Ask Paula: Student Loan Deferment HACK – How Christina Saved $60,000 in Interest

Joe, even though we're laboring on Labor Day, this episode is not coming out until September 27th. We're going into the future. We are trying to travel. We are such dedicated labors that we are laboring on Labor Day in order to work a month ahead of schedule. Boom. You'd never see Rogue Crews do that. That's tough. I mean, sometimes they're ahead of schedule, but we are laying down the foundation for future generations that are at least 20, what, 23 days? 23 days ahead of us. 23 days from now. Work ahead, people. That's the lesson, I think. I am the last person to ever share that lesson. My goodness. Paul is like, what's raining it in? I am reveling in this because it is rare. This is the anomaly, not the norm. Well, it's a great one. Thank you. Speaking of Labor, one of the questions that we're going to answer is from a woman whose spouse is trying to decide between a corporate job versus a small business route. And there's, you know, how do you make an apples to apples comparison? We're going to tackle that. We're shadowing. We're also going to answer a question from an engineer who has paid off her student loans, but it's a little bit in the middle of the fi journey, the financial independence journey, which she drives trains. No, I believe that's a train conductor. Sorry, I didn't mean to derail you. I was just wondering about her job. You know what? With that, let's just cut to the first question. That's just stop while we're ahead. So here's our first question. And it comes from, she goes on Zoom. She goes by, I am not aware wolf, but in reality, she goes by... Christina. Christina. Hi, Paul and Joe. My name is Christina. I continue to love the podcast and was actually a student in the last income property course. It was great. I highly recommend it. Anyway, my question is a general one. Recently, I've been hearing some questions on the podcast and listening to the financial situations people find themselves in. Many people sound like superstars, higher earners, and high end or growing net worth. I'm mid-journey, and I'm starting to feel a bit like I'm in my groove, but the groove is getting boring. I'm following the plan, made the large leaps in paying off debt early, which felt exhilarating. Now I'm in the auto-invest and collecting money for a down payment for rental property. What suggestions do you have to help stay the course during the less exciting parts of the journey? Thanks. Christina, that is a wonderful question. Joe and I were talking before we started recording. We were like, we want to lead with this question because it's one that I think a lot of people experience, but very few talk about. There's the on-wee of being in that muddled middle. And when I think of the term muddled middle, there's a podcast episode that we did with a guy by the name of Daniel Pink, who wrote a book called When, The Scientific Secrets of Perfect timing. What he talks about is that generally enthusiasm for anything is highest at the beginning and at the end, but then there's always a muddled middle. And you take this and you can apply it to literally a day in your life. Roughly 80% of the population has a very high energy first thing in the morning when we're fresh. Mid afternoon, most people have a slump. And then in the evening, energy actually picks back up again. That's the rhythm of a day. Similarly, if you look at happiness across a person's lifetime, statistically speaking, the time in which you are most likely to be unhappy is around your 50s. And that's because it's that muddled middle where you've lost the enthusiasm of your teens, your 20s, your 30s. But you haven't yet found the peace and wisdom and perspective that comes when you're in your 80s. So it's that the 40s and 50s where you're just in that muddled middle. And according to Daniel Pink in this book, when, and he talks about this in the interview that we did, it's in your late 40s, typically early 50s, that you are statistically speaking most likely to be kind of feeling a little bit of a slump. So what you're describing right now is the muddled middle of a journey towards a major financial goal. And I'm assuming for you, that's financial independence, which for people who are new to this podcast, that is having enough money such that work becomes optional. You know, having enough money such that you know that no matter what, you'll be okay. That is a multi decade journey. The only way to get out of the muddled middle is by breaking it into smaller goals and smaller constituent components such that you're not even thinking of the 20 year journey. You're thinking about some really cool one year or two year or maybe even six month goal that's immediately ahead of you. When we build financial plans, Paula, we do exactly that because the average financial plan we built somebody would need a multiple of millions of dollars to get where they wanted to go, you know, maybe two, three, four million dollars. And hey, if you're 28 years old and you've saved $80,000, you've done a really good job, but you're like, I am so screwed. I've got so far to go and you can run these games like the rule of 72, but much better than that is to build where do I need to be don't even look at that long term thing. Look at just where do I need to be six months from now and work off that because those quicker goals keep you in the game. And they keep you in the game one of two ways. Number one is if you're behind at a six month number, you're going to be behind by little enough that by increasing your saving, you can make up the difference. And I found often that if, you know, if the market didn't do what it was supposed to do or life hit and some unnecessary, not unnecessary, some necessary expenses hit that veered you off course, you can take corrective action. And that keeps your head in the game, right, which has huge effects long term, even though it feels like I'm just taking these little tiny correction short term. The second one is too many of us wait until late, late in life to do the fun stuff. And if we're ahead, we can also make the decision. I'm going to play a little more right now. I'm going to enjoy where I am because I'm ahead on this long term goal. So I love everything about creating those milestones. I think there's something else going on here though, Paula. What's that? I think when, you know, when Christina began, she was talking about, hey, I'm hearing these rock stars, these high income earners, comparing your goal to somebody else will always, always create frustration and boredom. And I'm not going fast enough, I guess. Right. Yeah, that comparison is the thief of joy. Absolutely. That creates the muddle middle for a lot of people. It makes it more difficult. You know, give yourself some grace. Don't compare yourself to other people. You'll get there. Yeah. It is, it's so fun to run your own journey and it's not fun to run somebody else's journey. You know, one thing that I like to do sometimes when I'm setting goals is rather than set a goal that pertains to a result, I will set a goal that pertains to effort. So for example, when I was in grad school, I gained the freshman 15 times two, right? I gained the master's 30. So I put on 30 pounds in the last year. If I think about that as a just get back to where I was on orientation day, if I think about that as a goal, it feels like I'm going backwards. And so it's not motivating. But instead, what I've done is I've reframed it. I'm like, you know what? My goal isn't even the result. My goal is, these are the number of hours per week that I want to be in the gym. That's the goal that I have. And so every week, it's, did I put that number of hours into the gym this week? And that's it. That is the only goal that I have. And if I happen to have any physical benefits from that, that's great. But the goal is, did I put an X number of hours? Yes or no? That's interesting. I have found that getting up early and doing the workout has become just increasingly annoying and difficult for me over the last few months. But what I also found just in the last few weeks is if instead of being frustrated by the gym or the run or whatever it might be. If I realize that that is my time and I'm out there, Paula, because I enjoy that time. That's my own time. And I find the joy in it. It's so much better. And the last, just literally the last two weeks, what you're saying hit home because my only goal is to be there and find what I like about it. And I found yesterday I did this four mile run. And I love the whole thing. It was super fun. And because I loved it, by the way, it was easier. I was sad when I got done with it, which is weird because usually I'm halfway done. I'm like, can I get the hell out of here? But instead I embrace, it's like being in the moment, realizing that it's not about this long term thing. It's about enjoying where I'm at now in the process. Right? And I mean, this is the case that we see all the time with retirement. If we want to take these little examples you and I are making and push them out to some of these huge goals. So many people get to retirement and then 18 months later, they're completely disillusioned. Right. And the reason they're disillusioned is because they feel like that finish line is what I'm finally going to be happy. Well, we know that that is not the case. You need to be happy with the journey. You got to be happy with where you are now. Right. So I love this idea of, hey, instead of, instead of this being the model middle, this is the cool right now. And what am I doing to make this process as enjoyable as it can possibly be? Right. Right. I just didn't interview for a news article. Somebody, there was a reporter who was writing an article about saving for a big bucket list trip. One of the things that I said to the interviewer was, hey, part of my advice is don't put too much stock into that big bucket list trip because if you spend five years saving for this really big, amazing trip, you've put so much expectation on that trip that there's going to be a gap between expectation and reality and the gap between expectation and realities where disappointment lives. It's fine to like enjoy the fun of planning for a trip, but it crosses into problematic or likely to cause disappointment when it becomes the expectation of the trip is the holy grail. And the same is true in finance. One of the things that you can do with a big long term financial goal, such as financial independence, and this is part of the reason one of the many, many reasons why I am much more fan of the earn more side of the equation than the frugal downside of the equation is if what you're doing on this journey feels like deprivation. Of course, it's going to suck if instead, okay, think about Homer Simpson, you know how Homer Simpson on the Simpsons, you know how like every other episode, he always has some crack pot, hair-brained money making scheme. He's like Mr. Plow, the snow plow guy, he starts a bar that rivals mose. Actually, you can go online and look at this like complete list of all of Homer Simpson's various side hustles, all of his various jobs. He never quits the nuclear power plant. He's always working for Mr. Burns, but he has 400 different side hustles. What he's doing fundamentally is he's finding fun, clever, creative ways to make a little bit extra cash, but he enjoys the game of it. And because each of these are like new adventures, there's also that novelty, right? He's not in the muddled middle because it's the beginning of this new kind of cool side hustling thing that he's doing. So I mean, you can take, you can take Homer Simpson's example and apply that to your own life in terms of like anytime that you're trying to make a little bit more money, what are the ways that you can start something new, make it fun, and kind of make it a hack or make it an adventure, make it something that's like kind of fun in and of its own sake as a discrete project. And over time, those cumulatively will progress you along that journey, but each one is its own discrete thing. It's its own episode. There's been a lot of science around the role of play in adult life, whereas we grow up, we forget how to play. And it's really interesting to read some of this research where if we take whatever job you're focused on, and it's a random Saturday, so it's your time. It's not work time assuming that you don't work on Saturday. If you do work on Saturday, take whatever you day off and make it that day. And instead, you're going to put in a little extra toward that thing, Paula. But instead of looking at the entire job, you just take the part that you really like and just play with it for a while and all the sudden it changes the task and make some of the things that you feared really fun. And you find that when we let ourselves play, we take the pieces of our job that we fear that we don't want to do and we approach them from an angle like our subconscious brain helps us through it. You know what I mean? It's really exciting to see if you take the Homer Simpson approach and you apply it to your own life in a very playful way as this way to get over the home. I just, I find the science of play to be very interesting and very cool, especially for people that are feeling a little bit of an unwae. Christina, you yourself have done a really good job of this because there's a little success that you've had which you got clever, you got creative, and you kind of figured out a way to game the system or hack the system in your favor to accelerate your progress. It's clever, it's fun, it's creative. Let's hear you describe it. Hi, Paul and Joe. This is Christina again. I'm submitting a second recording because I did something unique to pay off my student loans a few years back and it really helped me. For background, I graduated in 2007 with about $60,000 in student loan debt and at the time it was 7% interest, yikes. I felt like I was drowning and I had a solid starting salaries and engineer but was afraid I was going to have to get a second job. As an aside, I had worked in the financial aid office while I was in college and learned that if I was in college half time, loans would be deferred. So I calculated the cost to carrying the loan versus the cost of enrolling in community college part time. I learned it was cheaper to be in school versus trying to pay the loan interest. So I declared a general studies major at a local community college at the time I had to declare a major to get the deferral and enrolled in a gym class and a stress management class. I paid heavily on the loans toward the principal while they were deferred. To be clear, this only worked on the federal subsidized portion where the interest doesn't accrue. I also learned that this strategy was more beneficial in the spring term because if I get a deferral in the spring semester, I would carry it through the summer, so basically the cost of two courses for eight months of interest deferred. I paid the principal down heavily until the math no longer made sense, then just made regular payments and paid extra toward the principal. The math stopped working sometime near paying off the federal loans. This also made me think ahead early on when I was considering consolidation. I decided to consolidate the private money for the lower interest rate for as long as possible, so I'd have extra cash to really hit the deferred loans first. And I actually kept those separate. So when I paid one off, I would go and snowball into the next one quickly. Not all loans have to be consolidated together and I think people don't always realize that some food for thought is I hear the insanely high student loans. People are taking this might be a good strategy for others. It really, really worked for me. I paid everything off and under five years and saved over $60,000 in interest. Thanks for your time. Looking forward to hearing more about this. How about that? Christina, I love that. What an awesome example. And that to me, it's an example that actually helps illustrate the answer to your first question, which is how do you stay motivated? You find really clever, creative ways to hack the system to your benefit in addition to all of the money that it saved you, the 7% interest that you were able to defer while you were aggressively paying down the principle in addition to all of that. It's just kind of a fun, you know, that's just kind of a fun way to go about it. I think the thing we need to clarify for the whole emphasize afford anything family is that this only works if the federal student loans are subsidized. If they're unsubsidized student loans, they're still going to be you're still going to have interest accruing during that time and it's going to be much harder to make up that time and it probably doesn't work. But if your loans are subsidized. Yeah, federal subsidized loans. She subsidizes a lot more time. And she says that in her in her voice mail, but we just wanted to emphasize that. Yes, absolutely because somebody's like, I should do that too. And you really want to make sure they're subsidized. Second thing is that you're also realize that what Christina is doing is she's trading one currency for another currency. She's trading time for money and time is a currency. I think a lot of people under emphasize the value of time often. But if those classes she took Paula were classes she really wanted to take that will make her life brighter. Make Christina's ball burn brighter than heck yeah, you're trading time for something that you love to do and paying less money at the same time. Exactly. And she took a gym class and a stress management class. Those boats sound like they're wonderful wellness classes. I would prefer a wine-drinking class, but anyway. Well, maybe that's possible for you. Maybe that's it. Maybe the next time that you needed to defer your federal subsidized loans, you'll go to Somalia School. Delicious. All right. Well, thank you, Christina, for the question. And I hope we've provided some insight into how to get through that muddled middle. Last thing I'll say, I was reading earlier today that marathon runners oftentimes they don't run the entire 26.2 mile marathon. I mean, they do literally, but in their head they don't know in their head. They're running from this marker to that marker. That's right. And then they run from that marker to the next marker. And so mentally, they're simply running from marker to marker to marker to marker. Though to the outside world, it looks as though they're running a continuous 26.2 miles. I had a scholarship to run track and cross country in college. And when I was in high school, my mile times got much better when I separated the mile into four quarters. And I had a specific time I needed to have for that one quarter. It got even better though, Paula, when I separated it into eight 220 yard intervals. The more I broke it down and just concentrated on the here, the now the next 200 yards, I did so much better. There's this method called the Galloway method where you run and then you walk and then you run and you walk and you don't think about 26.2. For us, we run for seven minutes and then we walk a minute, meaning me and my friends when we do these marathons. I only think about the next seven minutes. And by the way, I don't even think about how far I'm going to run those seven minutes. I just concentrate on I'm going to run for another seven minutes and I get a walk break and then I'm going to run for another seven minutes. It made running 26 miles so much easier doing it the way you're talking about than doing it the other way. Right. And you know, on the subject of the walk breaks, make sure, again, if the goal is financial independence or retirement or whatever it is, if the big long term financial goal, make sure that you are building in short term goals and treats along the way. It's kind of akin to what I said about, if it's a big bucket list trip, don't put too much emphasis on that trip. Don't put too much expectation on that trip. Instead, enjoy things that you're doing prior to the trip. Same is true with retirement or financial independence. Don't overemphasize that it's not a goal so much as it is a direction. If you can reframe it not as this is my life prior to achieving it and then this is my life after that's the way a lot of people think of it. If instead you can reframe it as this is just sort of the a principle or an idea that outlines the direction in which I want to move. And then I enjoy every day of my life, regardless of whether I'm there or not. That's different. Again, to give it a marathon example, the purpose of running a marathon is not to reach the finish line, even though every marathon runner ultimately does want to reach the finish line. The purpose is also to enjoy the run itself. What's funny is I look back over those marathons and the number of the amount of stuff I remember about the finish line about being there is very little but the stuff that happened along the journey is some hilarious. We can just a whole different podcast but some hilarious some fun some funny some stupid stuff that happened along the way. It's the stuff that happened along the way that creates the stories, not the finish line often. Exactly. The finish line just kind of points you in the general direction. Well, so thank you, Christina, for the question. We'll come back to this episode after this word from our sponsors. Finding your life away to a big wireless provider is kind of like being trapped on a roller coaster, Braum Hell. 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My husband and I are trying to make a decision about two job opportunities that he has. The first is a corporate position at a well-known company commuting to the office three days a week full benefits, a matching 401k, etc. The second is working full time at a very small but successful company that sells equipment to towns along the east coast and expanding to the Midwest. The small company is run by a mutual friend of ours who is looking to find a partner to help expand and he wants to retire in a few years and possibly pass the reins to someone else. My husband is currently working for him while he is in between jobs and has worked in all corporate positions previous to us. The small company is closer house a 20 minute drive versus 35 45 minute train ride to the city for the corporate position but he does go in five days a week. The man he works for at the small company asked my husband quote unquote what would it take for my husband to stay and work for him. For years my husband has talked about working at a small business and has always wanted to run a small business. He's interested in staying at the small business versus going back to corporate. My husband and I are trying to figure out how to come up with a salary number if he was to work at the small company. How do we go about comparing two offers and what other things besides salary should we be thinking about that he would be getting at a corporate company versus a small. For instance, the small company wouldn't have a matching 401k which to me feels like losing free money for retirement but I guess that is something we could compensate for in a total salary package for the small company offer. We are in our mid to late 30s no kids but are trying have a mortgage no debt with a pretty healthy 401k and investment account. From our expenses point of view I have the amount he would need to make so we can live comfortably and be making our savings goal. We're trying to think of the total package and any benefits we might not have considered. Any advice or questions we should think about are greatly appreciated. I think my husband feels conditioned to take a corporate position but this opportunity seems like it could be what he's been looking for. Thank you to advance and we appreciate any advice and help that we can get from you. Questions like this are my favorite question. Yes, same and I've got some strong words. My answer. Jody, mind if I do mind if I roll full stomach. It is your show, Paula. So what do you roll into it? I don't think you have to ask my permission. So Mary, I'm going to say something intentionally shocking meant to provoke shock. Oh, yes, do it. Yes, salaries are for losers. Boom, you heard it here first. All right, what do I mean by that? Obviously I'm being tongue in cheek. Nobody, almost nobody gets rich from a salary. And if you're thinking about a salary, you're thinking about being a clock puncher. Salary does not matter. Don't ever do anything for salary. And if you're negotiating salary, if like that's where your head is at, that is the mindset of punching the clock and not going very far. This idea does not just come from me. It also comes from Mr. Jamie Dimon, the CEO of JP Morgan Chase. He talks about this frequently where he talks about, you know, any advice that he would give to any young person, including his own kids, is do not ever worry about your salary. You need enough to live, right? You need enough to make sure that you aren't in a bad financial position. You need enough to pay your bills to keep a roof over your head, to put food on the table, to keep the lights on, to put clothes on your back, blah, blah, blah. Once you have that, your salary becomes moot, frankly. It's a moot point. What matters from that point forward is your ability to take part in upside gains. So if there is a profit share or if there is any type of, you said that this guy wants to retire in a few years and he's potentially looking for somebody to pass the reins on to, any type of ownership stake or ownership potential, that's the money. I mean, frankly, if you can support both of you, and this is extreme, if you can support both of you on your salary, I would go to him and say, tell you what, buddy, give me a salary of $1 per year, but give me this incredible profit share or this incredible vested ownership stake. I'll work for a dollar a year. I don't need salary. I want the upside. Fabulous. Pay them. There it is, Bella. That's it. And it shocks a lot of people, right? Because we're conditioned to think a salary is how you are compensated. If you are thinking about salary, anywhere above and beyond the amount that you need in order to have, you know, pay your bills and put aside some money for retirement or create a rainy day fund, right? If you're thinking about salary, anything above and beyond what you actually need, then you're thinking small. And you're thinking in a way that's not going to grow. Sure. Which leads to my much less bam point, which is rather than do the difficult math around two things, one of which you want to do and one of which you don't want to do, instead take the one you want to do and see what it takes to make it work. Because life is about doing what you want to do, not about doing what you think you should do. So I think if I start from that parameter, it sounds like what they want to do is work for the small company. Yeah. Yeah. That was very clear from the way that she asked that question. The only thing you need to know then, to your point earlier, and I won't say this is fluently as Jamie Diamond is, well, what does it take to put bread on the table? And the one thing I would be clear about here, though, and this is much more tactical, Paul, than what you're talking about, I want to make it clear with that business owner why you are taking this opportunity, because you're looking at it as big picture opportunity. And I'll tell you this one, personally, we had an episode, a couple episodes ago, where you talked very openly about your divorce and about what you learned from that process. I learned that when I sold my business, and I don't talk about this very much, when I sold my business, the guy I sold it to told me that there was an opportunity for me to possibly take over this much bigger firm. I wasn't going into that for that reason. I was going into it for a lot of different reasons, but I thought that was the case. But Paula, we never, ever, ever really had a much bigger chat about that. Imagine my surprise, though, three months after I joined this bigger firm after selling it into that firm, that his daughter comes in, and I realized very quickly, even though his daughter has absolutely no financial planning experience, no idea what that's going on. The chance of Joe ever running this firm is zero, zero. But that was not what we talked about over beers while we were discussing me joining this much bigger firm. So if you can get that contractually, that's fantastic. Now, you probably won't get it contractually at the beginning, because he doesn't know you well enough, you haven't worked together enough, but there has to be some sort of a runway for me to get that, and that runway should be a runway that's in writing and very clear that this is what we're headed to. We are headed toward transfer of ownership here. We're headed toward me being the successor. I want to get as much of that as I possibly can in stone so that you don't make a mistake. Luckily for me, Paula, I wasn't even really concentrating on that. My goal actually was to sell the firm and get out of financial planning completely and go become a high school teacher in a track coach. I had made enough money, and I was ready to enjoy this other thing with some time. And obviously that changed. Instead, I made it to afford anything, which was way better than being a teacher in a track coach. But had I really been as invested as Mary seems to be in this company? If I've been as invested and that was a big piece of my decision making, I want to make sure that that's as in writing as I can get it. Right, exactly. And there are a lot of different ways that you can do this. So it might be that immediately, it would be uncommon in year one for an owner of a small company to start giving you a percentage of the company. Sure. But if the owner is interested in transferring the company upon retirement, there could be some type of metric-related benchmark where if your husband reaches XYZ performance metric, that might be one way to do it. For people that know any type of simple coding, like just if-then scenarios, if this happens, then that will happen. Right, exactly. And you can do a bunch of those. And remember, it could either be an ownership conversation or it can be a profit share conversation. And those are very much not the same thing, right? Ownership refers to ownership. It refers to who actually owns an interest in the company. Profit sharing is simply a percentage of the net revenues. And frankly, those aren't mutually exclusive either. Right. You couldn't, you probably should negotiate both. And again, that's if the owner is interested in transfer of ownership upon retirement, right? I wouldn't be bringing- If she had said, oh, the owner is like 30, right? There's no way in hell I'd be bringing this up. Because there's absolutely no 30-year-old in their right mind who if they believe in their company who would ever be interested in doing something like this. Anyone who does, I would be very suspicious that they don't actually believe, really? I do disagree with that. When you see some of these Fintech founders and I've been lucky to be able to interview a lot of these Fintech founders, they're goal when they create the company is build to sell, right? Yes. It's build to sell. It's not build to transfer from zero money to their employees. It's built to sell to have a big exit. Yeah, but it's not going to be Paula. It won't be a zero dollar transfer to this. And if Mary thinks it's going to be a zero dollar transfer to her husband, she is sadly mistaken. There will be a bicell agreement in place where you're going to help this person exit by buying the company from them. Now, you can use company assets to do that. But it's still Paula. It could still be at 30-35 a build to sell scenario. If you've got a founder is 30 years old who's like, you know what? In the next five years, Paula, I want to transfer this to you by the time I'm 35, but it's build it together and then you won't at long term and I don't. Yeah. That makes zero sense. It can still happen. It doesn't make zero sense to me. Yeah. I mean, if I can sell it to somebody else and go do something. If you can sell it, if you can sell it, sure. But I mean, a person who's completely unqualified to buy who doesn't have the assets, it's not going to be a big exit. I would be incredibly suspicious of any. How do I know that her husband is unqualified to buy? We don't know what he does at this corporate job. Right. We don't know if he's the dude that could run the company next. And the owner is tired and doesn't want to see it through to the next... Right, but if he doesn't have the underlying assets to make a big purchase, nobody wants to use their own company as collateral for the sale. Mary's yelling at her device right now. You guys are off on a tangent. Mary, to get back to your question, the big takeaway is, stop being brainwashed into thinking about salary because that's what small thinkers do. Strong words, very strong words, but that is what I believe. If you're thinking about salary, you're thinking small. Better to work for a buck a month or a buck a year and capture the profits, capture the upside. For everybody else who's listening to be clear, what I'm talking about when I say that is very specifically when it comes to small businesses. If you're working for a Fortune 500 company as a rank and file employee, any payout that you get is going to be heavily diluted. Right? But if you're working for a small business, the whole point of being in a small business is to be able to participate in the upside. A big Fortune 500 company can give you... they have economies of scale, so they can give you a break room with a foosball table, right? And they can give you on-site dry cleaning and a company holiday party and all of these things that a small business can't. But you trade that away when you move to a small company so that you can be in a setting with more flexibility, with more autonomy, and with more upward potential. So essentially, you're trading away a salary lifestyle for really an entrepreneurial lifestyle. No entrepreneur is ever thinking about salary, ever. I had a mentor tell me once that there's two doors in life. There's the security door and the opportunity door. And the person who reaches for the security door gets neither. Ding, ding, ding, ding, ding, ding, ding, ding, ding. Yep. That's good. I might tweet that or x.com that or whatever it's called these days. As long as you call me. All right, done, done, and done, done, and done. There are, would you say Joe, there's two doors security and opportunity and the one who reaches for the security door gets neither. Two doors in life. Security door and opportunity door. There are two doors in life. All right, being tweeted as we speak. So thank you, Mary, for the question. Best of luck with what I hope is this transition to the small business. We'll come back to the show in just a second. But first. Joe, our final question today comes from an anonymous caller. Paula, you don't say. I do say. Well, okay then. When I was answering Mary's question, I told her, Jamie Diamond, the CEO of JP Morgan Chase, I told her about his philosophy about salary, which is, you know, don't worry about your salary, worry about what you're going to learn. You know who else says this? Actually, Robert Kiyosaki in the book Rich Dad Portat also says the same thing. Don't worry about your salary, worry about what you're going to learn. It's good advice for life, especially for people who are at the beginning of their careers or who are about to change careers, or who are thinking about going back to grad school, but they don't want to bear the opportunity cost of missing out on having a salary for a couple of years. It's not about one or two years, you know, it's not about that. It's about what you're going to learn. It's about your upward potential. It's about, anyway, point is, in honor of that idea, and in honor of some of the people who have given a voice to that idea, let's name this caller Jamie. I thought we should have named him Homer Simpson, because I'm sure Homer Simpson must have said that. Oh, huh. Well, Homer Simpson is the master of side hustles, and the master of having fun at that muddled middle, which goes to Christina's question, you know what, let's do that. Oh, we're bringing in a release picture. Let's merge this together. This is Jamie Homer. Jomer. Jomer! This is Jomer. Hi, Paula and Joe. My wife, toddler daughter, and I will be moving in a body year, and we're trying to decide on the best option for buying our next home. My wife and I are both 35. Our combined income at the time of the move will be roughly 150,000, increasing yearly to 190,000, then 220,000, and remain generally steady after that. We currently have about $350,000 in retirement accounts. $300,000 in mutual funds and savings, and one long-term rental property. This generates about $2,400 yearly in revenue above paying its mortgage, and has about $275,000 in equity. We own the house that we're currently living in, which we would like to turn into a rental also when we move. If we do that, it will generate about $2,400 yearly in revenue above paying the mortgage also, and it currently has about $180,000 in equity. Ideally, we'd like to make this next move, or last move for a long time, and we'll need to spend around $600,000 on the next house. To generate the down payment for that home loan, should we sell one or both homes, or sell some investments? If so, how much would you recommend planning on using for the down payment? Or is there another option that we haven't thought of? Thanks. Jomer, thank you for the question. Why? Why is name is Jomer? I'm sorry. Jomer. Thank you for the question. First of all, congrats on everything that you've built on the increasing salaries, on the fact that you've got one, and soon to have two rental properties under your belt, big congrats on all of that, as well as on the clarity of your plan. That was one thing that really struck me as I heard you talk. Not only have you set things up well, but you have a very clear idea of exactly where you want to go next, exactly when you want to get there, how much that will cost, and what trade-offs might need to be made in order to facilitate that. So, let's talk about how to put together the funds for the $600,000 home that you want to purchase, your forever home. A couple of things strike me right away. Now, you mentioned that your rental, one of your rentals gets $2,400 a year, so $200 a month, above the mortgage payment. That instantly set off like ding-ding-ding alarm bells in my head because sometimes people use the phrase mortgage payment colloquially when they actually mean as mortgage payment plus all of their operating costs. I'm hoping that's what you meant. If what you meant was literally the mortgage payment is X and the gross monthly rent is X plus 200 per month. That is a concern because that $200 per month is not going to equate to actual profit once you factor... You're probably underwater. Yeah, exactly. Once you factor for vacancies, once you factor for repairs, maintenance, major capital expenditures, once you factor for all of that, that 200 is going to be over a long-term aggregate average. It's going to be gobbled up. Now, there will be minor variation. There might be a small run of a few months, maybe. If you're lucky, there might even be a run of a year or two or three when you're up, right? But over the long term, that 200 a month is not profit. So my question back to you is when you said that this property makes 200 a month or $2,400 a year above the mortgage payment, should I take your words at face value? Did you literally mean the mortgage payment or did you mean above expenses? That's going to be the differentiating factor. If you literally meant... If I take your words at face value and you literally meant the mortgage payment, that's big red flag there. But if it's 200 a month above expenses, including an estimate for long-term vacancy, CapEx, repairs, et cetera, cool. Then we're good. Then that's a great return, actually, and you should keep it. What was the other one that hit you right away? So the other thing is he talked about how much equity he had in the homes and then he talked about the cash flow that the homes were creating. But without knowing the value of the homes, I don't know what the cap rate on those homes is. And so, Joe, or what I would suggest to you is you calculate the cap rate and the way that you do that is net operating income divided by the price that you paid for the home equals. And it's going to give you something that is expressed as a decimal point. So then multiply that decimal point by 100. That becomes a percentage. That is the percent that represents your cap rate. So net operating income, which is the money that's left over after you pay all of your operating expenses, but not your financing expenses. Leave the principal and interest portion of the mortgage out of the equation, take your gross rent, subtract out property taxes, homeowners insurance, repairs, maintenance, vacancies, subtract out all of that, do not subtract out the principal and interest portion of the mortgage. That doesn't enter into the equation at all. Subtract out the non-financing operating expenses from the gross rent that will leave you with a figure that's known as your net operating income. Take that net operating income, divide it by the value of the property, and then that becomes the decimal point, which multiplied by 100 becomes a percent. That percentage is your cap rate. If that cap rate is three or under, then I would say definitely get rid of it. If it's four or five, you're in a grey zone if you like the property and it's easy to manage and relatively new, and if you like holding it, I don't have any objection to keeping that. If it's above five, that's actually probably pretty good. But yeah, if that cap rate, especially if that cap rate is like 1%, 2%, you're not going to want that. Yeah, that leads right into my initial thought, which is Paula, that we don't have enough information to make that decision, which you already illustrated. We do need more info, but the way that I think about this stuff is this. If our goal is to look not at which asset we sell, but which asset we keep, I think that is that's it, because I want to start with what's in the right place. If something's not in the right place, then I want to prune that bush. I want to make sure that I've got only assets that are working for me. So your methodology works toward that, even on just a more basic level, I think for a lot of the people hanging out with us is this. A collection of assets will generally have a lower standard deviation than one asset. What do I mean by that? I mean that standard deviation is the wiggle that you're going to have. So if I've got a collection of mutual funds that are well diversified, I bet the standard deviation on that, the chance that something's going to go wrong on that is a lot less than on a single property. So if my goal is to increase standard deviation, then keeping a single asset is a better idea. If my goal is to lower standard deviation than keeping the diversified collection is a better idea. For me, that's the first question that I would ask. Do I want to try to hit a home run with a single property? Are there things that, let's say, things don't work out or aren't working out according to the formula that you just laid out? Is there a way to change that formula? If there's a way to change that formula, so it's in my favor, and I want a higher standard deviation, then I'm going to sell off these mutual funds and I'm going to go with a single property that meets Paula's formula. If I can't, then actually it's pretty obvious I'm going to sell the property. So that's the basic framework that I use. Am I trying to get there more reliably? Or am I trying to shoot the moon? Jomer, if you do want to hold the property, because you have so much equity in the properties, you could borrow against the equity. Now, I would not do that with a cash out refinance, because a cash out refi will close the existing mortgages that you already have, and you have a locked-in fixed interest rate. You likely do. But what I would do is take out a home equity line of credit or a home equity loan, something that will not close out the original mortgage, but rather open a second separate loan against that equity. And then that would be another way that you could keep the properties and keep the rental income while also coming up with the cash for the next down payment. And yes, the home equity line of credit or the home equity loan will have a fairly high interest rate. But that's true, basically any loan that you're going to take out right now were in a high interest rate environment. And so the idea right now is marry the property date the rate. When you buy a house, you are marrying the property. This is the house that you want to be in for the long term. But you're dating the rate. This is just a temporary thing and this rate, you know, you're going to kick this rate to the curb in about a year or two when you get a better offer. Taking out a loan against the equity that you have in both homes, that would be another way for you to generate down payment funds without having to get rid of these assets that you already hold. Because the thing about real estate transactions is transacting is very costly. Every time that you buy or sell a home, there are substantial buy and sell related fees. And if you compare that to a mutual fund, I mean, Joe, as you know, as a former financial planner, if someone bought a mutual fund that had some crazy back-end load, people would be having a meltdown about it. Every home that you buy basically has a mutual fund with a giant back-end load. Yeah, exactly. There's a huge cost associated with selling the property. And so all else being equal, broadly speaking, the less that you can transact real estate, the better, people often ask me, are you buying and selling properties? I'm like, no, I'm just buying, I'm not selling. I never sell any of my properties. Because why would I take that kind of a hit? If instead, I could just hold the property, and if I ever want to tap that money, I can borrow against it. I'm not going to take the hit to sell, unless there's a very compelling reason to do so. So for you, Joe, compelling reason to do so would be, if your cap rate is absolute garbage, if you run the numbers and you've got a 1% cap rate, and then you say, wait a minute, can I improve this? Can I increase the gross revenue? Can I decrease the operating expenses? You try to create efficiencies around that property in order to improve the cap rate. But if that fails, and your cap rate is still garbage, and if the property is literally bringing in 200 a month above just the mortgage, meaning that you're over the long term underwater on it, or it's cash flow negative, you're not underwater equity wise, but in the long term, it's going to be cash flow negative because of the tight relationship between gross revenue and monthly mortgage payment. I mean, if that's the case, then yeah, those would be compelling reasons to get rid of it. Anything beyond that, though, hold the property borrow against the equity. Thank you, Jomer, for your question. Enjoy trading up to the next property. I just realized it could have been Jomer or Jammer. If we went with Jamie like, Jam, Jam, yeah. And then the Murr. It could have been Jammer, but we went with Jomer. Oh, it could have been homey. It could have been homey. It could have been homey. What a missed opportunity. Hanging out with our homie. So, Jomer, can people find you if they would like to hear more of your crazy portmantos? If you would like to be one of my homies, you can head over to Stacking Vegments. Every Monday, Wednesday, Friday, it's the greatest money and personal financial on Earth because it's a variety show patterned after, as you know, Paula, the late night talk show. So, very fast-paced, lots of fun, and maybe you'll learn something. Maybe, just maybe. Maybe. Where am I in the trivia contest as of Labor Day? Oh, listen to you. Yes. Well, I mean, this episode is going to air a month from when we're recording it. Right? This episode is going to air September 27th. We're recording this September 4th. Yes. So, I thought there's a 23-day gap between when we record and when this episode airs. So, we don't know where I'm going to be in the trivia contest. The reason Paula brings it up is because the very brilliant Paula Pant, who knows a lot about a lot of things, is I think the technical word is crappy. She's the crappiest trivia player ever. The last three years, four years, she's always finished last place in trivia. Somehow, and by the way, these are only our Friday episodes where we have this. Monday Wednesday, we have our trivia question, but therefore you, for our homies. But on Friday, it's a fight to the death. That's a little over the top. It's a fight between Paula, award-winning blogger, Lin Penzo, and my co-host OG, which is short, of course, for other guy, by the way. So, Paula's in first. Paula was just waiting for me to say that. I certainly am. Somehow, Paula's in first place. We can't figure out how that happened. We are. Steve, can we get a little, we are the champions going? I doubt it. That is copyrighted music, Paula. Oh, man. We could probably hum it. There we are. As long as YouTube algorithm didn't pick that up, which I doubt they did, because it sounded horrible. So often. I think we're probably good. It's a very smart algorithm to pick that up. But everybody doesn't know what you guys are playing for, which is a huge, huge thing. It is a trophy that our producer, Karen Repine, found at the dollar store. And it is, it looks like it's a little dennyed. I am going to insist. If I win it, I am going to eat macaroni and cheese out of that trophy. Oh, delicious. Yes. Fantastic. Have you ever drank out of one of your plutus award cups? No, I haven't actually. I've mimicked drinking out of one of those cups on stage, but I don't know if it could actually hold liquid. Yes. It does not. Tried. Tried. It does not. So you have to drink it very fast. Make sure it doesn't go to the bottom because it will spill out the bottom of the cup, unfortunately. All right. Well, thank you so much for tuning in. This is the Affordable Anything podcast. If you enjoyed this podcast, do a few things. Number one, check us out on YouTube for those of you who are not watching on YouTube. Oh, and if you are watching on YouTube, hi, if you're audio people, go to youtube.com, slash afford anything. Hit subscribe, hit the bell for notifications. Come join us there because we are really, we're making YouTube our home. You know, it's our home. It's where we settle in and have some coffee and eat some macaroni and cheese. Got rid of the tent, built a foundation. We're staying YouTube. Exactly. You see YouTube things. It's not just a fad. So yeah, come on over to YouTube. Say hello. Also subscribe to our show notes, afford anything.com slash show notes. We're doing a big overhaul of the show notes. In fact, it's going to be more beautiful, more well designed, more engaging, I hope. Come check us out, afford anything.com slash show notes for synopsis of every episode. Thank you again for tuning in. I'm Paula Pant. I'm Joe Salci. Hi. And we will catch you in the next episode. Here is an important disclaimer. There's a distinction between financial media and financial advice. Financial media includes everything that you read on the internet, here on a podcast, see on social media, that relates to finance. All of this is financial media. That includes the afford anything podcast, this podcast, as well as everything afford anything produces. And financial media is not a regulated industry. There are no licensure requirements. There are no mandatory credentials. There's no oversight board or review board. The financial media, including this show, is fundamentally part of the media. And the media is never a substitute for professional advice. That means anytime you make a financial decision or a tax decision or a business decision, anytime you make any type of decision, you should be consulting with licensed credential experts, including but not limited to attorneys, tax professionals, certified financial planners, or certified financial advisors, always, always, always consult with them before you make any decision. Never use anything in the financial media and that includes this show and that includes everything that I say and do. Never use the financial media as a substitute for actual professional advice. All right. There's your disclaimer. Have a great day. Thank you.