Mindy: Hello, hello, hello. My name is Mindy Denson and with me as always is my sports enthusiast co-host, Scott Trench.
Scott: And with me as always is my uh spike the football, slam dunk, home run podcast host, Mindy Jensen.
Mindy: Thank you, Scott.
Mindy: Scott and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting.
Scott: That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, create a flexible financial position, or have one one spouse stay at home and raise the kids, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams.
Mindy: Scott, today we have a new segment on the show. It’s called the Money Moment, where we share a money hack, tip, or trick to help you on your financial journey. Today’s money moment is, if you have trouble allocating your funds correctly, try the 50-30-20 rule. 50% goes to your essential needs like transportation and housing, 30% goes to your wants, like new clothes, eating out, or a gym membership, and 20% goes to savings.
Mindy: If you have a money hack, tip or trick for us, please email us at moneymoment@biggerpockets.com.
Mindy: All right, before we bring in Patrick, let’s take a quick break.
Mindy: And we’re back. Patrick is a full-time physical therapist for a major sports team. He has a four-month-old baby and his wife recently left her full-time job to be a stay-at-home mom. When he’s not on the road or at home with the family, he has a side hustle where he helps private clients with personal training and physical therapy. Patrick, welcome to the Bigger Pockets Money Podcast. I’m so excited to talk to you today.
Guest: Thank you so much. I’m so excited to talk to both of you guys. Um, this is kind of surreal being on the show. Um, but yeah, really, really excited about this.
Mindy: Okay, well, we have a lot to cover, so we’re going to jump right into it. Let’s look at your money snapshot. I have a salary or you have a salary of 64.50, which is post tax, so that’s good to know. With a raise coming in July to bring you up to 75.40.
Mindy: You have a side hustle that brings in about $750 a month, and you get a per diem while traveling for work, which varies during the on season, off season, but averages about $800 a month after taxes. So the income seems pretty solid.
Um, we have monthly expenses that total 51.90. So right now there’s a delta of 12.60. For investments, we have approximately $170,000 in various retirement accounts. However, there is $7,000 in crypto, 8300 in series EE bonds and $12,400 in a K-1 partnership. Yay for the $28,000 in emergency fund. Yay. Okay, debts is where we really want to take a peek. 207 on a mortgage at 3.125% interest. I don’t care about that. Heloc, 8.5%, $24,000. We’re going to talk about that. Private home loan, 7600 at 1% interest. I don’t care about that. Rental property mortgage at $55,000, 5.6%, eh, I don’t really care so much about that. $35,000 at a 0% interest for a private student loan for Patrick and your wife’s student loans is a little bit the balance is a little bit more there. We’re looking at $213,000, currently at 0%, but the aggregate interest is 6.335%. So, guess what we’re going to talk about, Patrick? And your wife has a car loan of $24,000 and an Hvac loan of $2,000, which should be paid off by May. So we don’t care about that either.
Scott: And just to summarize that because there’s a lot of numbers just for my my own purpose, we’ve got 260,000 give or take in mortgages against your primary and rental property. And we’ve got 250,000 in student loans plus another 50,000 in other uh personal debts between the HELOC and the car payment and a couple of minor debts. Is that is that a good summary, Patrick?
Guest: Yeah, no, I I think that’s a a good snapshot of kind of putting things together. Yep.
Scott: Could you give us a quick overview of how we got here? Just a maybe three to five minute overview of your money story and how we arrived at the current state.
Guest: Sure. Um, so I guess growing up, uh I was kind of like a medium income household. Um, definitely didn’t uh like struggle, but I also don’t think we talked a lot about money. And so I think um I did an okay job uh through the help of my parents of earning some money uh during high school and whatnot. And so I had some saved up going into college, uh but then was off to college and did what college kids do and had fun and spent some money. Um so not to say that I got into a lot of debt, which is great, but I sort of completed whatever savings I had had going into college. Uh and then leaving school, um started working full-time, and then also went back for uh additional school, which I was able to sort of cash flow from my from my job at that time, so I didn’t accumulate further debt. And then finishing up my my total eight years of school, sort of stumbled on to your guys podcast and that sort of kick started my my enthusiasm, my passion and my my uh knowledge and learning with with personal finance and sort of coming up with a plan of you know, where what I was going to do with what money I was making. Um so a couple few years later, um here I am with a wife and a a son and uh have a primary residence, um I think a a pretty decent job and then um just a handful of other debts whether it’s educational or or other minor consumer debts. um but sort of the the overarching theme uh is is not having to work till I’m 60, 65, that sort of thing. um trying to be a little bit more independent and and have some of those freedoms uh from some of the decisions that uh myself and my my wife make now that can help us a couple years down the road.
Mindy: Okay, your wife recently left her job to stay home with your son. Has this put a strain on your finances?
Guest: Um, a little bit. Uh and and I think like you guys talk about personal finance is is personal. And so it was sort of a conscious decision that we made, um because if we were looking at daycare, we were looking at putting half to three quarters of what she’d be making right into the daycare. And so it was sort of one of those, you know, do we want to be spending a majority of what she’s making just so she can not help raise our son versus take a little bit of a haircut uh on the on the income front and have her be at home, um and be able to spend pretty much every waking hour with him, which is uh the hardest job in the world, way, way harder than what I do. Um but it’s also extremely rewarding and um uh so the short answer is a little bit, um but we are trying to make decisions uh in terms of what we have going on now that help to offset some of those uh differences.
Mindy: And what did she do and how much was she making?
Guest: Uh so she’s an occupational therapist. Uh she was working at a brain injury clinic and she was taking home about 75,000 in a year.
Mindy: Is there any opportunity for her to work part-time or do uh freelance or anything like that?
Guest: We’ve definitely considered that. Um I think at this point it’s still a little bit early. Uh our son’s four months and so he still requires uh quite a bit of attention. Um as Scott, I know you know you have a a small one at home, so you you can kind of test to that. Um so so essentially, we’ve thought about it, but I don’t think the timing is right right now. Uh that might be something we’re looking at uh in another year or something like that. Um but also considering in the future, maybe another little one coming and so that sort of maybe resets the clock on on her being able to do some of those things. Um so I think for sort of the purposes of today, the answer is no, um but potentially in the future once our sort of home situation changes a little bit.
Mindy: Okay, that’s fair. Um I when I was pregnant with my oldest was like, what am I going to do with my days? I’m going to be bored. And then I have my baby and I’m like, when was the last time I showered?
Guest: Luckily she gets to shower most days.
Mindy: I cannot say the same about me.
Scott: a walk us through the student loan debt for both you and your wife. Um, how how did that come about and and um, you know, especially in your wife’s case, um what why are we looking at such a huge number?
Guest: Yeah, so so for myself, I was lucky, uh my parents were able to help out with school. So essentially, um whatever I had not earned in terms of scholarships or whatnot, um we sort of split expenses and whatever scholarships sort of went towards mine. So we everything was split half and half and then I just owe the rest uh back to my parents. And I’m lucky enough that they gave me sort of a 0% interest loan. So um I’ve got another probably five years paying those off. Um so that’s about 550 a month uh going towards that. With with my wife, um she was essentially responsible for for all of her student loans, er for student payments. So that included um five years of undergrad as well as three years of grad school. Uh and that sort of adds up to the uh larger number we we see there.
Scott: Okay, awesome. And and you’re going to receive a large raise in July, is that should we consider that uh a kind of a moot point for now from the total accumulation perspective because most of that will just kind of offset the side hustle income that you’re you’re you’re bringing in now or how do you think about it?
Guest: Yeah, I I think that’s that’s sort of a a fair way to look at it. Um based on that increase, I think I I’m able to decrease what I’m doing with the with the side hustle stuff quite a bit. and I think it’s actually still going to come out ahead. So we’ll we’ll be bringing a little bit more than what I’m doing now with my my W2 job plus the side hustle. Um so yes, I think short answer is we can offset most of that and it ends up kind of washing out by the by the end of that. Um but then additionally hoping to continue to have some of these uh raises each each year. Um so but the short answer is yes.
Scott: And and can you tell us a little about this this rental property? How how’s it how’s that going? What’s the kind of projection going forward for it?
Guest: Absolutely. Um, so after doing a ton of research uh and a ton of listening, reading, all that stuff, um on all sorts of bigger pockets uh forums and and everything, uh we bought our first rental in May of last year. Um and as you guys know, that’s sort of the time where rates were going up, inventory was flying off the shelves and to be completely honest, I got a little impatient, which everyone says is not to do. And so sort of bought something that was not exactly what we were looking for. Um had an inherited tenant that we struggled with getting rent from at times. And then uh that person ended up uh moving out sort of without telling us at the beginning of February. So it’s actually been vacant for about two months now. And so we’re actually finishing up some some work, um some contractors going through and getting sort of fixing it up. And our plan as of right now is to try to sell that, um try to recoup losses essentially just break even and then move whatever proceeds from that into uh our our next sort of real estate venture and um I’m definitely really interested in the mid-term rental, medium-term rental um strategy. We have a a decent hospital network system, um where we live and so I think there’s some opportunity for that. Um but short answer is it hasn’t gone great, but it’s been a good learning experience and I I think we haven’t gotten hurt too badly, financially. Um but certainly looking to kind of hit the reset button um on on that.
Scott: Got it. Okay. Um, let let’s go to your house uh next. Uh do you have any plans for your primary residence? Are you’re going to are you going to live there for a long time or should we consider the equity there kind of locked in and you’re happy with it and um you’re there to stay.
Guest: Yeah, I think the the plan for now and and for the foreseeable future is to stay here. Um you know, I think knowing a little bit more now uh about sort of house hacking and all that. Um my wife and I both read set for life, which sort of helped to kick start us a little bit more. Um and I think we’re, you know, maybe a few years past where that might be applicable to us just because of the the newborn and and a couple other factors. Um so it’s I I think we’re here for the medium to to long-term depending on just, you know, my job and everything. Um but the the interest rate is nowhere close to what we’d be getting right now. And so I, unfortunately, think the the equity in that is is probably best accessed through HELOC like we’ve done uh versus like a cash out refy. Um because I think whatever money we might take out of that is just going to go into a higher monthly payment and I don’t really think we come out ahead on on that. So that’s sort of how we view the the house. Um I think we’re in a a pretty affordable um area of the country. So so the payment is not crazy. Um but it’s obviously a pretty big expense in terms of where we’re at. Um but again, one of those where just because of our family situation uh and and again personal decisions that we’ve chosen to make, um it’s not necessarily something that we are looking to monetize or or help us out in that sphere.
Mindy: Okay, you have a whole life insurance policy. Is this a new policy or is this an older policy?
Guest: So, it’s a policy that was taken out um for me by my parents when I was about five. So it’s it’s got about 25 years of growth in there. Um and so I, I hadn’t really known what to do uh with that and I actually remember listening to an episode um with Eric Brotman years ago um with with you guys that that talked about like the infinite banking concept and you know, withdrawing from that or taking loans out. And so from then I started to think about it and I just haven’t done anything with it. And then after reading set for life sort of the the situation described in that in hey, here’s where you’re at. Um you know, here’s where you want to be in 5, 10, 15 years and taking out a a term policy that sort of lines up with with that versus a whole life. Um that’s you know, the the death benefit of that is is not going to be life-changing. It’ll it’ll help with you know, end of life situations, but it’s not something that can kind of help if, you know, something terrible happens and I end up gone next year. Um what we’ve set in place with our term policy is is something that could in theory replace whatever we would make and what we would need to live off of. Um so long way to say that the whole F policy is not something I foresee being in place for a lot longer. Um our plan has been to surrender that, liquidate that and most likely pay off the heloc, um and then using whatever proceeds we might get from selling the the rental property to then move into our next one.
Scott: I agree completely with that approach.
Guest: All right, yeah and and I I appreciate you saying that.
Scott: That’s very wise. Yes, I I I I think that you the goal is flexibility in five to eight years. That policy is going to be with you for life. That’s the whole life policy. You’re going to be paying into it. Um I think that taking coming out with a small gain is, you know, not the worst thing in the world and and you can deploy that to you have an 8% eight and a half percent helock right now. Guaranteed better return than putting more money into the uh the whole life policy.
Guest: For sure, yeah. and you know initially that HELOC was a a variable rate. Um intro rate was like 1.9. So for the first six months we’re hardly paying anything on it, but then that jumped up uh in my January. So it’s it’s been a a bit of a stressor. So any any cash we might have had while the tenant was paying uh has been wiped out by paying on that keylock. So for sure trying to get that taken care of as quickly as possible. So I I’m glad to hear you agree with our plan. Um we will go ahead and execute that um tomorrow.
Mindy: I would double check the numbers, run everything, but yeah, I see a whole life insurance policy, cash value, $24,000. Primary residenceloc, $24,000. It seems like that those two could wipe out each other.
Guest: Yes, exactly. And that’s sort of how we how we thought about it. um and ideally uh selling the rental would net about the same if we’re getting what we think we can for it. Um but again, not worrying about how long that might sit on the market and what how long it would take to close. I think doing the whole life and just wiping that out is the move. So I appreciate the discussion on that.
Mindy: Yeah, so I’m going to start crossing off these uh debts once we figure out a way to get rid of them. So the HELOC, we just figured that out. Primary home mortgage, I’m not concerned about. Scott are you?
Scott: Uh, no. It’s 207,000 at 3.125, three and three and an eighth. I think that’s great. That that’s a good one to not touch.
Mindy: Okay, rental property mortgage, he’s going to sell that, so we don’t need to discuss that. And how much equity are we going to harvest when you sell that property?
Guest: It depends on what source you’re looking at. Um we are hopeful it’s worth between 100 and 110. Uh we bought it for 75 last May.
Scott: Okay, so we’ll we’ll we’ll clear about $50,000 in cash. After all expenses, $40,000 in cash after expenses.
Guest: Sure. Hopefully.
Guest: Fingers crossed.
Mindy: Okay, you have a private home loan of 7,600 at 1% interest. I don’t care about that.
Guest: I mean, I care about it, but that’ll get paid off. One person interest is a gift and is that 1% fixed for like as long as you have it or is that going to vary?
Guest: It is. So, so that was actually um a gift/ loan from my parents to get us to 20% to wipe out PMI. And then I just agreed for, you know, again, the 1% interest is ridiculously low, but um that was sort of generous of them to to help us out with that. So give us the lump sum to get us to 20% to wipe out the PMI and now I’m just paying that. So just over four years left on that. Just over three years, sorry. And your student loan is at 0% through your parents until it’s paid off.
Guest: Correct.
Mindy: So, I don’t care about that one. Uh, which leaves us with the the HVAC loan, I don’t care about that because that’s almost done at 0% interest, which leaves us with your wife’s auto loan and your wife’s student loans.
Scott: Let’s zoom out for a second here before we get into this and acknowledge that that we’ve got a boogie man, I think to deal with here. So, wife has $213,000 in student loans and a $25,000 auto loan and does not work uh in in this situation. So, how like you know, and I know this is a personal choice, but has that have we had this discussion and and kind of talked through that that this is a real barrier to to that I mean your your cash flow for your whole your whole family on an annual basis if we’re if we’re not including you know, cap back allowances is about $25,000 a year and so that’s a decade. That sets you back a decade, these these two components for that. And so I just love to hear that I I want to confront that issue really quickly and and we’ll deal with it as after we have that discussion.
Guest: For sure. And and it’s definitely uh we’ve had discussions on it, uh a lot of discussions on it. Um and and I guess we can we can start by talking about the the car loan. Um so that was a a decision that we made uh when we knew we’re expecting um our first child. Uh so so we ended up selling uh the car that my wife was in uh and upgrading to, you know, a new car with uh you know, a little bit bigger and more safety features and all that. Uh so again sort of a conscious decision that we made. And yes, this is maybe not the ideal way to go about getting a new car or getting a car. Um especially if you’re running around with the five community. Um but it it made sense to us at the time, especially with my car paid off. Um and so, you know, it the payment’s not wiping us out every month. Um and that’s something that we’ll have for another five-ish years, um and then and then that’s that’s done. And and we obviously could pay more towards that, but I think with the with the rate at just over 4%, it’s one of those kind of in between as you’re not, you know, it’s not 1%, but it’s also not eight and a half percent. Um so so I I think at four, we can be using whatever excess money to make us more money rather than paying off that that loan. Um so is that does that make sense? Is that fair to that can you hear where I’m coming from on that or do you have more?
Scott: Oh, I I completely understand it and and frankly I I did something very similar in my in my personal life. I just I guess where I’m where I’m I’m asking the tough question of this combination of decisions is really in my opinion, locking you into like one path here. We can we could position a few of these assets, but it’s really I’m looking at it and there’s the math is is pretty straightforward here. You’re going to save at most 20, 25,000 a year. I think I agree with Mindy that after you clean up the HELOC situation, um with either the whole life policy or the sale of the rental property, um there’s no reason to pay off the other debts uh for uh in in an early fashion and with a 4% interest auto loan, there’s no reason to pay that off early either. That leaves your student loans which I think are 6% interest, but they’re paused because of the um uh forbearance. And so that that’s kind of the I feel like the crux of this financial of this of this finance Friday is kind of understanding that decision because if we go if we if we continue with the status quo, you you don’t really have much more in the way of options other than to slowly let this this debt amortize, save up the $25,000 a year and build again, $250 to $300,000 in wealth over the next, you know, 10 years in in various passive investment vehicles. And so that’s where I wanted I wanted to go right there for what I see is the big leverage point and um, yeah, uh, you know, see if there’s any flexibility in a couple of those choices. I could see wife returning to work and bring in some income there. I could see a house hack, uh which would be a sacrifice. I could see selling the car and going back down, um in order to free up some cash flow. Um but I I can’t see all of these things going this with the choices that the the choices that have come out and they’re being a path to really getting ahead. and that’s where I wanted to be frank and and just ask.
Scott: Sure. And and I guess it might be helpful if I explain a little bit more about those. So, um those are all uh income driven repayment loans, which is a, you know, a specific type of loan that you’re basically paying um from what you’re making, what your income is. And obviously they’ve been paused for uh, you know, three plus years now and those payments have all counted, which is great. Um but now that my wife is not working, her payments are effectively zero once those do resume and they still count. Um that is as long as we file our taxes separately. Um if we are filing jointly, then obviously my income is counted and we’ll end up our monthly payment will be whatever that is. And so based on that, I sort of ran the numbers, did the math and by knowing whatever we don’t pay off in the at the end of 20 years is going to be essentially given to us as loan forgiveness, which is essentially seen as like here’s this check for however much, 150, 200,000, whatever it is, and paying tax on that. And so what we are currently doing, um in the after tax brokerage that I had mentioned, we’re putting $300 a month into that with the hope that that is growing over time. So at the end of at this point, 13 years, that number in that brokerage will be however much we are anticipating we are going to owe in taxes, and we’ll just have that. We can liquidate that account, pay the taxes, it won’t be this big huge burden. And so running the numbers, doing what we’re doing now, paying whatever that amount is. and this scenario was based on what she was making at her at her job. And so if that is continues to be zero if she’s not going to work for the next handful of years, it changes a little bit, but at the end of the day, that math has us paying less over the course of all of our loans than if we were to say accelerate these payments and try to actually pay off that entire balance.
Scott: So, when when does they when does this come do? or when when does the when does the 20-year period end?
Guest: Yeah, so it was 20 years from when she started paying, which I believe was uh June of 20 15 or 16. Um so we have about 13 years, 14 years left.
Scott: Okay, if if she returned to work full-time and you had child care, what is the net spread again against uh how how much money she she’d like how much how much more cash flow would come into your household?
Guest: That number, I’m not sure of. It it’s a little bit hard to say.
Guest: so So if we had $75,000 in household income and we allocate $2,000 a month that was her salary before she left, right?
Guest: Uh, and that’s pre-tax. So, yeah.
Scott: So pre-tax, $75,000 is uh uh we’ll we’ll take out, we’ll we’ll assume a 25% household income tax bracket. So that that pulls out 18 $750. Um leading us with 56 grand. and then um 56 grand after tax, that assumes no kind of contributions to retirement accounts or anything like that. And what’s child care in your area full-time?
Guest: We don’t have an exact number on that, um but we are anticipating it would be at least uh a few grand uh a year, probably between two and three.
Mindy: A month?
Guest: Uh, a month. Yeah, sorry. Yeah.
Mindy: I’m like a $2,000 a year, take it.
Mindy: No, it’s gonna be like 24 to $36,000 a year. So now we’re at 25 to $30,000 that she’s bringing home.
Scott: Yeah, so that is significant. That doubles your household cash flow accumulation. So yeah, it may not feel that significant at the end of the day, but that that that doubles your net cash flow. And so again, I I I don’t we you you may be a personal finance personal situation, but we got to run the math and understand that’s a major, it’s not a it’s not a gimme, like it’s not a, oh, it’s not really much that we’re going to bring in here, the net spread. It’s a big spread. So aside aside from the fact that um the benefits are not I I don’t like it as a life or financial decision because again, not choosing not to pay it off for the next 13 years. Yeah, your spreadsheet may work out one way or the other, but you’re not going to be free that entire time. It’s going to mean that hey there’s an incentive here not to work for a decade, 13 years for your wife um to earn any income, otherwise the income will push up the balance. So that’ll make that decision very hard. You’re going to file separately which is going to impact your ability to borrow or or or have your wife again pursue um uh uh options in the future. It’s going to it’s going to reduce your ability to offset some of your income on your tax returns. and I think I think it’s just not very freeing. And so as much as like I understand the situation and I can empathize with the choices that you’ve made, I I really it seems to me like with $200,000 in debt, eight years in in education and really high income opportunities here that you guys should strongly consider having your wife go back to work and produce that 20 to $30,000, it probably will be a little more if you place a few year of tax efficient with that and just pay this thing off uh sooner than that. I think you’ll get a much more flexible financial position if you do that, you’re going to increase your income, your take home pay from $250,000 over the next 10 years to $500,000 plus, not factoring any raises, promotions, or anything anything like that. That’s going to provide a much, much more flexible position and this thing will be gone in five years. It will be a grind, uh it will not be fun, but uh it’ll be more fun backing into that position in five to 10 years with much more options for your life, I think than ignoring it the way that you’re not ignoring it, but but just essentially setting up a situation that has you doing nothing with it for the next decade plus and having you be the sole bread winner uh uh to to put cash in there. How does this sound? Is this is this uh too too blunt or or or harsh of an assessment on the situation or what what are you thinking in response to this?
Guest: Uh I certainly appreciate the bluntness. Um I I think it’s something that is important for for me to hear, for us to hear. Um and it’s maybe a little bit difficult to hear, but I think it makes sense. uh and and to your point about her um working in some capacity. We have talked about her sort of being like the property manager for um additional rentals we might uh bring into our portfolio. And and whether that in itself is enough to um you know, offset a little bit of this and and if that necessitates, you know, us having to put him into, you know, childcare or what not. Um but that also having certain uh you know, tax obligations for what what I’m bringing home. Um so it’s it’s definitely something that we will have to discuss um based on some of some of your feedback. Um but it’s uh yeah, no it’s it’s it’s a good reminder of of sort of the the reality of of our situation in terms of what this sort of this boogie man that you that you referenced uh looks like with with the form of these loans.
Scott: Yeah, and I get it. Like you just don’t want to you don’t want to attack it because what I’m saying here is no, like your financial position and your goals are not compatible with staying home with your son um you know, and so I think it’s a reframing of what’s realistic. I think what’s realistic in the next 10 years for you without that is again, a financial position that increases by about 250 to 300 grand on your your income and that’s fine. That’s not a bad outcome. You’re ahead of most people with that. But it’s not a path to financial independence. If you if you guys are looking to be financially independent, there’s a path there that puts you perhaps pretty close within 10 years because again, that’s assuming no raises from either of you guys, that’s assuming, I’m not factoring in investment returns, that’s just straight cash accumulation going on with that. But I think that that’s the crux, that’s the big decision is right now, are we going to play this game where we’re going to delay, we’re going to have no income, we’re going to file separately on this and allow the uh income driven repayment of forgiveness here and plan for the tax benefit in 13 years or are we going to go after our financial situation intentionally, bust our our butts, work hard for the next, you know, um uh you know, five to 10 years and pay pay off these debts, clean up and simplify this financial position, have in five years have essentially no consumer debt. Um your heloc’s gone, your car payments’s gone, your student loans could be gone, your uh um uh what is that? what is the other one? the HVAC loan and the auto loan, all paid off and gone. You just have rental property mortgages or primary mortgages and you got $500,000 in equity in investments. That’s the position that I would encourage you guys to have the hard conversation around starting in a few months, frankly, from from what I’m seeing on on this. And I think that that that’s a good situation. 5, 10 years from now, like that’s passive cash flow, that’s two, three, $4,000 a month. Now we’re in a really responsible position to stay home, um and and have lots of cushion here and in a and a the situation that’s capable of sustainably continuing to build $50, $60,000 a year uh in investible liquidity if just one of you works.
Guest: Yeah and I think you know, that’s a that’s a really uh interesting way to hear it and to think about it. um because for sure it is, you know, that is a sacrifice in the immediate term, in the short-term and the mid-term. um but then having some of that flexibility like you mentioned in five years, eight years, 10 years, um is is definitely something that is sort of what we’re what we’re looking to do. um with the longer-term projection. Um whether or not that’s a a sacrifice in the in the immediate term. um for sure, for sure. Uh I I guess my my question about how you’re envisioning going about this is this, we are throwing absolutely everything we have on top of what our expenses are at these and in that case, um deferring some of what our goals are in terms of our real estate investments, um or is there sort of a balance between hey, you’re throwing X amount at the at the loans, you’re throwing X amount into a savings account to build up your rental portfolio? What are what are your thoughts on some of that?
Scott: Great question. So I look, I think that I think that that’s a really like that’s going to be the crux of the asset allocation question. Your variable interest rate HELOC at 8.5%, I I mean, I can consider 8.5% guaranteed return after tax to be the highest, one of the highest and best use investments you can make. So, we already have a plan to clean that up. I think your whole life insurance policy is a great uh uh reallocation decision to to go with that. I think you’re I think that’s a much higher return um than what you’ll get there. I think that um when you when you get into your car loan, no sense in paying that off early. The student loans, that’s a really interesting one, right? So we got 6.3%, but it’s at 0% right now, not accruing interest. If you agree with my diagnosis that this boogie man needs to be confronted in the next couple of years, at some point that uh what what’s the term that they’re using? Forbearance? Is that is that what they’re calling it for student loans?
Guest: I’m not sure if that’s what it’s called. I I think they were just calling it a pause, but but essentially, yes, you’re not having to pay, there’s they’re counting and the the payments are zero.
Scott: Yeah, so while that’s at zero, there’s no real you just stick it in the you just stick it in your emergency account and get 4% or some some, you know, some other type of um uh debt. I I think that in your situation, I would stock pile assets outside of that. Maybe real estate, maybe maybe even lending um to get to get some sort of arbitrage there, maybe maybe the stock market. um and then toward, you know, after a few years, potentially consider borrowing against that to knock out these student loans, for example. So that that might be one approach to to knock them out because it is, it’s in this gray zone. You’re like, right, can you earn more than 6%? Yes. Is 6% a reasonably high return, guaranteed, and especially after tax? Yes. So I think it’s I think it’s a really hard call and an art. So I don’t know if I would necessarily um invest. I think I think that’s that’s going to be up to you guys. I think I don’t think there’s a wrong way to go about it. I think one school of thought is just sock all the extra cash and pay it off. Again, after tax, we’re looking at probably a seven and a half, 8% return um because that that would be what you’d have to earn in order to earn a 6.3% after return after tax um on on debt like that. Um but I I think it’s I think it’s a really in that coin flip space. Mindy, what do you think?
Mindy: My thoughts are multiple. First, uh are her payments paused for the length of the government payment pause, whatever forbearance moratorium, I can’t remember what it’s called either, or do they continue to be paused for as long as she does not work?
Guest: So the current pause is strictly from the government pause. And so those are expected to restart. Um it’s it has to do a little bit with what the um what the government decides to do with the the laws that were passed and now you know, contentious and what not. but so essentially those are expected to resume between June and October of of this year. And that will that will be now the payments are are still zero and they count, but now the interest is continuing to accrue, which it hasn’t been for the last three years. That’s really the only difference as we’re doing it currently. Um so that’s helpful. So yeah, the interest will kick back in in a couple of months.
Mindy: Okay, so for right now, I would not make any payments, but I would start collecting that. I agree with what Scott said, this is going to be a burden on your in your mind, on your shoulders until you pay it off. In 13 years when you get the repayment or if you start paying it off beforehand. But if you can pay it off and not take the uh the forgiveness, it’s freeing so much faster. I truly believe you can pay off these student loans before the end of the 13-year payment and if you can’t, then you still get them for you get like whatever’s left over forgiven, right?
Guest: Correct. Yeah, essentially how I understand it at the end of 20 years, whatever is left is forgiven. Um and I think there are certain stipulations um about making qualified payments and whatnot, which you know, currently we are even if we’re making the zero, you know, zero dollars, that’s a quote unquote qualified payment. So I believe anything we contribute in excess to what we need to contribute would be considered a qualified payment. We’ll have to to check on that. um because there’s certain language in her um account or whatnot that uh has some of that. So we’ll have to look at that, but I I I think it should. like you said, whatever is not uh paid off will be forgiven at that time.
Mindy: Yeah, I like the idea of pushing through and paying it off. Um, and it’s I mean it’s a lot of money, but it’s it’s a lot of money. You’ll work towards paying it off.
Scott: It’s 10 years of your earnings, it’s five years of your combined earnings.
Guest: Okay.
Mindy: Versus 13 years of having it on your like weighing on your psyche while you’re not filing jointly and you’re not, you know, investing and whatever. Now, let’s talk about real estate. This is the Bigger pockets Money podcast and we’re all gung ho about real estate, but is real estate the right investment for you at this time? I think that your uh HSA, if that’s an option is the right investment. I think your Roth IRA is the right investment. I think 401k if there’s any sort of match is the right investment. But I’m not sure that real estate with your demanding job and a baby and travel and your side hustle and and and, I’m not sure that throwing another log on that fire is the right choice at this time because you could I mean, I can talk you into a great real estate investment. Oh my goodness, it’s going to be amazing and your tenants are going to pay on time and blah blah blah. But reality says that that’s not always what happens.
Mindy: How long has your property been vacant?
Guest: uh about two months now.
Mindy: Yeah, does that feel awesome?
Guest: Not so much.
Mindy: Yeah, it kind of sucks. and it gets worse the longer it’s vacant and you start thinking, oh, I’ll just put anybody in there. And let me tell you, the bigger pockets forums are filled with people who just put anybody in there to get a warm body in there. and all of the money you’re putting in there now when they start playing hammer darts in the kitchen, you’re going to feel even worse about putting anybody in there. So, I if you love real estate, continue thinking about it, continue, you know, investing in your education about it and continue looking at the properties that are coming up. Really learn your market. Know when, you know, what properties are coming up? How much are they selling for? What are they renting for? Go to open houses for rental properties, go to open houses for actual properties and just really, really learn your market. There might be such a smoking hot deal that pops up that you have to snap on it. But I wouldn’t buy a house that you just because you get impatient and I don’t mean to throw that back at you, but
Guest: No, I I think that’s totally fair. That was for sure what happened. Um and my wife and I have had multiple discussions about that. That was definitely what happened.
Scott: Did you use the HELOC to buy the rental property?
Guest: I did. Yes.
Scott: Yeah, so so that that’s a real killer here too because even let’s forget the 8% interest. If that, if if you just had 30 grand in that HELOC, it’s 24, but I’m using 30 grand for easy math and you want to pay that back over two and a half years or you know, that’s $1,000 a month or five years, it’s $500 a month before the interest payment and so even if it was a good deal, that would kill your cash flow. It wasn’t going to produce more than $500 at this purchase price unless you’re, you know, um a real estate investing God. Uh so so that that’s the that’s a big issue here and that’s where I think selling this and restarting with a stronger financial position will be helpful. But I disagree with Mindy that real estate’s not for you. Again, I want to zoom out and say the goal you came in was, I want a flexible position five to eight years from now so that I can do the things that I want to do in life, right? And so if we just stack $25,000 into the Roth IRA, that doesn’t get us there unless you’re willing to attack tap the Roth IRA to to to live your life. That’s a great way to have 5, 6 some you know, three to $500,000, you already have like 160 something. Let’s call it even 4 to $500,000 after investment returns in five years inside your retirement accounts, but that wasn’t your stated goal, right? So I think a better financial position would be something that looks something like this. I want $50,000 if if I, if we keep the status quo and I owe him the only bread winner, I’m going to have $50,000 in cash. I’m going to have one to two rental properties with let’s call it 100 to $200,000 in in equity producing $1,000 to $1,500 a month in cash flow. That’s a realistic outcome for you. If you save diligently uh and and put some aside for in real estate over the next couple of years. that that like and and make some smart decisions, maybe maybe do a little bit of uh creative finance. Uh I think that’s a reasonable possibility for you in five years. And your your your car payment will be paid off, your HELOC will be paid off, you’ll have you’ll slowly kind of get this consumer debt, your student loans maybe, your student loans maybe paid off to your parents. That’s a good outcome. And again, if we layer on top the much bigger decision, which I think is the real crux of your financial the decision you and your wife need to make, um if she works and is able to bring in something close to what I just described there, that that adds another three to four, maybe more $100,000 on top of that position, all of which could be invested in real estate or some could be spread across those retirement accounts. again, bringing that flexible position. Let’s call it in that case to $50,000 in savings, $3 to $4,000 in passive cash flow and $250 to $300,000 in in um retirement accounts. So, those would be the two two kind of outcomes I think you could back into over the next five years. Do those sound realistic to you? Bearing back of the napkin math?
Guest: I I think so. And and I think like you said, it’s going to come down to us discussing, having conversations about what do we want our life, our financial position to look like in, you know, currently this year, next year, five years, 10 years, 20 years, and and what gets us there. Um because I think I’ve sort of had a little bit of tunnel vision in that like hey, real estate is like the thing. It has all these great benefits. It’s, you know, there’s four or five different ways to make money in it. um and and I would like to think I’ve done a decent job in kind of keeping the pulse on the market that I’m in. Um I I’ve tried to do everything kind of local. I’m not looking to do long distance or anything like that. Um so, so I think uh and I guess clarifying something, Scott, you said, you said real estate can be a part. You think in five years or you think at some point in the near future?
Scott: Again, this this is where I I thank you for coming on the show because you’re giving us such a hard financial I and I I can I can completely empathize with the struggle you’re probably having across all this because your position is so complicated on the debt side in particular that you know, what what I’d love to do, there’s there are multiple schools of thoughts. One good option is, I’m just going to pay off these debts, right? They’re all reasonably high interest rates except for the ones that are at zero and if you just pay them off and start with a flush a a a fresh slate, that’s going to be tremendously freeing and really turbo charge your ability to accumulate wealth. It’s not a bad option. Dave Ramsey is a great potential choice for you. Another reasonable choice is, you just bought the wrong rental property here and you bought it with a HELOC, which compounded the pressure that this property has brought on your life instead of generating cash flow for you. If you were to reuse your whole life policy to pay off the HELOC, you have 28 grand in a year from now, you could probably buy a property similar to this with a responsible financial position, with a true cash down payment, that does put money in your pocket and that would be a reasonable choice. So I think it’s it’s an art and there’s no right answer here and that’s why you’re going to really struggle with it. I think you should either pick pick one or the other and again, the major the major component here that’s going to put you determine the the level of flexibility you have in five years is how much cash flow your family is generating. So, and that’s the function of your job and whether or not your wife chooses to go back to work. Even though I know that was kind of settled coming in, I I think it’s it’s it’s such a big deal because of the amount of the student loan debt and the the the size of the 100%, the potential to double the family’s cash flow.
Guest: Yeah, no, I think I I think you’ve definitely given us uh a lot to think about and to talk about. Um so it it’s a good way to think about it in that hey, if we are paying off X Y Z loans, um some which some of which, you know, don’t make sense to pay off like the super low interest ones and some of which are kind of in that gray zone like you said, um what that does on the back end in terms of what we’re bringing in uh on a monthly basis and how we can then scale what we’re accumulating uh in different type of accounts, in different type of assets such as real estate, um to to then have a a strong financial position in a handful of years, you know, five-ish plus years. um so, yeah, it’s this is not where I thought the conversation was going, but this has been I mean super helpful. Um definitely gives us some some tough stuff to talk about. um but it’ll be it’ll be fun.
Scott: No, I I appreciate it and I’m sorry, um we we didn’t have a more painless approach for you to solve some of these these problems. That’s the that’s not a fun conversation to to think about, um, and and and the the trade-offs in your life that this session has. No, these are just our opinions. Talk to your wife, listen to the episode with her and see, you know, maybe 60% of this makes sense to both of you together. I think the most important of all of this is that you’re both on the same page. I do appreciate your time today, Patrick. I appreciate you sharing all of this information with us. I think that you have a lot of great opportunities ahead of you.
Guest: This has been really helpful. I’m I’m really appreciate your time.
Scott: Awesome. Well, thank thank you so much, Patrick for for listening and coming on the show and sharing your situation.
Guest: Awesome. Thank you guys again.
Mindy: All right, Scott, that was Patrick. That was interesting.
Scott: Yeah, I I look, it’s a tough situation and I think, you know, if we’re being blunt about it and and really attacking the problem head on. We we can’t take out hundreds of thousands of dollars in student loan debt, not work, have a new car, not house hack, and expect to move to financial freedom. Patrick and his wife are in a great financial position. They’re they’re they’re cash-flowing their lives. They have some cleanup work to do on a couple of debts and those types of things, but they um they’re they’re in a in a middle-class position and they can cash flow their lives and live comfortably with with the choices they’re making. They’re just not going to progress toward financial freedom rapidly without I think confronting head-on the boogie the student loan boogie man. And and we talked about a very parallel problem to this in episode 338, um become debt free 20 times faster than you thought with a very similar problem, very similar couple that was looking to uh basically uh delay the payment of student loans until the forgiveness program came out in about 15 to 20 years. And look, I just I get that there’s a a spreadsheet where that works, but I really hate that way of attacking financial freedom. I I I really I I really prefer attacking the big problems in a financial position head-on and defaulting to hard work, sweat, grind, and fundamentally increasing the cash flow after tax of a household. I think that produces a better financial outcome, a more sustainable approach, one that’s within your control, and um, you know, I’m I’m sure people will strongly disagree with me. I’m sure there’s a spreadsheet that can strongly disagree with me that that would that would prove me wrong. And I bet you that the government does end up forgiving a lot of that tax burden for folks that do get student loan debt forgiven. But I still, still bias people I think heavily towards attack the problem, do the hard work, cash flow, pay it off, invest and build and and move towards financial freedom.
Mindy: I agree with you, Scott. There’s a lot of tough decisions to make. What is most important, I’ll say this again, is that Patrick and his wife talk about it and are on the same page.
Scott: That’s right. This is not this is a a team effort and um I think I think that their situation was one of those really hard ones to diagnose. I had I have my opinion and my bias towards that approach, but from a financial lens, there are three or four different approaches that are all reasonable in his position, right? And and it’s not just in paying the choice to pay down that student loan debt or uh, you know, file taxes separately for the next decade and and and uh and look for the the the payoff at the end of that. It’s also the asset the resource allocation decisions. Does he pay off debts that are in that bubble zone or does he invest those assets? Does he put it into the retirement accounts or into after tax investments? Those are all hard choices with no right answer and there’s a like you can you get the textbooks could be written on why you should do any one of the of available variety of approaches. And we appreciate Patrick coming on and sharing uh a situation that has no particular right answer.
Mindy: And if you want to debate, email Scott@biggerpockets.com, not Mindy@biggerpockets.com.
Scott: And I would love that. I I I I’m not sure on this one and and I’m and I would love strong feedback uh if there’s a different approaches that folks had. I’m sure we’ll get a couple on the whole life insurance policy advice as well.
Mindy: Yeah, and you can call Scott at just kidding.
Mindy: All right, Scott, should we get out of here?
Scott: Let’s do it.
Mindy: That wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench and I am Mindy Jensen saying, don’t be a stranger.
Scott: If you enjoyed today’s episode, please give us a five-star review on Spotify or Apple. and if you’re looking for even more money content, feel free to visit our YouTube channel at youtube.com/biggerpocketsmoney.
Mindy: Bigger Pockets Money was created by Mindy Jensen and Scott Trench, produced by Calen Bennet, editing by Exodus Media, copywriting by Nate Wine Troub. Lastly, a big thank you to the Bigger Pockets team for making this show possible.
