Mindy Jensen: Welcome to the BiggerPockets Money Podcast, show number 320, Finance Friday edition, where we interview Chris and talk about zooming out three to five years and thinking about your future portfolio.
Chris: I’ll tell you what I’m more challenged with than the leverage is the time commitment needed to do it properly and do it effectively. We’ve listened to the BiggerPockets Real Estate Podcast, we’ve listened to the Rookie Podcast. I have struggled with time management with all the different balls we have in the air right now. Hello, hello, hello.
Mindy Jensen: My name is Mindy Jensen, and with me as always is my Costco clothing-wearing co-host, Scott Trench.
Scott Trench: That’s right, Mindy. My entire wardrobe is from Costco, except for my shoes.
Mindy Jensen: Tip to toe, well, head to toe, right? Scott’s socks. Scott and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story, because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting.
Scott 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 deal with the philosophical and good problem of earning a very high income and needing to understand how to allocate your time, 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 am super excited to talk to Chris today. I really like his story about not having a high income for quite a while and how having a mountain of debt and then, I don’t want to say lucking into, but kind of lucking into a big windfall when they decided to sell a business. And now they have the very fortunate decision, what should we do with all of this money?
Scott Trench: That’s right. It’s a pop-up moment. We’ve spent 20 years grinding away, building a strong financial foundation, and now it’s really strong, and we’re almost surprised by how the options that that affords. And I think a lot of folks, or I think many folks, hopefully will experience a similar end state at some point. And it’s good to be aware of that, plan around it, and deal with the good problems that that presents. There’s still problems and there’s still things that we need to address here in our personal financial situations.
Mindy Jensen: Yep. And one of the things that they do need to address is how do we go from super saver mindset to, hey, we can loosen the purse strings a little bit and actually start to spend some of this money that we have accumulated. Okay. Before we bring in Chris, I must tell you that 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. Chris and his wife, Carrie, have a clear-cut set of financial goals, which means they’ve had conversations about money. Yay! Further, they’ve written down their goals, which tells me that they are discussing them on a regular basis.
Scott Trench: More yay!
Mindy Jensen: Some of these goals are rather aggressive, but they just sold Carrie’s veterinary practice, and now they’re looking for ideas for what to do with this big old pile of cash they’re sitting on. Chris, welcome to the BiggerPockets Money Podcast.
Chris: Thanks for having us. And really, unfortunately, Carrie can’t join us, but thanks for having us. We’re excited to be here.
Mindy Jensen: I’m so excited to talk to you today. Normally with this show, we start off, we jump right into it with what do you earn and where does it go? But I think we need a little bit of context about your financial situation. So let’s get a little bit of your money story.
Chris: Sure. So Carrie and I have been married for about 20 years. We’re coming up on that in another month or so. And we’ve always been pretty conscientious about our finances. Up until the last couple years, we haven’t really earned a whole lot of money, but we’ve always been very conscientious. We’ve discussed it. She, about a year out of college, she decided she wanted to go to veterinary school. And we had met with a financial advisor and the advice was, if you’re going to do this, if you’re going to take on $200,000, $300,000, $400,000 worth of debt, do it now while you’re young and you have time to pay it off. And so we did. We jumped in and went to— I supported her while she was in veterinary school for a few years in the early 2000s. She worked for a couple different clinics and then ultimately decided to buy her own clinic in 2011. And just this year decided, and for a variety of reasons, and I can go into a little bit of this, being a veterinarian is a pretty tough job on top of being a business owner. And this year was the year she decided, you know, I probably still love being a vet and still doing the medicine part of the work, but I really want to drop doing the marketing and the HR and the legal side of things. And so we looked at a couple different buyers, and in January signed a contract to sell the practice, and really made almost three times as much as we paid for the practice back in 2011. So it was a great investment. I don’t know if we— I would love to tell you that we had all of this lined up, we knew exactly what we were doing back in 2011. That was not the case. A lot of this was trial by fire and trial by error, and we made a lot of mistakes along the way, but it did pay off in the end. And she has worked very hard for the payoff that she got, and I’m really proud of what she’s been able to accomplish and what she’s built.
Scott Trench: Awesome! So can you walk us through any other parts of the money story? How significant is this event relative to the combined rest of your story and financial position?
Chris: Yeah, that’s a great question, Scott. I think for us, we’ve always had goals, but to be quite honest with you, for the last 15 years or so, the goal has been pay off the veterinary school loans. And we have been really diligent about that. And then we had this moment, we had about three months’ notice where we said, oh, well, we’re going to be able to do it like that— in a heartbeat, we’re going to be able to pay off all the rest of her loans, any of the business debt that was with the business, and just kind of start fresh, decide where we want to go from here. We have a lot of good skills that have been built up over those years. But this was a significant payoff. So we purchased the clinic for about $430,000 in 2011. And with all of the payouts— and so the way the deal was structured is she would get a certain amount of money. It was about $1.2 million when the practice sale closed, and then an additional somewhere in the neighborhood of $400,000 to $500,000, each broken up over several years if the clinic continues to hit certain revenue targets. So that gives us a little bit of a break on the long-term capital gains, which is nice. But it also gives us some runway now to try to figure out what we want to do next with that capital and how we can invest it for our future and for our children. And we have two daughters. One is in the middle of high school. The other is about to finish elementary school. So we’ve got those major college expenses potentially and other expenses on the horizon. Maybe to go back a little bit further. So we kind of came from different money backgrounds. My parents were both professionals. My father worked for the Federal Reserve Bank. My mother was a professor. They sort of knew how to manage money, and that was a part of my upbringing. On Carrie’s side, her father was a general contractor, didn’t have the best skill set to manage money, and unfortunately during the ’80s, the family went bankrupt because of some spec homes that they had. And I think that influenced— certainly Carrie’s risk tolerance over the years, and just how I think it manifested itself in that we were not really willing to invest a whole lot while we were paying down that debt. We didn’t want to take on that risk at the time over the last 15 years. But fortunately, through a lot of hard work— it’s almost like winning the lottery, except there was a lot of hard work behind it. Fortunately, we’re in a position now where we can be a little bit more forward-leaning.
Scott Trench: Yeah, well, the practice is an overnight success in just 15 short years.
Chris: Right.
Scott Trench: Yeah, nice lottery win for you and Carrie.
Chris: I mean, you talk about this a lot on the program and I appreciate it, but her salaries through those years were less than $50,000 a year. My salary, thankfully, was able to carry a lot of our housing expenses and a lot of our other expenses. We were paying almost $30,000 a year just to pay off the debt, just to service the debt. I wouldn’t even say to pay it off, but just to service it.
Mindy Jensen: Was that in addition to her salary, or was that basically her entire salary was paying off her debt?
Chris: Basically her entire salary.
Mindy Jensen: Okay. If you’re listening and you want to be a veterinarian, listen to that, rewind it, and listen to it again. Her whole salary was paying off the $200,000 to $300,000. How much total debt did she have? What was the exact amount? Do you remember?
Chris: Well, the exact amount I don’t, but with interest and everything else, it was at least $300,000.
Mindy Jensen: $300,000, and her monthly salary essentially covered her debt payment to be a veterinarian. And she was able to, very fortunately in 2011, which was a downturn, did you get a deal on the veterinary practice? It sounds kind of like—
Chris: I don’t think we realized we did, but we did.
Mindy Jensen: So you were able to buy low and sell high, which is a very lucky series of events. That’s not something that you can study for and, you know, fortunately get into. You luck your way into that— I don’t want to say just like with the stock market, but yeah, just like with the stock market. You luck your way into it over time, and then you were able to sell it because we are in a really great position right now, again, the economy. So—
Scott Trench: How much did you sell the business for? How much cash did you receive? And what are the key terms for the earnouts on a go-forward basis? Because this play is not over yet, right?
Chris: It’s not, no. And there’s still hard work to be done. So the way it worked, her practice was grossing about $1.2 million when she sold it. So that’s a two-vet practice grossing $1.2 million. She was on track to add an additional veterinarian, wanted to do that, but it costs money to hire a veterinarian, and there wasn’t enough cash coming off with what we had to hire another full-time veterinarian at more like $80,000 or $90,000 a year. Still not a whole lot when you’re spending $300,000 on an education. If she hits that $1.2 million, there’s a payment of about $67,000 a year for the next three years that she could earn. Once she gets it to $1.5 million, there’s an additional $100,000 per year on top of that as well. It doesn’t have to be earned in the first year. It can be earned over the course of a few— by the end of that third year, and then she would be eligible for the entire payment.
Scott Trench: Are there any other guaranteed payments from the business?
Chris: No, there aren’t. She has the ability to earn production. In the veterinary world, your salary should cover about 20% of what your revenue is as a vet. If she earns— if she brings in more than that 20%, then she gets a cut of that above the 20%. She can earn— my guess is she’ll probably earn in the neighborhood of about $100,000 this year.
Scott Trench: Interesting. I have no idea at this point in time how to factor in the value of your continued interest in this business into your net worth statement. I was wondering if we’re missing a big asset. We have your net worth in front of us here. I don’t think you are. I don’t think you can reasonably put any part of that business interest into your net worth at this point in time.
Chris: No. I mean, it’s an important goal to hit, and I have full faith that she and her team will. But yeah, exactly. It’s not a given. And if the economy takes a downturn, that could certainly impact the revenue that’s coming into the practice.
Scott Trench: Fair enough. Well, let’s go through your financial statements and get a good picture of where you’re at and what your goals are.
Mindy Jensen: Okay. Here’s the part where we say, so what are you bringing and where does it go? Let’s look at your salary and expenses.
Chris: So, if you’re okay with this, Mindy and Scott, I’m going to go with after-tax income because I think that’s a little easier to narrow down. And this would be both after tax and after some of the other deductions. So my retirement account, life insurance, all the stuff that would come out of my check. So total per month is about $12,366.
Mindy Jensen: And that is just salary, or is that salary and additional income?
Chris: Yeah, so that’s salary for me and Carrie. And then we also sold, in a separate transaction, the building that the clinic was housed in, and we sold it into a real estate partnership that we earn a monthly dividend off of. And then ultimately, we’ll have a payout in five years, should everything go successfully with that. But it gets us out of the landlord business, which, as you might imagine, being a busy vet and another busy professional, we are short on time in our lives. So that’s about $1,000 a month at this point.
Scott Trench: Awesome. And where does that go?
Chris: So mortgage is a little over $1,800 a month. Utilities are around $400. Charitable giving is at $2,000 or so a month right now. No car payments, but gas is about $300 a month. Food, which is inclusive of groceries and our restaurant budget, is about $1,900. We save out of— so we have some savings that go from my paycheck, but savings is about $3,167 a month. And then subscriptions, Netflix, you name it, $318 a month. I have a category I call miscellaneous, and that is $2,000 a month, and I can go into a little bit more depth on that. Then medical is $100 a month. I wish I had a—
Scott Trench: Okay, we’ve got about $6,700 to $7,000 in what I’ll call household spending, which includes charitable giving, mortgage, utilities. Then we’ve got about $3,000 going into cash that you’re accumulating each month after tax.
Chris: Yes.
Mindy Jensen: I want to jump in because this doesn’t affect you, but we are going to publish this and people are going to listen. If your expenses are something that you are interested in reducing, then I would suggest going a little bit more granular. You have restaurant and food combined. So I would break those out if you wanted to track your expenses to see how much is going to restaurants versus how much is going to food, because restaurant expenses are going to be more expensive than grocery shopping expenses. You have subscriptions as an all-encompassing category. How many subscriptions do you have? Is that truly all the subscriptions? Do you need Netflix and Hulu and, and, and, and, you know— I’m not saying, Chris, you need to look at this, although you could if you wanted to, because I truly believe almost everybody has room to cut. And I’m doing that spending tracker this whole year, so I’m just going to plug that again. You can see me and my expenses and how granular I get, because I truly do want to cut my expenses, at biggerpockets.com/mindysbudget. But you have a miscellaneous of $2,000. I bet you could really cut that if you wanted to. You also have savings of $3,167 right here. So I’m not here to say, oh, you need to cut. Your salary is $12,000 after retirement accounts and insurance and lots of other things. So you’re already saving half of your income, including $3,000. You’re doing okay, Chris. You get the stamp of approval from me.
Chris: You know, we were talking before the show recording started, Mindy, but it hasn’t always been this way. And that’s, I think, a valuable lesson. We really have tightened. We’ve followed our budget from the first day we were married, which has helped us significantly, particularly when we weren’t earning anything when she was in veterinary school. And so we’ve slowly grown it, but it’s never really gone off the charts for us, which has been really helpful, particularly when this windfall sort of hit our accounts this year and when we’re saying, well, I don’t even know how to spend money. That’s part of our challenge, was trying to figure out how to appropriately spend. And luckily, a lot of this is automated, so we don’t think about it too much. It just goes where it needs to go and does its job.
Mindy Jensen: I love that.
Scott Trench: How much do you have going to pre-tax, if any, as part of this?
Chris: So pre-tax— so health insurance is pretty expensive, but I would say, let’s look here. So my retirement right now gets $1,700 a month. Carrie’s retirement, because we’re trying to catch that up, because she has literally nothing except for the last few months, is almost $3,000 a month we’re putting in to try to max her retirement funds out this year. Then we have another $365 that goes to her HSA that she can invest.
Scott Trench: Once you’ve maxed out the retirement account for Carrie and you go into a more normalized situation, you have another $1,000 probably that you can add to your after-tax bucket on a monthly basis.
Chris: Yeah, that’s right. Yep.
Scott Trench: That’s exactly right. I might be off a little bit on the math there, but hopefully that’s in the ballpark.
Chris: Yep.
Scott Trench: Okay, so we have $3,000 to $4,000 a month in cash accumulation, plus really healthy allocations filling up your HSA and your retirement accounts, pre-tax.
Chris: All right.
Scott Trench: Love it. Let’s go through assets and liabilities.
Chris: Yeah, so assets, we have quite a bit of cash on hand right now, and I’ll explain that. We have about $400,000 in cash. We have my 403(b) — I work for a nonprofit, it’s our version of the 401(k) — and $133,000 in that. Carrie’s HSA— I have these backwards on our form, but her HSA has about $1,500 in it, and her retirement account has about $4,500 in it. Then we have our home, which is valued around $320,000.
Mindy Jensen: It’s probably a little bit more than that, but that’s a safe bet for now.
Chris: We have our after-tax brokerage account invested in VTSAX at about $373,000. We have a— this is the real estate partnership that we’re in. That is $153,000. And then our personal vehicles, which I put on here, but I don’t really count them as assets because they continue to— well, at least recently they’ve been going up in value, but that’ll eventually wane. Liabilities is a pretty short list. We have $190,000 or so left on our mortgage in our primary residence. So that’s our liability right now. We don’t really have any beyond that. We don’t have any other debt. We paid the education loans off. We paid the cars off. All that stuff has been done.
Scott Trench: Awesome. And your mortgage is on a 15-year note, I believe.
Chris: It is.
Scott Trench: And you’re paying that off early, right?
Chris: Yeah, I think the intent is we’d rather not, you know, if we can pay that off early. It’s not a huge amount, and it’s not a huge amount for us per month.
Scott Trench: Alright, now the most important question: goals. How can we help you? What’s the best thing? What are you trying to get to?
Chris: Yeah, so we want to have a good cash cushion, an emergency fund, so we’re going to kind of keep $50,000 aside for that. I think both of our daughters are likely college material, not that we’re pushing them in that direction, but they’ve both kind of separately expressed interest in that path. That’s expensive, as we all have known, and I’ve been listening to the podcast for a while and I know others see that expense as well. So I’d love to figure out a way to build some assets into our portfolio that would throw off enough cash to pay for college education. So the benefit that we have is that our older daughter and our younger daughter are separated by about 6 years, so we don’t have to pay for college for both of them at the same time. Now, again, that wasn’t planned, and I don’t think, you know, if you talk to Carrie, she’d say, yeah, it just, you know, it happened when it happened and that’s how it worked. But, you know, now 15 years on, I’m going, oh yeah, that was, that was probably a good idea. So that’s one thing. We love our house. We had a house fire about 5 years ago, and thankfully everybody was okay, but we rebuilt. And so we have really what we want, aside from one thing. We took our 4th bedroom and made it part of our master suite, which means we don’t have a really comfortable room for guests. So we have a garage, it’s kind of a mess. We’d like to build a housing unit there that we could potentially use for like an Airbnb-type rental, but really for our guests, our parents, those who might come visit us. So that’s on our plan as well, and that’s probably in the neighborhood of $100,000. We’d love to have a place to go. Both of our jobs are pretty stressful. I refer to it as being out of the zone. If I am in the community here, I am always on and always on call to a degree. So trying to find a place where we can escape to when we have time, but also to use as a short-term rental, would be ideal for us. We love traveling. I think Carrie is more interested in retiring early than I am, but the idea is not a terrible one in my mind either. It’s a short list. It’s not too aggressive.
Scott Trench: Awesome. I think a lot of those goals are going to be super achievable with the situation you’ve built here. Let me ask you another question. Your only debt is your mortgage, and it’s on a 15-year note. What does that speak to about your overall tolerance for debt and investing in something like real estate, for example, with leverage?
Chris: I think it would be best to describe my mindset as shifting on that. I think for so many years we’ve been grinding to pay off the $300,000 worth of veterinary school loans that we’ve sort of had a tendency to avoid debt if at all possible. We have credit cards, but we pay them off each month. We don’t overspend on that. And I think we logically understand the value of leverage and what that can do. And certainly in the recent housing boom, it really has paid off for a lot of folks who were in that. I think for me, though, it’s still a mindset shift. And over the past 6 or 8 months, I’ve really tried to get more comfortable with the concept of adding a debt burden, ultimately to achieve, you know, greater wealth in the end.
Scott Trench: Now, when does your oldest potentially go to college?
Chris: I have a sophomore, so that’s 3 years. So what’s that, 2025?
Scott Trench: Let’s start there. What does an ideal portfolio look like? You’ve got $1.4 million in cash— your whole situation converted to cash. What does an ideal portfolio look like in 2025? Let’s assume you stockpile another $200,000— well, actually, I’m going to take a step back here because I have cheating information. There’s another piece of information we need before we get into this, which is: you are projected in future years to earn way more than what you’re currently earning this year. The $3,000, $4,000 per month that you’re saving will increase substantially in the next 3 to 5 years. Can you walk us through a couple of those key projections?
Chris: Yeah, that’s a great point, and that’s kind of where my brain has been spinning over the last few months. So with Carrie’s hard work and efforts with the veterinary practice, she has the potential to earn maybe basically $167,000 a year for each of the next 3 years. Whether she earns that all at once at the end of the 3 years or builds up, that’s how it should work for her. She also has the ability to earn production bonuses if she’s producing more in the practice. That could be a total of, I’d say, $20,000 to $25,000 a year. If she’s able to keep a vet on board, she has the ability to earn a bonus from that. And I have a side hustle which I’ve had for probably 10 years now, where I consult with some large international organizations on crisis management, and that can earn up to $40,000 to $45,000 a year for a couple weeks of work. So I’ve got some different levers to pull to bring, you know, more cash into play.
Scott Trench: How much— you know, if right now your run rate is, let’s call it $40,000 to $50,000 per year in after-tax cash accumulation, what does it actually look like for 2023, 2024 in terms of how much cash you can accumulate?
Chris: Yeah, I mean, we’re probably talking between $200,000 and $250,000 additional dollars per year.
Scott Trench: After tax? Before tax?
Chris: Before tax. Before tax.
Scott Trench: Great. So let’s call it $150,000 after—
Chris: Yep.
Scott Trench: So that’s $200,000 in cash accumulation per year for the next 3, 4 years. That is a realistic possibility for you.
Mindy Jensen: Yep.
Scott Trench: Okay, great. So the point I want to ask is, you have $1.4 million in assets. You’re going to accumulate $200,000 in cash per year over the next 3 years. That puts you at $2 million, not counting any appreciation of your existing assets, any loan amortization, any of the 401(k) balances, that kind of stuff. Let’s call it $2.1 million in 3 years. Now imagine you have a pile of $2.1 million in cash. What does the perfect portfolio that gets you those options that we just discussed, what does that look like to you?
Chris: Well, that’s really why I’m here. I don’t have a huge sense for that yet. I think Carrie and I have talked about our FI number at probably between $2.1 and $2.5 million. So based on what you just said, it looks like in 3 years she can call it quits and get out of here. So she’ll be happy to hear that. I’m only joking a little bit there.
Scott Trench: Portfolio could go down.
Chris: It could go down, that’s right.
Scott Trench: A year in your case.
Chris: Yeah, but for me, I think we would both benefit from having more freedom to travel, more freedom to do certain things with our family and do things that we love with them. I think that the mix for our— I mean, I was sort of doing the math before I got on. Right now we’re about 34% cash, 43% equity in the stock market, and about 24% real estate, including the equity we have in our home and the partnership that we’re a part of. I would probably like to see the real estate be closer to 30% to 40%, and probably earning us some regular monthly cash flow on that, so that we can sort of transition from maybe what we do on a daily basis and our W-2s to more of a part-time. I don’t think either of us envision ourselves completely getting out of the work that we’re in. We both love what we do, but I think we would benefit from not doing quite as much of it. That’s a common theme that I hear on this podcast and others, but certainly with your guests over the time that I’ve been listening.
Scott Trench: So let me try a portfolio and see how you react to it. Suppose your portfolio— you have $2.1 million. $100,000 is in cash. $1 million is in rental property real estate, generating a 5% cash flow on that, so it’s $50,000 per year. $600,000 is in stocks, and the balance is in your paid-off— your primary residence, which may or may not be paid off or on the track to get paid off. How does that portfolio feel?
Chris: Yeah, I mean, on face value, it sounds pretty good. I mean, I would have to digest it a little bit more, but that is likely what we’re aiming for there. It probably goes without saying, but I’ll say it anyway: a lot of this thinking is new thinking for us. This has been a mindset shift in general that we’re still sort of getting used to. I think we believed for a very long period of time that— Carrie was hoping she might be able to retire one day, given the debt that she had and the salaries that she was earning. I don’t think that’s a question anymore. It’s just a matter of when now. I think she’s got a shorter horizon on that. And I’ll say this one thing, Mindy: you were talking about becoming a veterinarian. The one bit of advice that Carrie gives to people who are interested in it is this is the type of career that you have to need to do. It can’t just be a want. If this is what will fulfill you in your life, then you’re probably cut out for being a veterinarian. But if it’s something you’re like, oh, that’d be fun to play with dogs and cats, it’s probably not quite to the level it needs to be in your desires to do it. Because you’re going to— there’s a payment for it. She loves what she does, but it is not easy work.
Mindy Jensen: Be a vet tech if you just want to play with dogs and cats. But if you can’t imagine your life without taking care of animals and saving any, then maybe talk to vets. I mean, I think there’s a lot of veterinarians out there who will talk to you and give you the real scoop about it. Yes, there’s the amazing “I saved this dog and it was this family’s whole life” and, you know, yay, but there’s also a lot of $300,000 loan payments that you’re making that don’t go away, and those aren’t eligible for public service loan forgiveness, are they?
Chris: In some instances they are, for a career in law.
Mindy Jensen: Oh, they are, okay.
Chris: So at the time they were not, right, exactly.
Mindy Jensen: Yay.
Scott Trench: But I think it’s a great point. We don’t think about these things, right? There’s a grind that’s been going on for 15, 20 years in your household to accumulate and get by and figure those things out and be smart with money. And all of a sudden, as a result of that cumulative 2 decades of work, you now have options and can pop up and think, okay, what happens next? And how do I think about that on a go-forward basis? And that’s, I think, our job today, is to help kind of discuss that. And hopefully it’s fun and exciting, right? It’s also terrifying. There could certainly be decisions you make that could put you at risk for certain things if you decide, for example, to take a lot of leverage on something and it doesn’t work out, or you’re all in stocks and the stock market will have volatility. And that could be— who knows what that volatility leads to in 3 years from now? But this is where we have to make essentially a gigantic bet with your entire net worth. And the thing is, you’re doing that regardless of whether you do the exercise or not, right?
Mindy Jensen: Yeah.
Scott Trench: Right now your bet is saying, I want to be 35% in cash, I want to be this much in real estate, my primary residence, this much in stocks, so on and so forth. But either way, it’s a bet. It’s just, if you have complete control of that and you can live with the decision— and there’s no right answer to any of this. It’s an art.
Chris: It is. And even though the— working at the clinic was really hard work for Carrie, and again, she’s the one really driving that— I wish she were here to give you the insight that she has. But, you know, she guarded that asset, she controlled the asset. She was able to increase, and, you know, pull the lever here and push the button there, and build it. This is scarier for us because there is limited control if we go into something that’s more passive. And so I think both of us are sitting here going, how do we properly hedge against the risks that we’re likely facing? We’re in a great position, Mindy. You said it. I have a secure job, Carrie has a secure job, there’s always going to be a need for vets. You know, if the worst-case scenario is we continue working like we are, but I think we both feel a responsibility to do right by this hard work that she’s put in for the last 15 years.
Mindy Jensen: I have a few things that I want to talk about. You said that you have this ability to consult at what seems like a fairly lucrative amount. A couple— you, I’m using your words, you said it’s a couple of weeks a year for up to $40,000. Is there any way to grow that? Is that a guaranteed amount of work? Is there any sort of way to— ’cause that’s the kind of thing that I would suggest you just work for a couple of weeks a year, even after you quit your job, because that— you’ve said that your goal is about $100,000 a year, maybe $80,000 a year. That’s half of your spend right there. So instead of needing $2.5 million, or $2 million, you need $1 million, because you’re already generating the other right there— or maybe a little bit more, because taxes and all of that. But I mean, that seems really lucrative.
Chris: So I would love your input on this. So I’ve been doing this for about 10 years. I only consult with former colleagues and people that I know personally. So these are people that— I do have a website out there, but it’s not searchable in Google. I have to give you the exact website. It’s really for those folks to help them sell it to their purchasing department. Here’s the challenge though: I can’t figure out how to scale it. What people are buying is my personal expertise, my abilities in a room facilitating a group exercise. When they’re buying that service, they want me doing that service. And there’s a certain— yeah, it’s a couple weeks a year. It’s a couple weeks that I take away from my family, though. And that will maybe, in 5 or 6 years, that will be okay, because the kids will be off in school, etc. But for now, it’s a real struggle for me to go, do I really want to— I mean, is it worth the time and effort to do that? So I think the challenge for me is a scalability one. The more I do, I could burn myself out on that pretty easily. It’s in high demand.
Mindy Jensen: Oh, sure.
Chris: But yeah, long-term, absolutely.
Mindy Jensen: If you’re looking to generate $80,000 a year, and these— let’s call it 2 weeks— make $40,000 a year, then you could do another 2 weeks and now you’re working a whopping 4 weeks a year. Tim Ferriss got nothing on you: 4-hour workweek, 4-week work year.
Chris: Right.
Mindy Jensen: Then you’ve got your $80,000. Then— I don’t want to say it doesn’t matter what your investments are, because I still want to see a cushion, but then it kind of doesn’t matter, because you are generating the money that you need to live off of comfortably. I mean, $80,000 is a pretty comfortable living. And then if you don’t want to work 4 weeks a year, maybe you want to work 5 weeks a year.
Chris: Yep.
Mindy Jensen: Then you’ve got your $100,000, you know. So that’s something that I would definitely not give up, even plan on continuing that into retirement, because it’s so lucrative. But it sounds like you both enjoy your jobs.
Chris: We do. I mean, I—
Mindy Jensen: Carrie has a 3-year plan to generate more income at the business and then step away completely?
Chris: So I doubt that will happen. My guess is she’ll step back to maybe— she’s working 4 days a week now, she’ll probably step back to 3 days a week, and then a year later maybe to 2 days a week. She has an interest in doing some international work and some volunteer work in the veterinary field, and I think this would give her some opportunity to do that. You know, luckily, she would have to get her license in different states, which is not impossible, but it does take some work and some financing. But she would have a broader capability of using those skills, if not volunteer, for minimal resources coming in.
Scott Trench: Let’s jump back to the big picture here, because I think that’s the major piece that you guys need to decide.
Chris: Yes.
Scott Trench: Coming out of this is: what does my portfolio look like, in an about-right sense, plus or minus 10% in terms of total volume, in 3 years? And what are my outcomes from that? And I think you have a variety of choices, and this all jives with all the goals you have here, right? So, but if you went in and said, you know, I think it sounds like real estate’s going to be a part of that.
Chris: Mm-hmm.
Scott Trench: But I, for example, could see a portfolio that is $1 million in paid-off real estate producing 5% to 7% annual cash yield on that at that point in time. I could see you having a paid-off primary residence at that point in time if you chose to do that over the next 3 years. I could see you having $600,000 or $700,000 in stock assets with that. And I could see that real estate being in both short-term and long-term rentals per your desire to have a vacation property with that. So all that’s possible. Do you think that you want to have— but you have to make a fundamental choice. Do you want to have leverage and go with that, or do you want to not do that? Because I think that has a major impact on how you go about this, whether you finance your house, which is going to get you the best rates and the best terms, and use that to buy the investment real estate, or whether you go out and just get everything paid off in cash. And I think that’s going to be a hard decision for you based on what we see about your position right now.
Chris: Yeah, I mean, I’ll tell you what I’m more challenged with than the leverage is the time commitment needed to do it properly and do it effectively. We listen to the BiggerPockets Real Estate Podcast, we listen to the Rookie Podcast. I have struggled with time management with all the different balls we have in the air right now. I’ll tell you a quick story. Earlier this year we were looking at a short-term rental property, a potential property outside of Western North Carolina, a community we’re familiar with. We found a great real estate agent who knows investors, went down the path, put a bid in on a house. In North Carolina, they have a due diligence period. So with a little bit of investment, we could get a little bit more information, but we could for any reason say, no, not us, not now. We went through the process. We were in the due diligence period for maybe 60 days almost. Had a contractor come in. The house needed quite a bit of work. Ultimately, we couldn’t figure out how to do the work ourselves. It would have meant more weekend trips there. We just don’t have the weekends — busy schedules. My work is not a 9-to-5, 5-day-a-week job, nor is Carrie’s. And we ultimately paid a little bit of money and got out of it. It would have made a great deal. I mean, it was a good deal, and I think it still would have been. We couldn’t figure out from the time perspective how to commit those resources there. So I don’t know if you have any feedback on that angle. Leverage, I don’t think bothers us as much.
Scott Trench: I think we’ve kind of gotten over that. Well, you have to think about your time management at this point, right? So right now your portfolio is not, it’s a large portfolio, but it’s not huge relative to your combined income, right? Which is probably in the ballpark of $300,000-plus pre-tax. So the value of your time, let’s say, is probably north of $100 an hour, right? And managing a property of that size is probably not that valuable from a use-case standpoint. But when we think about backing into your $2.1 million portfolio you’re going to have in 3 years, if we’re still aligned on that thinking, okay, that portfolio should generate 8% to 10% per year, most likely, or 5% to 10% per year, depending on what your projections are. That’s $100,000 on the low end and $200,000 on the high end, right? So dedicating the time to getting that portfolio right is another full-time salary on top of that. And I think you need to factor the time value of that activity into the way you’re thinking about it, because it may not be worth that right now, but it will be worth that in 3 years. And that will eclipse any one source of income that your family currently has soon. Maybe not exactly by that point in time, but that’s the framework I would give to you. And if you want to get exactly what you want out of that portfolio, time needs to be invested in it, and you’ve got to treat it like the asset that I think it is.
Mindy Jensen: What other index funds would you be interested in? Or are you just interested in VTSAX? Jim Collins says VTSAX is the way to go. He’s got a lot of money in there and he’s doing real well. So, you know, that’s a great place to put your money, but VTSAX goes up and down as well. So if you’re comfortable with it going up and down, that’s a great place to continue to put after-tax dollars. And if you’re not, that is something you need to take into consideration when you’re looking at where your money should go.
Chris: Right.
Mindy Jensen: I know where you live because we had this conversation before we got on the phone or before we started recording. And you live near the coast. There’s a lot of vacation opportunity spots where you are at. I think that your desire to have a cash-flowing asset or assets that generate $50,000 a year by 2025 is viable with your income, with your debt situation, which is practically nothing, with your mountain of cash that you’re sitting on, and with your future income that’s available. I think you have a lot of opportunities to get several short-term rentals. What do you think about renting out your auxiliary dwelling unit when your folks aren’t in town?
Chris: Yeah, so it’s up for discussion with Carrie. She’s not thrilled about that idea, but honestly, I probably would leverage that build. We’re right in the process of getting the designs completed on it, and if I could just convince her that a couple weeks a month we rent it out and cover the mortgage on it, then that’s sort of where I think we could be right now — at least covering our costs on it. But yeah, I’m a little bit more interested in that than I think Carrie is. Still up for discussion. Maybe she’ll listen to the podcast and tell me one way or the other.
Mindy Jensen: Okay, Carrie, this is for you. What is it about renting out the ADU that gives you the heebie-jeebies? Is it just that you don’t want to do the cleaning? You don’t want to have people there? I mean, I’m assuming it’s going to be a rather small unit, a one-bedroom or maybe even a studio unit. So there’s not going to be the opportunities for a lot of parties because there’s just not a big space for it. You don’t have to have people in your space all the time. You could have somebody there just one weekend a month, or maybe there’s a big festival in town — apple picking or whatever. There’s a lot of opportunities to do short-term, just do it on the high-dollar days, like 4th of July and Christmas and Thanksgiving, and you don’t have to have them the rest of the time.
Scott Trench: With the short-term rental for your primary residence, at this point you’re going to generate $330,000 in household income this year. And you’re going to be generating $500,000 in household income within 2 or 3 years. And so that income is irrelevant to your financial position. It’s nice, it’s a nice bonus, but it’s irrelevant to your financial position. And so you have this incredible luxury that I think is what you’re grappling with as a family right now — this immense amount of income generation and optionality that comes with that. And it all comes back to backing into 3, 5, 7 years from now and saying, what does my ideal portfolio look like? And you have the option to, for example, have that paid-off portfolio that produces $50,000, $60,000, $70,000, $80,000 a year, work a little bit part-time, and live your life the rest of your life. You’re going to give up $400,000 in income in order to have that. And at that point, renting out your auxiliary dwelling unit makes a big difference. And that may enable that freedom. But that’s kind of the luxury choice that you guys have right now. And that’s why I think you’re struggling with a real estate investment, right? Because you’re like, good God, I’m going to earn $350,000, $500,000 over the next 5 years. What am I doing dealing with this rehab around the corner here?
Mindy Jensen: Right.
Scott Trench: Well, that’s highly relevant to your future-state portfolio and that option you want. You just kind of have to figure out, okay, the life I want in 3 years is this one. And if that life says I’m working my full-time job and Carrie is not working anymore and we have some passive income and we’re able to comfortably save and I can begin the transition of leaving that, maybe you go with a more passive option that has less stuff there. If it’s we’re both done and we’re just going to chill, you can do that because you’re going to have a paid-off mortgage. Most of your spending is flexible, right? With charitable giving being like a quarter of your spending right now, which I imagine you would decrease with lower income to a certain extent. So that’s the crux of your issue, right?
Mindy Jensen: Right.
Scott Trench: I don’t have the answer for you. Do you want $500 grand a year, or do you want a lot of free time? That’s — congratulations, I think a lot of people are happy to have that problem. But that’s, I think, the crux, if I can get to it, of the issue that you have or that we’re discussing today. Do you think I’m right?
Chris: I think you are. I mean, again, it’s getting used to seeing numbers like that on a regular basis and just trying to put it in the right context, because it hasn’t been like that. Maybe for the last 2 years, maybe, but it hasn’t been like that for a while. So I think you’ve hit the nail on the head, Scott.
Scott Trench: I think not a lot of people, but many people will come into a situation like this at some point in their lives, especially if they have a variety of interests in investing, entrepreneurship, side hustles, those types of things. And the value of your time begins to compound and overwhelm you to a certain degree. I’ve had an issue like this to a certain extent, and it’s something to just consider. So I think it’s a great issue to bring up.
Mindy Jensen: Yeah.
Scott Trench: All I can give you from the advice standpoint at that point is: determine what you want in 3, 5, 7, 10 years and say, here’s what it is. I’m writing it down. I’ve got a draft outcome of what that looks like, and begin making those moves. And if you decide you want the portfolio and the passivity, then invest the time at the expense of other income opportunities to set that portfolio up.
Chris: Wow.
Scott Trench: If you decide I want to keep working, then you’re right to be more passive and forego opportunities like that real estate deal you walked away from. But I think that will put it in context and help you appropriately prioritize the way you invest your time, and then obviously the big portfolio you’re going to have.
Chris: Yeah, a lot of what we’ve been doing is continuing to educate ourselves, and it seems like the more passive syndications are on our — we’re thinking through syndications now, these other partnerships. We have a couple of opportunities. Through my work, I do have the opportunity to see entrepreneurs, successful entrepreneurs building their own companies, and there’s maybe a possibility of doing some angel investing locally where I have a deeper knowledge of the widget or the process that they’re engineering or building. Those are other options that we have in our toolkit right now. But it’s a lot of education. I’m not going to lie.
Scott Trench: If you like those investments and want to keep working, I would do that instead of real estate, frankly. Real estate — there’s a learning curve associated with this business. It’s 300, 500 hours. And that includes both time invested in podcasts, in books, and looking at properties and all that kind of stuff. And your value of time is pretty high, so paying that price is really expensive for you.
Mindy Jensen: True.
Scott Trench: It’s really cheap for $50,000-a-year earner Scott Trench. When I started my journey, I was making $25 an hour. That’s a cheap education to invest that time. It’s expensive for you. And so the passive option may be much better if you decide to work for 10 years. If you don’t, then the value of your time — you can kind of put, oh, I’m going to pull that down because the value of my time is actually going to be $40 an hour on my $80,000 a year in passive income that I’m going to have in 3 to 5 years. And that’s how I’m going to rationalize the way I commit that. Hopefully that’s a helpful framework, at least.
Chris: It is. That was what I was hoping to get out of this call today — context, thinking about things in a slightly different way than I have been.
Scott Trench: We have no specific advice, then, it sounds like.
Chris: Maybe a couple of pointers here and there.
Scott Trench: Just some really good questions, and hopefully reframing it.
Chris: Well, maybe one area that you can give me some advice specifically on — we haven’t had the opportunity to really save a whole lot for Carrie’s retirement in pre-tax retirement accounts. Is it worth us doing that? We have the opportunity to do it. We probably could use the tax help in the near term, but is it better just to put it in more flexible investments after tax, given where we are on the retirement side of things?
Scott Trench: I like moving into the after-tax investments when you’re starting out and earning $50,000 a year and trying to get your first house hack or your first entrepreneurial pursuit. When you earn $300,000, $500,000 a year and have this flood of excess cash flow coming in over the next couple of years, I think you’re wise to shield it, to play the tax-advantage game and do that personally. That’s my thought on that. So I like exactly what you’re doing. I wouldn’t change a thing.
Mindy Jensen: Well, I’m looking at this 2022 salary of $325,000 and thinking, what is $20,000 of tax savings going to get him?
Chris: Yeah.
Mindy Jensen: Or $40,000?
Chris: Yeah.
Mindy Jensen: I mean, it’s—
Scott Trench: I love not paying taxes. It’s going to get you $40,000 in tax savings.
Mindy Jensen: It’s — yes, I love not paying taxes, but it’s not hugely moving the needle. Deferred tax savings — it’s not like—
Chris: It’s deferred.
Mindy Jensen: Yeah, well, and yeah, it’s deferred. But I mean, they’re already paying boatloads of taxes.
Chris: Yeah, and so that’s the lure of real estate, right? If you do real estate correctly, then you can limit your tax liability, but per our earlier part of this conversation, it does take effort, work, time, commitment — all those other things that at this point we have limited.
Scott Trench: Real estate will not help your tax situation because you’re high-income earners. So if you earn less than — I think it’s like $150,000 a year, I’ve got to double-check that — but I think if you earn less than a certain amount, then you can use the passive losses from real estate to offset your income. But with your income, I don’t believe you will see those tax benefits from real estate. The passive income from your real estate will be lightly taxed most likely, depending on how much income the business produces. But I think this goes back to the Roth versus 401(k) debate. And I will say that even though I like what you’re doing, I actually contribute to the Roth in spite of also having a fairly high income.
Chris: Okay.
Scott Trench: Because with a Roth 401(k)… you can’t contribute to a Roth IRA directly — you’ll have to do a backdoor Roth or something like that in your circumstance. But I contribute to the post-tax retirement accounts because I like to think that I’ll have a high income when I hit retirement age.
Chris: Right.
Scott Trench: And perhaps tax rates and inflation will be very high at that point, making an impact. But that’s a major bet. I like the tax-advantaged play in your case, because you have way more cash than you know what to do with in terms of income right now.
Chris: Right.
Scott Trench: That might change next year when you figure out your portfolio.
Chris: True.
Scott Trench: Yeah, so that’s my high-level take on that.
Mindy Jensen: Frankly, Chris, this has been a lot of fun. I think there’s a lot of things that you and Carrie need to sit down and talk about. And just like the document that you sent us with your salary and projections and investments and all of that is very well laid out — I think that you didn’t do that in one day. I don’t think you can just sit down in one day and say, ooh, we’re going to have this big old plan. But it gives you an idea of what to think about. I love Scott’s idea: what do we want our portfolio to look like in 3 years when your daughter starts college? What do you want your portfolio to look like in 5 years, in 20 years?
Chris: Yeah.
Mindy Jensen: And, you know, back into it that way. But I do really want to caution you that the stock market is unpredictable. So what would you do if your portfolio lost 50% of its value? And then, you know, start to hedge your bets. Maybe you have bonds because you are getting into the age of bonds. I don’t think—
Scott Trench: Well, here’s what I think on the bonds thing. Here’s what I think you should do on that. You want to save up for your daughter’s education, and that’s in 2 years, right? We just had a conversation about I bonds the other day. Why don’t you put that money into a 529 plan, since you know you’re going to use it for college education?
Chris: Right.
Scott Trench: And then earn the interest on the I bonds, which is going to be ordinary income. And now you can shield that income from taxes. You’ve got a fairly safe, perhaps, overall investment with that, that’s going to likely meet inflation. And that might be a really good tip for your daughter’s education — to contribute to… and you’ll have a business, you potentially have a side business, you potentially have a real estate business — the two of you might be able to put a good chunk into the 529 plan or into very — I’ll have to think about that. There may be an opportunity to put money into a 529 plan, at least $10,000, maybe more. I’ve got to noodle on whether you can actually do what I just suggested and use multiple businesses to contribute to the 529 plan and get the I bonds that way. But either way, even if you just do that with one bucket, that’s a few thousand bucks that you’re saving in taxes for an expense you believe is highly likely to occur in 2 or 3 years.
Chris: Right. Yeah, I listened to the I bond episode a couple of days ago and I didn’t realize that the business could also contribute. So we’ve got, between the two of us, 3 or 4 businesses. Each of them could contribute. And a trust. And then each of us. Do you know if our children— can we put I bonds in our children’s name?
Scott Trench: This is a good question for our Facebook group. I don’t think we know the answer on this show. Let’s put that in the Facebook group and see what our listeners have there, because we don’t have the research at the top of our fingers. But I wonder if that would be a really good way to think about it. Is there a way to put the money into the 529 plan? If so, how much? And how much can we— is it just— can I, inside the 529 plan, just use one I bond to save up for college, or can I put multiple in there? And if not, should we use additional I bonds to be a savings vehicle for an expense we know is coming, even if it’s outside of the 529 plan?
Chris: Helpful. Thank you.
Scott Trench: So that would be where I’d use bonds.
Chris: Yeah, yeah, yeah. Well, we were always planning on using a 529 to sort of legally launder that plan. We don’t need to put it in there for the long term, but certainly to help us pay for college, we can do that a year in advance because we know we’re going to use it versus hoping that we—
Scott Trench: Legally launder.
Chris: I love that. Yeah, you like that?
Scott Trench: We need to use that phrase more frequently. We’re stealing that one.
Chris: I’m glad I could contribute to your lexicon.
Mindy Jensen: Thank you.
Chris: No, I really appreciate the time. This is always useful to talk about, and I will— I know, Mindy, you talk about the money dates quite a bit. We do those pretty regularly, have for a long time. They’re super helpful, keeps us on the same page, and we throw in a little parenting date there too where we say, okay, how are we going to manage this with the kids? So we try to mix it up a little bit.
Mindy Jensen: Okay. Well, Chris, I’m sorry Carrie couldn’t join us, but it was lovely discussing this with you today. Thank you so much for sharing your financial situation with us, and I think there’s a lot of things for you to think about. I would love to hear what options you guys have chosen.
Chris: Sure thing. We’ll keep in touch.
Mindy Jensen: Okay, fantastic. I’ll check back in with you in a few months.
Chris: Sounds good. Thank you both.
Mindy Jensen: Okay, we’ll talk to you soon. Bye, Chris.
Chris: Bye-bye.
Mindy Jensen: All right, that was Chris. That was a really fortunate series of events that he has found himself in. And now he and his wife have a lot of decisions to make. And Scott, I think you gave them a really great framework to look at. Look, you are making a lot of money and you are looking at investments that aren’t going to be generating so much cash. And that’s, you know, I’m in the same position they are with this whole, ooh, how should I invest to generate this amount of money? No, keep working at your job and generating this big, big, big amount of money that you’re generating, because that’s where your true value is right now.
Scott Trench: Yeah. Well, I think that’s just a shift that everyone has to deal with. If you save 50% of your income or more, then mathematically, after a period of about 10 to 15 years, your portfolio is going to be a bigger source of wealth accumulation than your job. I think this is the math behind early retirement in general. It may be a bigger portion of your wealth accumulation than your income at that point.
Mindy Jensen: Right.
Scott Trench: A part of the journey that you should just be aware of. That’ll be really hard for folks to deal with. If you’re following the basic rules here and saving a big chunk of your income, investing for the long run, have a couple of lucky breaks or windfalls down that stream, you may face that problem earlier than you thought and have to make some trade-offs about whether you want to earn money or invest and manage your assets.
Mindy Jensen: Yep. And that’s an interesting conversation to have. And I don’t think that’s a 5-minute conversation that you can just— nope.
Scott Trench: Only on this show.
Mindy Jensen: OK, you should just totally flip that switch.
Scott Trench: Blam!
Mindy Jensen: Next problem.
Scott Trench: I have one challenge, or one question I’d like to ask the community for our Facebook group at facebook.com/groups/bpmoney. And that’s the question I was asking earlier about the 529 plans. How much money can you put into a 529 plan and use that to invest in high-yield bonds like the I bonds that we talked about last week? I’d be really curious to know that, and any other strategies for shielding short-term income or gains like that when you know you have an expense like college or a health expense or those types of things. What can you do? What are applications of that? I’d love to get a discussion going and get some ideas churning.
Mindy Jensen: OK, Scott, should we get outta here?
Scott Trench: Let’s do it.
Mindy Jensen: From episode 320 of the BiggerPockets Money Podcast, he is Scott Trench and I am Mindy Jensen saying, be sweet, parakeet.
