a reasonable trade-off for now. It may not be later if I wanted to leave my job in three years, for example, on a modest amount of passive income, in a house hack or whatever. So that would be one thing there. So that leaves us with $1,500 in other variable expenses. And I think this is where Mindy’s system can become really powerful for you.
Mindy Jensen: I have a couple of other things I want to talk about. You said your homeowner’s insurance just doubled. I want to tell a quick little story about how I had really low coverage for my automotive insurance and really low coverage for my homeowner’s insurance. And I decided that now is the time for me to get an umbrella insurance policy. A friend had just gotten one—she really did a lot of research, and she landed on Liberty Mutual. I called them up and I talked to them, and they said, oh, you know what we can do for you? We can give you more automotive coverage and more homeowner’s insurance coverage and an umbrella policy, and your annual premium is going to be less than what you were paying for your lower amount of auto and your lower amount of homeowner’s insurance. And I was like, what? This has to be a catch. She said, nope. And I did increase my deductible on my homeowner’s insurance, because I don’t really need that. I’ve never used homeowner’s insurance in my life, but I’m always gonna have it, because if my house burns down, I want somebody to come in and rebuild it for me, for free. I’m doing little air quotes for those listening. But I think that insurance is valuable, and I was shocked at how much lower I’m paying now versus before I had the umbrella policy. So I challenge you to get your insurance requoted. And you’re in a place where you have to have probably some certain kinds of insurance that other people don’t have. I don’t have to have hurricane insurance over here in Colorado, where we have a historically low chance of hurricanes every year. But I do have— oh, I don’t have flood insurance either. But in another house, I had flood insurance because I lived on the lake, and it was much more rainy there, and there was a real possibility that I would flood.
Scott Trench: So the ocean has to rise like 5,280 feet for it to be an issue. Yeah.
Mindy Jensen: And then we’ve got way bigger problems than just, you know, having flood insurance.
Scott Trench: I think that’s right. I think with the insurance, there may be an opportunity to combine those with the car insurance and the home insurance. And we are not lawyers—this is for entertainment purposes only, of course, with all this. But one thing to noodle on, from an insurance perspective, is the concept of: do you have assets to protect? And your assets are almost entirely in home equity. Homeowner’s insurance can help with that. And then retirement accounts. You have no other assets outside of that besides the car and $40,000 in brokerage accounts and checking and savings. So I’m not clear on the advantages for you of a big umbrella policy, for example, and other forms of asset protection, because you may find that when you self-educate on this topic a little bit more, that the retirement account contributions and such are going to be generally more protected from lawsuits and those types of things than other forms of assets.
Rebecca: Yeah.
Scott Trench: So when you have a huge real estate portfolio that’s in your name or an LLC that you own, or you have other things, and you get angry at somebody at the bar and punch them in the face, those can go after you if you don’t have the policies in place, right? But—obviously, this has not happened, I’m making this up—but that would be a good case for an umbrella policy at that point, to help cover some of those higher-level things. But maybe not if you punch them in the face—I don’t know if it would protect against crimes that you commit. But I think that’s where you’d want to have the umbrella policy, I think, in place. And that’s the thing that can come later, maybe when you approach $500,000 to $1 million in net worth outside of those areas that you have—that would be a good place to start.
Mindy Jensen: Yeah, and I wasn’t suggesting that she get an umbrella insurance policy. I was just highlighting that because when I had my insurance requoted, I went from two policies—auto and home—to three policies. My auto and home coverage went up, and yet my out-of-pocket premiums for all three policies is currently less than my out-of-pocket premiums for the two policies that I had before, for lesser coverage. So it was just shocking. I mean, they didn’t raise my insurance rates significantly over time. It was, you know, every year it’s like $5. Well, why am I going to go re-quote my insurance for $5? Now it’s been a few years, and it’s not $5. I think my insurance was $600 for car, and now it’s like $500. So I’m not saving an enormous amount, but I’m saving enough that it makes it worth my while to call up and—you know, 15 minutes can save you 15% or more on car insurance. That’s actually not even where I went—that’s where I was. But with all of this other coverage, I’m still paying less now. So definitely re-quote your insurance. If you have not re-quoted your insurance in a year, it’s time to re-quote every year. They have no loyalty to you, so you have no loyalty to them. Investment comment—you said that your boyfriend has an inherited IRA.
Rebecca: Yes.
Mindy Jensen: Are you familiar with the rules around inherited IRAs? There’s a timeline for liquidation.
Rebecca: Yes, I believe the last we checked, it was 10 years.
Mindy Jensen: Yeah. So how long has he had this?
Rebecca: Since 2020, so only two years now.
Mindy Jensen: Okay.
Rebecca: I guess I was just going to say, I think based on her income at time of death, there is no required minimum distribution, from my understanding at this point.
Mindy Jensen: Okay.
Rebecca: But I think that—
Mindy Jensen: Do you have a CPA or a tax professional that helps you with your taxes, or are you a DIY tax person?
Rebecca: This year was the first year I actually paid someone to do it. So, but we’re not married, so that was just for me. On his end, he’s got a tax guy that I think his dad uses, that he inherited as well. So yeah, hopefully we haven’t had any withdrawals from that account this year, but last year it was minimal and it didn’t really make a dent.
Mindy Jensen: So I just would give him a research opportunity to look into the rules surrounding that, because you don’t want to get to year 10 and say, oh, now I have to withdraw all of these funds, and I have this huge taxable event that I wasn’t planning on that I now have to deal with. So just—
Rebecca: Yes.
Mindy Jensen: You have eight years to look into this. Start looking into it now and making plans for it. Maybe keeping it in there is the best choice. Maybe rolling it over is a great idea. I don’t have an inherited IRA, so I don’t have a lot of information about it. I just know that there is a timeline for you. So I’m going to send you down that rabbit hole.
Rebecca: I think our unofficial plan is to withdraw the majority of it and do something with it, be it put it in the brokerage or anything, while his income is still low and before we get married.
Scott Trench: Let’s talk about your incidentals. We said they’re $1,800 a month. If you pull out the $300 for house cleaning, lawn care, and pool guy, which I think are perfectly reasonable given your income situation, that’s $1,500 for incidentals per month. That is super reasonable at the end of the day. I mean, if you say it’s $750 for groceries, and then you have $750 between the two of you for life’s fun stuff and guilt-free spending, what is that? That’s $375 per person per month. That would be a very reasonable amount of money to spend—perhaps even on the low end—from a “hey, I get to do that guilt-free” perspective. And I would encourage you to make that guilt-free. So I think you have an opportunity to control that grocery budget, so you’re making sure that that’s going where you want it to go. But at the end of the day, with what I hear here, have that $350, $400 per month be guilt-free spending. Just make sure that it doesn’t go beyond $300, $400 per month, which is what I’m hearing might have been happening for the last year or two.
Rebecca: That’s the hard part.
Scott Trench: So great. Maybe it would be helpful to provide a toolkit that could help—some options that could help make sure that that money does not advance beyond $400 a month per person, for example. So one simple option would be the money date in the budgeting process, and saying, look, we’re going to have all these other expenses, and then here’s your fun money account, and here’s my fun money account. Groceries and household goods are all included in this budget here, but then we’re going to track—and all of your spending, boyfriend—I don’t think we’ve said his name yet—is going to be on this credit card, right? $400 a month, and I’m going to get the same on this credit card, this separate one. And that way every one of those expenses is tracked by that individual each month in preparation for the money date. And you can see where those are going in crystal clear clarity, right? So you can even put a limit on those credit cards that is $500 or $750 or whatever, and then use your debit card or whatever for any bigger purchases, if you want to control that. That would be one toolkit for this. What do you think, Mindy?
Mindy Jensen: I think that’s awesome. In fact, I just made a note: ooh, put a new card on the Amazon account so that I can track my Amazon spending easily, because I do think that I am using it mainly for necessities.
Scott Trench: That’s what my wife and I do. I have my credit card that I put all of my purchases on, and she has her credit card, which she puts all of her purchases on, and we only use the debit card for certain expenses where it’s just really hard to use the credit card or doesn’t make sense. Like right now we’re renting—we wouldn’t pay 3% of the rent in transaction fees on the credit card. But that way, at the end of the month, it’s super easy for me to track all the expenses, because it just says “Scott’s credit card” in our budgeting software. And so I know that I’ve got to put in all those transactions, and she’s got to put in all the ones that say “Virginia’s credit card.” And so that’s really easy at the end of the month, and we can tell where the money’s going. By the way, I’m always the culprit on the one that’s spending more frivolously than my wife every month, without exception.
Mindy Jensen: So I’m like, wow, what a surprise.
Scott Trench: Yeah, yeah.
Rebecca: Yeah, my boyfriend’s like, “let’s just cook in,” and I’m like, “let’s go out, we haven’t been out in like three days, let’s just go, it’s fine, we have money.” So yeah, it’s—
Scott Trench: And that’s great. Put it on your credit card as like, “hey, I wanted to go out, it’s gonna be my credit card for this one, and that’s coming out of my fun money budget.” Boom, we’re good to go there.
Rebecca: Okay.
Scott Trench: And then, at the end of the month, okay, those are all my calls.
Rebecca: That’s my bad.
Mindy Jensen: Okay.
Scott Trench: But that would be a toolkit that we found really powerful, because at the end of the month you just look at it and there’s no guilt. You’re not shaming the other person—you’re just facing the reality. Here’s what was spent on Scott’s credit card, and here’s how much was spent on Virginia’s. And do we want to make any tweaks? Nah, we’re good, we’re going to keep going with that. Or, yeah, we want to get this expense a little bit more under control next month—let’s make a plan.
Rebecca: Yeah, I like that. And we don’t really have any guilt—I wouldn’t use that word—but it needs to get under control, because at the end of the day, I made a goal for savings. We’re on track to meet the goal, so it feels like anything outside of that is okay. And that’s just it. It’s okay, but it’s not the right thing to do—we should be saving more. So I like that idea of splitting up the fun money.
Scott Trench: So without reducing what you said, which is $1,800 per month in these miscellaneous expenses, your total spending comes to $4,300 per month, right? And if you were to come out of this in a year from now, be house hacking with an Airbnb or a rental property with that, your expenses now drop from $4,300 per month to $2,900 per month. And you’re good to go. You can cover that with your second job right now within a year. You won’t be building a lot of wealth on top of that at that point. So you may want to continue that process—maybe buy several properties over three years and set up some systems, maybe think about stockpiling $80,000 or $100,000 a year—$80,000 this year, next year, and then maybe $100,000 or $120,000 after a year or two if you make some of these moves, grow the income in some of these categories. And that would further cement your position. But I think you can reach your goal of flexibility way faster than trying to just work toward this kind of amorphous $7,200 per month in passive income goal.
Rebecca: Okay. All right, I do have another—I guess small wrench. It’s not a huge deal. I do have a pension with this local government job, and the problem is it’s an eight-year vesting period. I’m about three and a half years in, and it’s already one of the longest jobs I’ve ever held. But if I stay the full eight years, and then even at that point wait until retirement age, that will be an extra $1,000 a month. So if I leave before the eight years, that’s kind of like walking away from, what, like $300,000, right? Is that right?
Scott Trench: So the $1,000 a month—does that come into play four and a half years from now, or at retirement age?
Rebecca: That would be at retirement age.
Scott Trench: Interesting. I have to think about how to value that asset. At retirement age, it would be worth $300,000, if you want to call it that, depending on how likely it is that the company—sorry, the government—is likely to pay out that pension, which is probably fairly likely in Florida.
Rebecca: Yes, I would say fairly likely.
Scott Trench: But that’s discounted by 20 years by a discount rate, because you’re not going to access those funds until 20 years from now. Then you’re going to access a $300,000 annuity at that point from the pension. So it’s worth considerably less than $300,000 at this point. Let’s call it— let’s value it at $75,000 for purpose of this discussion. I’m probably off there. You should go and value that by using a discount rate you think is appropriate, but that’s 20 to 25 years from now. Is it 65 or 59 and a half?
Rebecca: Gosh, I think it’s 65.
Scott Trench: Okay, so you’re 25 years out. It’s probably worth less than $75,000 in present value right now.
Rebecca: Okay.
Scott Trench: So that would be a way to think about that from a valuation perspective when you’re making decisions. So yes, am I going to stay 4.5 years in order to make $75,000 in additional value right now? Or could I— I could easily make more than that potentially in this avenue, but that would be a way to think about it over the next couple of years.
Rebecca: Okay. Okay. Yeah, that was my expectation.
Mindy Jensen: I missed how long you’ve been at this job?
Rebecca: Three and a half years.
Mindy Jensen: Three and a half. And it has to be a total of eight?
Rebecca: Yes.
Mindy Jensen: Okay. And do you like your current job?
Rebecca: I do. I do like it. It’s a higher-level position. I’m not a huge fan of the human resource aspects of being a director. I’ve never been the best or most, I guess, interested supervisor. So that part of the job is not my favorite. I would rather be an individual contributor like I am with the technical writing. But right now it’s just— I mean, I like it enough that everything makes it worth it right now.
Mindy Jensen: Okay, then I wouldn’t make a rash decision right now because it’s still $300,000 down the road. If you hated your job, I would say 4.5 years is a lot of time to spend at a job that you hate for $300,000 in 20 years.
Scott Trench: By the way, I pulled out a present value calculator because this is fun. And the present value of a $300,000 pile of cash in 20 to 25 years— 2047— would be, at a 5% discount rate, $88,000. So if you think you can earn—
Rebecca: Pretty close.
Scott Trench: If you think you can earn a 10% return, it’s going to go down to $27,000. So if you’re using a 10% discount rate, it’s like $25,000 with that. And by the way, you’re not getting a pile of cash for $300,000 in 25 years. You’re getting a set of future cash flows. So it’s even less than that from a valuation perspective. So all of those things I think will be helpful perspective for you in making that decision. I would not consider— this is less than 5% of your net worth right now. It’s 10% to 20% of your net worth depending on what discount rate you want to use, but probably closer to 10% or less.
Mindy Jensen: In that case, the current life satisfaction and current job enjoyment is going to factor heavily into my own decision if I was in your shoes. If I like my job, why would I leave? It’s hard to find a job that you like, and there’s no guarantee that when you change jobs, you’re going to find one that you like better. If I hated my job, I would start looking. This wouldn’t be enough to keep me there. Based on what Scott is saying, it’s—
Rebecca: Yeah, it’s kind of—
Mindy Jensen: He’s not saying it’s worthless.
Rebecca: Yes.
Mindy Jensen: He’s saying it’s not worth much.
Scott Trench: Yeah, well, I’m saying there’s a calculable value on this income stream. And at the high end, assuming you are a terrible investor and get 5% returns on your money for the rest of your life, it’s worth $90,000. But it’s worth less than that because it’s a set of incomes. It’s income from the future based on that, not a pile of cash. So it’s not worth a lot relative to your financial position. But it is a factor. I would not stay in the job for 4.5 more years in order to realize that benefit at the opportunity cost of really seeing some things that you want to do— doing things you want to do in your life, pursuing investments or other job opportunities in other locations. This is not a powerful benefit relative to your overall savings rate.
Rebecca: Okay. Yeah, I appreciate that. I was stuck on that, you know, what it would take to generate $1,000 in income today. And based on that calculation, I think that that’s pretty much a non-factor for decision-making going forward.
Mindy Jensen: No, I was saying that’s really great to be able to realize that. A lot of people don’t factor that in. Scott, can you share a link to that present value calculator? We’ll include those in our show notes.
Scott Trench: Sure. I Googled present value calculator very rapidly and then put it in there, and this became one of the first results on Google. So I will go ahead and link that in the show notes at biggerpockets.com/moneyshow314.
Mindy Jensen: Yeah, I think it’s important to have the ability to realize, oh, this is a really great thing that I’m about to give up if I just work there for another month, or this is nothing even if I work there for 10 more years. So it’s when the decision is much tighter that it makes it a lot more difficult to make. But this one— I like that you have realized very quickly too, it’s so easy to let go of this, this golden handcuffs thing. That’s not the right phrase.
Rebecca: No, that’s exactly what it is. It is. I’ve referred to it as that before as well. No, it’s— I think it’s easy to let go because, over the years, I’ve learned that the money’s out there. You can get it. It’s just— I’ve changed this job that I’ve had for three and a half years. That’s the first time I’ve ever done it. When I walked in the door three and a half years ago, I had no idea. I didn’t even have a background in it. So it’s just like— but up until this point, I was just kind of throwing all this money away. I didn’t know what to do with it. So now that I’m on this track, now that I’m thinking about it in a different way— you know, 10 years ago, if you would have said that, I’d have been like, eh, that’s too far in the future, I’m not going to think about it. But if you had said it a year ago, even, I would have been like, I will never let that go. But now here I am thinking that maybe, maybe it wouldn’t be worth it.
Scott Trench: I mean, if you’re at year 62 and you have another year left to vest the thing, obviously we’re going to say, okay, we’re going to do that. But I think that we can make a different decision or value it differently because of your circumstances. And by the way, I would discount it at a 10% rate of return.
Rebecca: Okay.
Scott Trench: That’s because I am perhaps a little arrogant and think I can do much better than a 5% return over the course of the next 25 years with my invested dollars. So that value then is $27,000, $28,000.
Rebecca: So now that’s not the maximum I would get. That is just— that is basically the minimum if I stayed vested. Now if I continued working there for another 20 years, which I don’t see happening, it could, you know, be quite a big sum of money, maybe $4,000 a month. It just depends— if they take the average of your top five earning years, I believe, and that’s how they base their calculations. But the less you work, the less lucrative it is. So, okay.
Mindy Jensen: We did an episode— I just want to remind people, episode 259— we spoke with Grumpus Maximus, and it was called Pensions 101. So this is something to listen to if you’re considering taking a job that has a pension, or if you’re considering leaving a job that has a pension, or if you just want to know more about pensions. Because I’ve never had a pension, I didn’t know anything about them. I thought it was a very interesting show. So that’s episode 259, wherever you get your podcasts. I think this has been great from my perspective, but how do you feel about this information?
Rebecca: It’s a lot. It’s interesting. It’s interesting. I knew you guys would— I’m excited too. I knew you guys would pull out some things that I hadn’t really thought about, and I did— yeah, it’s been really helpful. So.
Mindy Jensen: I’m glad. This is not meant to be, here’s all your problems solved.
Rebecca: Yes, yes.
Mindy Jensen: We’re done.
Rebecca: You have homework.
Mindy Jensen: Yeah, you have homework. You have things to look at, but it can be really difficult to get outside of your own head when you’re focused on this. It’s hard to see what else is around. So having these other options— you currently have $7,200 in expenses, therefore you need to generate $7,200 in income to be able to quit your job. And I love Scott’s way of thinking: let’s reframe that. And in 45 seconds, he cut your monthly needs in half.
Rebecca: Yes.
Mindy Jensen: Yes. And then you’ve got $2,000 of that already from your current job. So now you’re down to working 20 hours a week, and we’ve got to figure out another way to generate $2,000 more, and then you can quit.
Rebecca: Yeah, then I’m good to go. Yeah, or don’t. Yeah, right? Which I probably wouldn’t— you are right about that. There’s no way I could just sit around. But another thing you pointed out was my lack of accessible funds right now, which I really need to think about. And I think I may try to redirect some of this into maybe a real estate deal or something.
Mindy Jensen: Into a real estate deal, into after-tax brokerage accounts, your boyfriend’s inherited IRA. I’m assuming that because you’re not married, you don’t file taxes jointly?
Rebecca: Correct, yeah, yeah, yeah.
Mindy Jensen: So look up the Mad Fientist, “How to Access Retirement Funds Early.” I don’t know if you’ve ever read that article before. He talks about the Roth conversion ladder in that article. And the inherited IRA isn’t a Roth, so you convert it to a Roth by paying taxes currently, at your current income level. So you want to look up— and this is where a good tax planner will be able to give you great direction. They will look at your situation and say, oh, you have this much space between your income and your capital gains tax cap, where you can convert—
Rebecca: Okay.
Mindy Jensen: And not pay any capital gains on this. And then once it’s sat in the Roth IRA for five years, you can withdraw the principal— not what’s grown, but the principal. And everything that you’ve converted over is now principal. So it is an interesting idea. And he’s got eight years to pull out $135,000. He could Roth-convert it little by little and reduce his taxable income, reduce his tax burden on that while changing it to a Roth. When the market’s low, I can’t guarantee— past performance is not indicative of future gains— but I think that the market will continue to bounce back and will return. I mean, if you look at historic market returns, it goes up and to the right eventually. So you want to buy low when you can. That’s fantastic advice. Thanks.
Rebecca: Thank you very much.
Mindy Jensen: Yeah, if you Roth-convert it, then it’s growing. He takes out the principal if he wants, and the gains are still there and they continue to grow, or go up and down, whatever. But yeah, just— I think having a conversation with a tax planner, having all of your numbers out there for them to see, they can give you some really great advice that’s even better than what Scott and I are giving you, because we’re not tax planners. We just know enough to give homework. So that’s another homework assignment: connect with a tax planner and ask them for suggestions to maximize what you have, both pre- and post-tax, but more along the post-tax lines, and see what they say.
Scott Trench: What else can we help you with, Rebecca?
Rebecca: No, I think that’s actually it. That’s awesome. I’ve got a lot to think about.
Scott Trench: Well, let’s recap. At the strategic level, most of your net worth is in retirement accounts and home equity, and that is not going to get the job done in giving you life optionality and financial freedom. So as you acquire more cash, that needs to go into accounts that can provide that freedom. Options would include after-tax brokerage accounts, your emergency reserve— which I think is a great starting place because that will help you build financial runway, which may create options for you— and you might consider buying real estate. Your home equity is a major part of the equation, and you should think through that as part of your journey here to cut costs and potentially think about redeploying that into a house hack or other investments that can bring you this flexibility. You make a great income, so you’re really not at all unreasonable with your month-to-month spending, even though I think that’s what you thought was your big problem coming in. Although that’s assuming that you keep it at the levels that you stated and have been true in the recent past, it sounds like. So we have some tactics and tips to do that. Maybe consider the credit cards for each of the partners here, you and your boyfriend, to make sure that you are accountable for your own spending and can talk about it in a positive way once a month. And then lastly, Mindy had some great tips for how to think about dealing with the boyfriend’s inherited IRA and rolling that over bit by bit in order to play a really strong tax-advantaged game— ideally, parts of that being done before, if you guys are considering this, before you get married and have to file jointly. So lots of good, I think, hopefully helpful tactics here, and hopefully some helpful perspective on reframing the strategy and the overall goals. A lot of homework for you.
Rebecca: Yes, definitely.
Mindy Jensen: Awesome. Well, Rebecca, thank you so much for your time today. This was so much fun. I really appreciate you sharing your unique situation. I think it will help a lot of people who are in similar situations. I don’t think anybody’s going to have the exact same scenarios, but I think a lot of people are going to have this portion or that portion or that portion. So this is always really helpful, and that’s why we do these shows. I’m so grateful for your time.
Rebecca: Thank you so much.
Mindy Jensen: Okay, we’ll talk to you soon.
Rebecca: All right, bye.
Mindy Jensen: Okay, Scott, I just want to give you huge, huge, huge props for that reframing idea. I really, really, really like how you gave her different things to think about and were able to basically chop her monthly needs in half in such a short timeframe. Nice job. That was super helpful, I know, to her.
Scott Trench: Yeah, I think that the goal usually is optionality and flexibility right now or very soon, for most people. And so I think that’s, you know— and so when you hear a number that is just like, okay, well, we are not going to get you to $7,200 a month in passive income anytime soon with the current way things are structured, let’s reframe the goal, and let’s come up with a strategy that we can use to really jumpstart the journey towards that by increasing the amount you’re going to save every year, moving more of that wealth into after-tax investments like real estate or after-tax brokerage, and having a bigger runway that gives you some flexibility. Now we can play a game that is winnable in the short term and gives you real-life options and improves your life.
Mindy Jensen: Absolutely. I am so excited for her homework assignments and her— for what she finds out about them, because I think she is going to take this. At the end of the show, after we stopped recording, we checked in with her and we’re like, hey, is this— you know, did we get you what you needed? And she said, I have so many things to look into now. And it was like, excitedly, like, now I have all these options that I thought I— that I wasn’t aware that I had before, which is the whole point of this show: just here’s things to introduce you to, so you can make sure that you are doing all the things that you need to do, that you want to do, that you can do to reach your goal as comfortably as you want, as you can.
Scott Trench: I love it. Should we get outta here, Mindy?
Mindy Jensen: We should. From episode 314 of the BiggerPockets Money Podcast, he is Scott Trench and I am Mindy Jensen, saying I have no clever line today. Email me, mindy@biggerpockets.com, with your suggestions.
