Finance Friday: Why You Don’t Need to Sacrifice Everything to Hit Financial Freedom

Mindy:
Welcome to the BiggerPockets Money podcast show number 172, Finance Friday Edition, where we interview Jeff and talk about getting your spending under control, the sunk cost fallacy and selling underperforming assets.

Jeff:
Just looking at the amount that we spent a month, I mean, for how much you make, it doesn’t sound like, okay, we make enough to spend that much, great. But then, if you had to plan. Okay. You try to look at your number. Let’s say, how many doors do I need at this much cash flow to reach our goal, right? And then, all of a sudden, you’re like, wow, we need $14,000.

Scott:
It’s a staggering amount of wealth. You have to build an empire to support that.

Mindy:
Hello, hello, hello. My name is Mindy Jensen and with me, as always, is my low hanging fruit expert co-host, Scott Trench.

Scott:
These introductions are always so appealing, Mindy.

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 that 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, start your own business, or maybe you’re already a millionaire and just don’t know how to rejigger your financial position to become free. We’ll help you reach your financial goals and get money out of the way, so that you can launch yourself towards your dreams.

Mindy:
Scott, I’m super excited to have Jeff on today because Jeff has a nice problem to have in that he makes a super high income and he’s not really keeping track of where his money is going. So, he has a lot of really easy, I don’t know if easy is the right way to say it, but a lot of really easy fixes to launch him towards his financial dreams, which are retiring early.

Scott:
Yeah. I think that he’s really got control of his finances. He wants to do better. He’s got a lot of things going right for him. His family is doing a good job in a lot of ways. What I think this show highlights is a classic problem that is crippling middle class America, in general, on this country. It’s that the money, the liquidity, the cash, leaks through your financial position. And the numbers, the net worth numbers only show up in that home equity and that retirement accounts in a really meaningful and robust way.
And that limits freedom. It’s net worth on paper, but it’s not enabling you to make changes in your life or it doesn’t feel like you’re getting ahead. It feels like you never have any cash. It feels like you always got that one month. It feels like if you lose your job, your whole position blows up.
This is the situation that Jeff has found himself in, in spite of the fact that he’s a millionaire. And so, I think today, taking that, digesting his position, and spitting out a new framework that allows him to accumulate real liquidity and begin re-distributing his wealth, so that some of his wealth at least is intangible assets that produce spendable cash flow today. Or spendable liquidity today is going to make a huge difference in his freedom, quotient, if that’s a thing, his ability to enjoy life and realize his goals because he’s there. He’s there or close. He just needs to re-strategize his capital deployment.

Mindy:
Yeah. I’m really excited for his follow up episode because I think that once he starts making these changes, they’re going to become easier and easier and easier to continue to make.
Before we bring Jeff in, my lawyer makes me say, the contents of this podcast are informational in nature and are not legal or tax advice, and neither Scott nor I nor BiggerPockets is engaged in the provision of legal tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants, regarding the legal tax and financial implications of any financial decision you contemplate.

Scott:
Thanks, Mindy. Now, should we go talk to Jeff about money?

Mindy:
Yes, we should. Jeff, welcome to the BiggerPockets Money podcast. I’m so excited to talk to you today.

Jeff:
Hi, I am excited as well. Thank you.

Mindy:
Jeff is married with two children and he’s on the path to financial independence, but Jeff has a caveat. Jeff has poor vision and is pursuing FIRE to be able to use his eyesight while it’s still there. I share in Jeff’s poor vision, so I totally get it. You see me with glasses on today because I can’t see.
Jeff, why don’t you tell us a little bit about your financial background? What is your income? What state do you live in? High cost of living area, low cost of living area, your debts, and let’s get an overall financial picture.

Jeff:
Okay. So, I’ve always been money conscious, but while my efforts and goals are there, the actions haven’t always turned out the way I’d hoped. So, I always had two jobs in high school and in college, so I know the value of working hard for money, but it always went out in different areas.
So, I’ve always worked and after college, I paid off my student loans. It took about six, seven years. I bought a duplex before I bought my single-family home that we live in. We live in California, so it is expensive. So, we live in Orange County, which is expensive, but we have our house one-off ramp away, so we could save money. So, we bought the duplex in 2007 in a small town, thinking that that city would get bigger and whatnot and the values would grow.
After 2008, the reverse happened. So, it went down. I hold on to it. The rents pay the mortgage and whatnot. So, it’s there, but it doesn’t generate any income per se. We live one-off ramp away from Orange County to save money and we bought our house in 2010 and you got a good deal around $340. And now it’s worth around $600. So, I’m trying to save money that way, but because we still work in Orange County, the one-off ramp away takes us about 45 minutes to drive every day. So, it weighs on it.
So, our goals, along with being financially independent are to try to move in that area one day. So, along with that, we try to save on groceries and whatnot. And I have an investment property in Memphis. We have two HELOCs. I’m not sure how detail you want to go on those to try to pay off existing bills.

Scott:
We’ll definitely dive into those. We’ve learned a lot about those recently.

Jeff:
Okay. And then, I have a truck payment. And I will never buy a brand-new truck, but I would always buy newer to save on maintenance and whatnot. And so, we have a truck payment. And I was driving a lot for work, so the reimbursement checks paid for it. Well, now I’m not driving for work anymore, I’m staying home. So, I’m paying for that. But it’s a 2% interest rate, so that’s not crazy.
So, while I could just try to pay it off, I’m a big fan of try to invest elsewhere where the numbers are higher to try to pay it back with those profits. So, I have about one and a half years left to pay that truck off and I’m not in a hurry to do that right now. My wife has a leased car. And so, she makes more than I do and she deserves some luxury. She’s in meetings all day. She works longer hours. And she says, “I want a newer car every three years. And I don’t have to do maintenance. I don’t have to struggle. It doesn’t go up and down in value. I just know I’m going to be paying more every three years.” So, we’ve talked about that and whatnot. So, those are our car payments.
The HELOCs, so we took a HELOC out of our primary to pay off one of our biggest financial mistakes ever, which is a timeshare. And we cannot get out of it for the life of us and we’re paying on it and paying on it and it’s hard to use. So, we’re just making those payments a month. We use the HELOC to pay it off, because we thought, “Hey, if we pay it off, we’d have more options.” Turns out, it was the exact opposite. So, we’re stuck with it for now. So, we’re trying to pay off that. And a kitchen remodel, which we did before we had our second because our kitchen was literally falling apart, so it had to get done.
So, we use the HELOC to pay for those two things. And I’m a big fan of the HELOCs because it’s a lower interest rate, it’s flexible, you don’t pay for it unless you use it kind of thing. And depending on your tax, man, the interest is a write off. So, we’re trying to pay those off. That’s about $35,000 right now. It was $85,000 a couple years ago. So, we’re chipping away at that. That’s been the biggest one. So, this year, we’re going to try to walk from the timeshare just say it is what it is. Stop trying to sell it and get away from that. As far as our big debts, that’s it.
I have child support and that’s about $650 a month. And also, we have daycare for our second and that’s $1400 a month. And that’s a private and that’s why that’s so high, and we justify that because it’s across the street from my oldest son’s school. So, it’s easy pickup, grandparents could pick up and whatnot. And we tried a cheaper one and it just did not work. So, it’s the price you pay for kind of living far away in a different city because you can’t just drive far away to different schools, it’ll just eat up your afternoon after work too fast. So, it’s a price we pay.
So, those are pretty much the big ones that we’re working through. And then, so I can give you quick numbers. Our mortgage is $1600 and we’re in the middle of a refinance right now to save $200 a month on that and duplex is about $1100 a month and that brings anywhere from $1300 to $1200 a month in. So, it’s fine when the tenants are paying your mortgage. But this year, we had an AC go out and the septic tank go out. So, you’re out $9,000 out of pocket right there, so that definitely hurts.

Scott:
You’ve got a $200 spread with $1100, $1200 in rent and $1,000 mortgage. Is that what I heard?

Jeff:
That’s correct. Yeah.

Scott:
Okay, great.

Jeff:
And I did look into refinancing that as well to try to go lower interest rates, but an additional $150 a month I’d save is not worth it because I paid $240 for this thing in 2007. In 2010, it was worth $80 and now it’s worth about $170. So, as my real estate knowledge has grown, I’ve realized I can get a lot more money out of state. And so, I’m going to try to sell it next year to try to put whatever profit I can to something cheaper to try to just get equivalent to that rent without the big debt hanging over me, if that makes sense.
So, that’s another one. Timeshare is not too bad. It’s about $280 a month, but we can’t use it, right? And we’re still paying it off with the HELOC, which is about $350 a month. And then, we have minimal expenses. We only have cable during football season. So, I’ll usually have it, cancel it. We just YouTube it.

Scott:
Highly necessary, yes.

Jeff:
Yeah. As if maybe, you can tell through my background is, I always care about money, but the results aren’t always there. And another big one hanging over our heads is, so I have a paid off property in Memphis and I bought that five years ago. It’s been rented the whole time, no problems. So, I took a second HELOC out on that with the idea of, hey, let’s use this “free money” to make some profit, and then help pay off the other HELOC?
Well, that turned bad. I went to flip our money, didn’t work out, I ended up putting more money. So, right now, that’s at about $60,000 that I owe, which the payments on that are about $200 a month. The house is on the market. It’s under contract.

Scott:
And that’s interest only, right?

Jeff:
Yes. HELOCs are interest only.

Scott:
So, your payment is much higher than that. Your interest requirement is 200 bucks a month.

Jeff:
That’s correct. And so, one of the reasons why I like HELOCs, I believe in the value of them if you can make money off of them is, at the end of the year, when you find out how much interest you’ve paid depending on what you bought with that, it is a write off. So, you’re getting a cheaper interest rate than just, let’s say, maybe hard money or credit cards.
So, depending on how you use it, I do feel it’s a valuable tool. I know it can be hard to get more than one. So, I was lucky enough to get two. I don’t know if I’m lucky right now. So, I learned and I tried to apply these things, but this just hasn’t worked out. So, that will be something that we would be paying off down the road once the house sells and the dust settles as far as exactly how much we owe.

Scott:
So, when I think about your assets, we’ve got the primary residence. We’ve got the rental property in California. We’ve got the rental property in Memphis, Tennessee. Is that right?

Jeff:
Yes. Correct.

Scott:
Do you have cash?

Jeff:
Yes.

Scott:
Well, how much cash do you hold on hand?

Jeff:
Okay. So, I would call it a blessing and a curse. So, we bring in about roughly $250,000 a year, I pay a lot of taxes. But as the income comes in, so my wife gets bonuses and she’s very good about, okay, I’ll sit in the meetings all day, but you kind of handle the money.
And so, I’m heavy into the stock market, not just a broad S&P fund, I play individual stocks. It’s like a gambling addiction, basically, because you can make a lot one morning and you can lose it all the next. So, I play that. I try to be smart. So, we have about $65,000 right now in that. And I could take that all out today and pay off a lot of those debts. But that money is not working for me then. And then, we’d have to start saving over and over and over again.
So, that is one of the questions that we kind of go back and forth on is, if I’m regularly making 30 to 40% in the stock market this year, is that worth trying to pay off a HELOC that’s at 4% right now and a car loan that’s at 2%? But I try to do half and half every once in a while, so every three or four months, I’ll take whatever profit I made, not the original investment out of the stocks, and then pay off the HELOC. So, I try to compromise in that, whether that’s the best way to do it, I’m not sure, it’s just to me it has made sense.

Scott:
No. Fair enough. Well, let’s get into kind of the why behind all these things later on, and let’s just keep going through your assets. So, your assets, we’ve got the Memphis property, the California rental property, the primary residence, and then $65,000 stocks. Do you have a cash cushion, specifically?

Jeff:
Maybe about $10,000?

Scott:
About $10,000. Okay. And then, do you have retirement accounts or anything else like that?

Jeff:
Yes. So, we each have a Roth that after listening to it, I can’t remember what show was that you did about converting the Roth. I listened to it six times to understand step by step. So, we each have about $25,000 in a Roth IRA. I have $260 in a 401k. And I was doing 25%. And then, I realized, well, I’m just going to stick to the five because that’s matching. And then, try to invest the rest, right? So, $250-ish in the retirement account.

Scott:
Does your wife also have a retirement account?

Jeff:
Yes. I think probably, let’s say, high 20s maybe, in that one. And once again, I think, it’s 3%, which is the match.

Scott:
Right. And is this a pretty complete picture of your assets now?

Jeff:
Yes. Assets, absolutely. Unless you want to look at my truck, which I owe about eight, and it’s worth about 17.

Scott:
Yeah, we could talk about the truck. I don’t know if that’s going to be the meat of your financial story here. You’ve got some big numbers around the income expense and some of these assets and things. So, while there’s certainly optimization to be done in some areas like the truck, I don’t think that’s going to be the 80/20 of your financial position in this.

Jeff:
Okay. And then, would you like to know our expenses for the month?

Scott:
Yeah. I would love to start with how much do you think you’re able to accumulate on an after-tax basis each month? How much can you deposit into a bank account for example, if you were just diverting it there while maintaining your 401k contributions as they currently stand?

Jeff:
We are about $14,600 a month and I have a side job. I do IT work. So, it depends on if there’s any projects and whatnot. That’ll bring home anywhere from 500 to $3000 every couple months, so it’s not guaranteed. But I’ve been doing it for so many years now that we can rely on it.

Scott:
Okay, great. And then, what is your state? How much are you able to save out of that $14,000 plus?

Jeff:
So, we put 20% aside each month. And then, we were saving around $3000-ish. Our expenses come to about $9600, give or take. And one of those big bills was our groceries, which was coming out to about $1000 a month because we were all at home for a while, and that we probably trim that down to about $800 now.

Scott:
Awesome. I don’t know specific. We always talk about groceries. It is definitely possible to continue to knock that down. But $800 a month seems pretty par for the course for a family of your size that we’ve heard on the show, even in other places that maybe are cheaper than California. I know we can get those down, but I’m not sure. Yeah, I don’t know.
$9600 a month. Let me just point something out here. Let’s round it to $10,000 a month in expenses. At that level of spending, if you like the 4% rule, for example, that’s $120,000 a year. If the 4% rule says that I can safely withdraw about 4% of my portfolio to sustain a 30 year. And we’ve had a lot of arguments and disagreements and debates about how that translates to perpetuity, but we’d like the 4% rule as a general rule of thumb, as that moving FIRE targets. Some people like to go beyond that and be more conservative.
But just playing devil’s advocate, if we’re doing that, if you want to spend $40,000 a year at the 4% rule, that means you need a million dollars in net worth, invested net worth, in order to draw down $40,000. At your current $10,000 spend, that implies a $3 million net worth target for FIRE. So, I really think that that $9600 number, given your goal of moving toward FIRE very rapidly, is got to be one of the first things in there because the more you spend, if you can cut that down from $120,000 a year to $80,000 a year, now you’re not only able to accumulate more wealth, but now you only need $2 million instead of $3 million to sustain retirement, if that makes any sense.

Jeff:
Yes, it does.

Scott:
So, where is that $9600 going?

Jeff:
Yeah. So, we have a mortgage payment, which is $1600. The childcare which is $1400, but he will go into the public system in a couple years, so that will go away. But if we do move closer into Orange County, then our mortgage will go up a little bit as well, but that will go away. Child support, it’s here to stay. And I’ve looked at, you start from the top, the big expenses and try to work your way down. Looked at renegotiating that as well. So, maybe it will go down. Not sure. But right now, it’s there to stay.
Yeah, grocery store, a couple of small subscriptions, nothing big. Our shopping, so, Amazon and this is where communication is key, that is anywhere from 400 to 700 a month. And that is diapers is about $100 a month and any kind of supplies we need right away, right? And Amazon creeps up on us because I’ll have a budget, you’re all [inaudible 00:20:29]. Okay, we spent this much, this is how much we have left and all of a sudden that Amazon card comes up and say, well, I did not know you would spent this much. Why you needed this and that? Whether they’re an essential or not, we didn’t know, right?
And so, we talk on how much we have to spend. But we don’t really talk on how much we’re allowed to spend per se because we’re both money conscious. If we need it, we need it. Because the money’s there, if that makes sense. So, the Amazon, which is just anything we need for the house or gifts or anything like that. So that’s about 600 a month. Going out to eat, whether it’s happy hour, or just like a quick dinner, which is my wife and I, that’s about 250 a month.
Now that everything’s shut down again, that has really helped out. So, I would put that at about 150 a month, give or take. Restaurants were about and that’s just take-out for the family, right? If we can’t cook one night, that’s about 460 a month, give or take. We are doing so much better now that we’re forced to just do a big grocery run and have leftovers and instant pot and crack pie. We’re doing a lot better, but that’s around 400 a month. Fast Food is 100 a month.

Scott:
So how much total are you spending on food other than groceries? How do we sum that up? I hear 250 a month eating out, 460 a month on takeout, 100 a month on fast food.

Jeff:
Yeah, you’re at about 800.

Scott:
Okay, great.

Mindy:
So, $800 a month at various restaurants in addition to $1,000 a month in groceries?

Jeff:
Yeah.

Mindy:
Okay.

Scott:
Okay, great.

Mindy:
I’m seeing some big opportunities, but I’m also seeing like your mortgage, you said is $1600 a month? That seems really low for the Southern California market. I don’t know that moving closer is going to free up much of anything because when you sell your house, you get a big bunch of money. But then, if you don’t put it all down on your next property, you’re going to be having a higher mortgage payment. I mean, what are properties going for? I think you said you paid 350, 360 for your current house?

Jeff:
Right. So, we paid 340, it’s worth like low sixes, give or take. And yes, in that value, my mortgage payment is going to go down 200 a month in a month or so because we’re refinancing. So, it’d be about 1400 a month, but while it’s cheaper, it does weigh on you sitting in 45 minutes of traffic to go one off ramp every day. And then once we have sports, you’re sitting in traffic two or three times a day to go back and forth for practices and whatnot.
So, it does eat at you, it’s a lifestyle thing. Do you want your kids sitting in the back of a car versus having a higher mortgage payment to live closer, which is, we struggle with. But yes, how do you make that compromise? You want to retire early, but you want to have a quality of life to where we’re not in the car all the time.

Mindy:
Yeah, that’s a tough one. Because let’s say you sell your house for 600. What can you buy closer? Is it going to be less? Can you get anything less than 600 closer?

Jeff:
No, it is going to be one off ramp away that we will move and the cheapest we could probably find is 750. You can find quadplex for a million. And we’ve thought about doing something like that if the numbers make sense.
I’ve talked to my wife about buying a bigger house with a fourth bedroom or fifth bedroom and renting it out, but she’s very skeptical with having kids and having somebody else. So, we are talking about those strategies but our goal is to try to do this in two years. So, we’ll see. But yeah, 750, 800 would be the price.

Mindy:
Okay, yeah. I don’t see that being a financially beneficial decision, not taking into consideration the life quality part. Financially beneficial, I don’t see that really working out in your favor, unless you do something like the quadplex. But then, do you want to live with other people, and that’s a consideration.

Jeff:
I’ve taken note to some of your previous podcasts about living flipping as well. Because if I could do one or two of those, I could sort of maybe flip my way up to an affordable house? So, that would be something we could look into as well.

Mindy:
That’s also an option.

Scott:
With your expenses, we’ve gone through 1600 in mortgage, 1400 in childcare, 1000 in groceries, 650 in child support, 600 in Amazon shopping, and 800 in food. Do we have any other major expenses coming out of your position right now?

Mindy:
Car payments?

Jeff:
Yeah, so car payment at 2%, which is my truck and her car, which is 428.

Scott:
So, what is the sum total of those car payments?

Mindy:
It’s like 850.

Jeff:
872.

Scott:
Great. Okay. And keep going, what else we got for expenses? And that’s just car payments. How much does the car in total cost yet on a monthly basis between the payments and the gas and the insurance?

Jeff:
So, our insurance for both, it’s pretty cheap. It’s 125 and then we have our cell phones, which between us both is 330, which is a lot and we tried to reduce those. The HELOC on our primary 350. Timeshare 282. Oh, and we have two dogs, and so, those dogs between dog food and vet is 175 a month.
And we’re just talking about the big ones, right? And like you said, grocery they’re 1000, Amazon 650.

Scott:
Okay, great. So, you think we’ve covered most of it now?

Jeff:
The big ones, unless you wanted less likely, I have an HOA which is 170. So now you’re getting into the lower ones.

Scott:
Give me a sum of the miscellaneous stuff, like how much total are we missing from your spend of the smaller stuff? Why don’t we add it all up and lump it together?

Jeff:
You’re about 2,000 with the miscellaneous.

Scott:
Okay, so we add another 2000 on top of that. So, I’ve got 14,600 a month in income. I’ve got 1600 in mortgage. I’ve got 1400 in child care that’s because it’s 3000 in expenses. I got 1000 in groceries, that’s 4000 expenses. I’ve got child support, Amazon, and various other food coming in at 650 plus 600 is 1,200, another 2,000. It’s now at 5,000 in spend.
I’ve got about $1000 a month going to car payments before we get to gas and that kind of stuff. And that is now at 6000 in spend. I’ve got cell phones, HELOC, and timeshare. HELOC again, we’ll talk about it. I’m not sure that’s expense. But you’ve got another 1000 coming out from those items. Now we’re at, was it 6,000 in spend? 7000 in spend?

Mindy:
Now we are at seven.

Scott:
7000 in spend. And then we’ve got another 2000 in miscellaneous spend for 9000 a month. So, what I’m seeing here, when I zoom out on this is, your housing expense, I think, is quite reasonable relative to your income. So, your fixed expense, that’s the biggest fixed expenses where we always start.
And I think like your current situation is quite reasonable. What you choose to do in the future will have a big impact as a big fixed expense. But you really are, I think, in this spot where your variable expenses are what’s killing your ability to accumulate cash on an ongoing basis.

Jeff:
Right.

Scott:
These cars, they’re crushing you, you’re taking $1,000 a month, and we didn’t even get to gas or maintenance on those cars, right?

Jeff:
Yeah.

Scott:
And you have maintenance, at least one of the cars for those. So, something’s going on there. We’ve got 1800 a month on groceries and food is a lot and I think that you can probably figure out a way to form a tight budget there. Amazon shopping, I think, there’s a way to get controls around that that will allow you to still do that without being crazy.
And then, something’s going on in this $2000 miscellaneous category. That to me, screams, “Hey, we’re not really in tight control of our spending with a budget. Well, we’ve had a clear communication about what our goals are,” and those types of things. What’s your reaction to those these statements?

Jeff:
Agree. Completely agree and I think it’s a juggle as far as with two kids. What’s acceptable to cut out? What’s going to hurt us the most versus is it worth it or not? I completely agree. And then, with just our normal expenses, the utilities for the house. If it’s a summer or not, but it could be around 300. But that’s included in the 2000 that I mentioned.

Mindy:
I approve the air conditioning. I approve the air conditioning spent.

Jeff:
Oh, well here, yeah. And we had to actually …

Scott:
The air conditioning didn’t kill you on this one.

Jeff:
We had to replace it along with the duplex air conditioner. They went out a month apart so …

Mindy:
Oh, of course. Which is why you need an emergency fund and a reserve fund for your rental properties. Sorry, kicking a dead horse.

Jeff:
Absolutely.

Mindy:
Well, I’m going to kick another dead horse. I asked you if you track your spending in the application and you said yes recently and it was eye opening, but life happens and so do big expenses that derail us. And I want you to know that that is every single person I talked to. As soon as you start tracking your spending, it is shocking, where the $10 goes, the $20 goes.
Oh, my goodness, at the end of the month, I just spent $2000 on random stuff. I put stuff in the Amazon cart all the time, it is a shock. I don’t even want to look at how much money I’m spending on Amazon right now because it is so easy. Oh, I just need this one thing, I’ll throw it in the Amazon cart, it’s not real money. It goes on the credit card. The credit card automatically gets paid. You don’t think about it until you start tracking your spending.
And over the past few weeks, the past few Fridays, I have suggested that people track their spending the Mindy method, which is getting a notebook, putting it on the countertop, and writing it down in front of your face. And Scott is a millennial, and he wants to do everything online. He’s Mr. Computery and good for him. I’m old and I don’t want to do anything on computers. I just want to write it down.
But when you do it the Mindy method, it is in your face. You see this every time you write something down. The first time, the first of the month, mortgage payment. Okay whatever, there’s one line item that you owe, it’s $1600, whatever, it’s always the same.
Then, the third of the month, you’re like, “Why are there 10 line items on here? It’s only three days in?” And then by the sixth of the month, you’re like, “Holy cow, I’m almost to the next page already. Why am I spending all these money?” That’s the first month that you do this.
And then the next month, you’re like, “Oh, well, I don’t need to, I can consolidate some trips. I don’t need to buy that. I don’t need …” You start to pay attention because it’s right there.

Scott:
And I want to chime in here. For me and some other folks that works because, guess what? I have an enormous cash surplus after every month. And no, I don’t have as tight controls over my spending as Mindy’s household does. I should do that. I’d be a little richer if I did that. But for me, I don’t need to do that.
You need to do that. Because you earn a high income and it’s all leaking, it’s flowing through your hands like water, I don’t know. It’s just moving right on through your position and you’re not seeing it, which says to me, you need these controls. You can relax on them one day, perhaps, if you’re consistently saving that $5000, $6000 a month on this, but you earn $250,000 a year as a household. And your net worth, I’m estimating is only one to one and a half times that level of household income.
I think you guys can do a lot better on that. Well, outside of your rental properties. You got what? Maybe $500,000, $600,000 in total net worth that we kind of articulated there if I’m doing back of the napkin.

Jeff:
Yeah, according to Mint our net worth, everything is about 1 million.

Scott:
Oh, okay. Maybe I’m way off.

Jeff:
Because I mean it takes into consideration the 401ks.

Scott:
Oh, that’s right. Okay.

Jeff:
The rental properties and everything like that. But yes, I mean, I understand what you’re saying. It should be a lot higher for how much we make.

Scott:
I did a very bad math here. Thank you for correcting me on that. Okay. Fair enough.

Mindy:
But I mean, you’re doing well in the income front. What are the four principles? Earn more, spend less, invest in income producing assets, and start a business. So, you’re earning more.

Scott:
Great assets. Yup.

Mindy:
You have great income. And it’s really easy to be at that income level and think to yourself, “Oh, I make a lot of money. I don’t have to pay attention to it.” But when you don’t pay attention to it, as Scott said, it’s leaking out. Did you said leaking or pouring?

Scott:
Pouring.

Mindy:
It’s not pouring out. It’s leaking out? It’s little bits here and there but it’s a lot of little bits. It’s 20 bucks. What’s 20 bucks?

Scott:
Okay. There’s a lot of holes in the bucket maybe. There’s not one giant one. Yeah.

Mindy:
There’s a lot of little holes in the bucket. And I make $250,000 a year, I can spend 20 bucks, whatever. But it seems like there’s a lot of those 20 bucks. I think your food budget is the first thing that could be a huge win is just to try and figure out like meal plan. It is horrible to go to work, spend the whole day at work, and then come home, and you’re like, “Oh crap, now I got to make dinner for everybody. I have no idea what I’m going to make. I’m just going to have …”
I went out and got Chinese food last night because my husband ripped apart the kitchen and it was a disaster. Once it’s fine, but every single night, which is so easy to do. I’m not sitting here telling you you’re a bad person, but it’s so easy to just like, “Oh, I got it last night and oh I’ll just get it tonight.” And so, I think the eating out budget can be cut significantly without a lot of impact to your life when you combine it with meal planning.

Scott:
And let me ask you this, does your wife like her job?

Jeff:
No.

Scott:
She does not like her job. Okay. That’s interesting. So, a couple of things here. Your wife is the major income earner. She’s playing the offense in the household. Was that what you had mentioned?

Jeff:
Right.

Scott:
So, I think that that allows you to fairly take up the defensive role in the household and map those things out. And I also think, it’s perfectly fair for both of you to have spending money that you can use at your discretion. And I think that that’s a conversation you and your wife need to have about, “Hey, what do you want your discretionary spending to be?”
It sounds like she brings in several $100,000 in income per year. So, I think that allows you to have a $2000 a month, seriously spending allowance for her and you can pick whatever one you want for yourself. I don’t know, it could be a large number though, something there that you don’t get to touch. That’s a discussion point.
But then, everything else is stuff we’re going to do. And so maybe, what she picks with that is her car lease, right, and the gas associated with it, because gas is a necessity no matter what car you drive. But maybe she wants a fancy car, that’s totally fine. Personal finance is personal and we get to choose or spend our money on those things that makes our lives enjoyable, and that’s something that sounds like it’s important to her. And the way you brought it up, made it sound like it’s a discussion you’d had about the car.
But I think what can’t be happening here is you can’t be doing that, and leaking $2000 a month out on miscellaneous stuff, and carrying a $330 cell phone bill, and doing the Amazon shopping, and be doing the shopping out or the takeout and all that kind of good stuff, right? That’s the combination.
So, I think there’s a way to helpfully not challengingly, bring this up and say, “What’s a reasonable amount for us to allocate to our personal spending here and then the rest is going to go to defense and fortifying our financial position? Because with your fixed expenses, your grocery bill, I bet you, that grocery bill can stay at 1000 bucks, and you can eliminate nearly all of that 800 bucks. I bet you can get grocery bill down and still go out a few times a month, and have a nice dinner, a date or whatever around that 1000, maybe $1200 total food mark, which is a big dent.
I think, again, your fixed expenses, the way I’m looking at it. You bring in 14,000, 15,000 a month in income. I think you can be saving $7,000 or $8,000 a month over within a year or two. And that’ll make a transformative difference, that’s $100,000, and after tax liquidity, annually, if you get to that point, give or take.

Jeff:
Right.

Scott:
And that’s going to make a significant difference in your flexibility in life options. So, I think that’s the 80-20 of this financial picture, in my opinion. It is something around those lines.

Jeff:
Agreed. And it also goes back to with the amount of money that I have in the stocks right now, I could eliminate a lot of it now. If I took care of the car payment and HELOC, that 700-ish, that would be gone. But that 700 a month wouldn’t be helping me in the stock market either. So …

Mindy:
And you would have to pay capital gains on those stocks when you sell them. So, it’s not just you’ve got 60,000, you sell it, and now you have 60,000.

Scott:
Right. Yeah. Let’s just point this. Let’s just zoom back out and say, that is a separate issue and we’ll get to this. This is always fun. This is more fun, I think, than the spending stuff because the spending stuff is boring. It’s a grind. I have to have hard conversations. I’m going to have to get control over these things. I have to work at a spreadsheet. That’s no fun. This is called budgeting. At your level, you might call it cash flow management because you’re pretty rich.
But it’s budgeting, it’s accounting. Nobody likes doing this very well. Mindy likes doing this, but very few people like doing this, you got to do it anyways. If you want freedom, you have to do this.

Mindy:
Scott likes it too.

Scott:
Yeah. Now, the next piece of your thing. So, step two, that’s step one and that’s a distant first. Okay, now we’re zooming way down the list and we get to item number two, and that’s your capital allocation strategy, which I think also needs some work here.
So, what you’ve done is you have most of your net worth, the vast majority of your net worth in real estate equity, primarily in your primary residence and then also in retirement accounts. You have $10,000 in cash, and you got the $65,000 in stocks. Right? Is that a fair assessment of your general net worth?

Jeff:
Absolutely.

Scott:
Okay. So, what that tells me is that you’re not accumulating any cash and it’s just kind of flowed out of your bank account. And you’ve got this mental guard rule as a family around that $10,000 mark. That’s not enough cash. That’s one month of cash flow in your current situation.
One, you should cut your expenses, it becomes two months, just by cutting your expenses. But I think you need a significantly higher liquidity reserve, personally. And I think you need to build out that reserve for your rental business as well. So, when you have that rental business, I would like to see like a 15. You have two properties. I like to see a $25,000 reserve in that rental business. You don’t have to call it an LLC. I don’t know how you structured it, but you should think of it as a private, separate business, run it as a separate line item expense, a line item through there and capitalize it accordingly.
Okay. Now, so, that’s I think the first thing is cut your spending and build out that liquidity position because you’re going to breathe a lot easier when you have a nice strong liquidity balance both in your rental business and your personal life. The second thing we’ve got here is the HELOCs. What you’re doing here is because you’re not accumulating a lot of liquidity in your life, a lot of cash, just from your day-to-day operations, what we just talked about, you are taking out debts to finance investing activities against your primary mortgage and your rental property equity. Is that is that also correct?

Jeff:
Correct.

Scott:
And that, look, it makes sense on paper. You look around these numbers, and you look at it and you run it through the spreadsheet and you’re like, “Oh, this makes sense. I can arbitrage this at 4% for the higher returns.” But in reality, what this does is it sucks even more cash out of your life position and limits your freedom even more. We just had a similar situation on episode 170 the other day or week, I guess. And it’s a very similar concept that’s going on here.
So, what I would say here is, you’ve got to stop the activity set of using HELOCs to continue investing activities. I think it’s fine to use a HELOC to consolidate in debt at high interest rates. But I would really grind out your financial position and deleverage on those HELOCs over the next year or two. Build out that cash reserve for both your personal life and your business and begin accumulating cash that you can invest in each new property from a position of financial strength, capitalizing each business independently and not taking on a new HELOC debt out.
So, for example, you said you have a $60,000 HELOC against that Memphis property, is that right?

Jeff:
Correct.

Scott:
That’s costing you $200 a month in interest. That’s interest only. If you’re considering a $60,000 HELOC against and you’re kind of pay it off in five years, you’ve got to pay $1000 a month, 12 times 5 is 60, right? So, it’s a $1000 a month plus that interest. Now, as you pay it down, the interest number goes down, right, because it’s 250. Now, when it gets 30, it’ll be 125. If you think about it that way, and I don’t think you should hold the HELOC for more than 5, 10 years. That’s a long time to hold a variable interest rate loan like that.
So, if you think about it, if you agree with that logic, and you say, “I’m going to rationalize a HELOC as a five-year plan there,” that’s 1250 a month coming out of my financial position. What’s your rent on that Memphis property?

Jeff:
1,000.

Scott:
So, right there alone, now, your rental property while you’ve made a calculation that makes sense on paper in some ways. Right now, we know that over the next five years, that’s going to suck 1250 out of your life, that rental property not provide that cash flow, because of the way we’ve capitalized it, right?

Jeff:
Mm-hmm (affirmative). Correct.

Scott:
So, I’m not saying necessarily to sell the property and start over. But I do think that I would not continue down this path of using that leverage like that to purchase these properties. And I would instead think about how do I buy these positions from a position of strength and create a freedom position for myself? Because each time you do that, you’re just, you’re almost … If you want to get to the end goal here, and you’re taking this big dip that might come out over five years and put you in that position.
But it’s really a struggle in the meantime, and you’re feeling that pain right now, I think in terms of your liquidity position, even as you’re maybe cutting out some spending, you’re still not able… Like, “Why am I not building up a bigger cash position?” I don’t know if that’s been thinking through your head. But that’s probably part of the reason of why that’s going on here.

Jeff:
Yeah, absolutely.

Scott:
So, let’s see, what should we do here? Once we cut up the expenses and have that significant cash reserve, I build up a bigger buffer because I don’t think your safety net is … I think you have one month of cash right now, and I think that if something happens to your wife’s work, you guys are going to be borrowing again, or selling that stock position, rather than breathing easy and assessing the next option from a place of cool, calm and collectiveness.
So, right now, you need to get that freedom, I think, is your top priority for the next six months to a year. And then, I would begin slowly allowing these debts to get out of your life, get that car payment out of the life. I would continue, man, there’s a whole bunch here because your income too. Your income is so high that the tax advantaged accounts are probably a good move here as well.

Mindy:
Yeah, and you said that they do pay a lot of taxes.

Jeff:
We pay a lot of taxes. We also, with the car payments, we drive a lot and with my side job I drive. So, we write off a lot of that too. It helps at the end of the year, even though we pay out every month, so.

Scott:
Yeah. But like, here’s the thing, like I get that, but the driving a mile is still a net loss. It’s just instead of $1 loss, it’s 60 cents loss, right? So, it’s not a gain to write that off from the tax perspective. But the elephant in the room, when it comes to taxes is your wife’s very high income. The way to shelter that from taxes is to max out the 401k. But then, that also doesn’t contribute to the goal of the freedom thing we had here.
So, the answer is, get control of that spending in a really robust way so that you’re able to go from earning 14,000, 15,000 a month, and accumulating probably 2000 or 3000 a month to play within the stock market, to accumulating $7,000 or $8,000 a month, so that you can both contribute to that 401k in a meaningful way over the course the year, and have plenty of liquidity to build out that stable cash position, and begin paying off some of these debts.
That’s the hard answer, I think ,to your financial position. It’s not that hard, because you’re in such high income, which is great. You’re a wonderful advantage.

Mindy:
Well, and now, there’s something to look into it. Are you eligible to contribute to 401ks? Can you max out the 401k after you hit a certain income …

Scott:
It’s a Roth, I think. I think you can contribute the 401k really at a lot of income levels.

Jeff:
Right. So, the Roth individually, I don’t remember the exact amount, but we can contribute. I think it’s like 7000 something maybe. But do you contribute, or do you pay down debt? That’s what we struggle with, because we have the income to do that.

Scott:
That’s always the art of this, right? That’s the question. It’s like your debt is at 4%. It’s not like at a high interest rate. Do I pay it down aggressively or not? I think the answer is, it’s hard to justify paying down the debt versus investing at all times. But your debt is killing your freedom and your options in life right now.
So, stop taking out more debt is number one, even if it is at this low interest rates. And then I would say, a couple of these are going to get knocked out like your car loan is probably going to get knocked out over the next year two or three, I imagine, right?

Jeff:
Mm-hmm (affirmative).

Scott:
Knock out a HELOC or two because I would think about this like, I took out a HELOC to buy an investment property. That means, I didn’t capitalize my business before buying it. I just leveraged my house to start the business, and that’s leaking money out of my position. I would separate the two and say, “I should have saved up money and invest in that house from a position of strength.”
So, now, I’m going to knock that one out or consolidate my debt in some other way, maybe like, with a long-term cash out refi or something on the house, and really make sure that my business is capitalized and that the property is stable, adding cash into my life, and I’ll be able to build the next position. So, I buy the next one, and I have a snowball working for me, as I build this property business rather than against me, where every time I buy, I’ve now got another cash suck coming out of my life, at least for a temporary period, to get to that next one.

Jeff:
Yeah. Agreed.

Mindy:
I agree with Scott that the HELOCs should go. But I do think that you’re right on the cusp of the age where contributing to a Roth is still really, really beneficial because that grows tax free. So, you’re putting in $7000 now, but when it grows to 25,050, 150,000, you pull that out, and that’s tax free, that’s all yours with no taxes. I would much rather pay taxes on $7000, than pay taxes on $150,000.
So, the Roth I think is a good thing to continue to contribute to. The 401k, I would continue to contribute to get the match. And then, you said at the very beginning you said, you and your wife are both money conscious. Have you had a money date where you sit down with all the numbers and all the spreadsheets and you look at everything?

Jeff:
No. Our money dates consist of, “Okay, what can we try to eliminate? High five. Let’s go.” That’s about it.

Mindy:
Okay. So…

Jeff:
Without the numbers.

Mindy:
So, Scott likes to say, offense and defense. And I think that you have been playing more defensively, and I would love to see you play offensively. And it isn’t just against Jeff’s wife. It’s Jeff and Jeff’s wife against the world. So, you guys are a team. This isn’t, “You spend so much money,” and it doesn’t sound like you have those kinds of conversations, which is good, because that doesn’t help anybody at all to blame people.
But when you have this conversation, “Hey, let’s just look at our picture. This is how we’re spending. I would like to look at ways to fix this. I would like to look at ways to reduce some of this spending. Let’s together agree on a category to tackle.” And this I think should happen after you start tracking your spending, after you start looking at where every single dollar is going. Because it is really eye opening and shocking when you first start tracking your spending, because you haven’t been conscious of it before, it’s just so, “Wow, I had no idea.” So, that is going to be my number one suggestion.

Scott:
Yeah. Like, I think the way to do it is to be like, your wife doesn’t like her job, which is not what I was expecting you to say. I was expecting you to say, she likes it a lot. I don’t know why, but that was [inaudible 00:50:24]. But she doesn’t like her job, you want to be retired early, you guys are millionaires. And yet, the way you’ve constructed your financial position is resulting in no freedom, no options for you, where it’s kind of inconceivable to consider other realities, right?
There are people who are of a million dollars in net worth, and a family of your size, that are done, right, and free. So, there’s something going on here around the expense side of things, and in the way that your capital allocation is going where it’s not intentional about zeroing in and laser focusing on that goal. Because once you do that, I think you’re going to find your net worth increasing at a much faster rate, and you’re going to be like, “I got way more cash and cash flow than I know what to do with.” And like, “Why is my wife driving 45 minutes an hour away to make this level of income, when there’s a remote job that pays instead of 200 or whatever a year, it pays 75 a year? And really, that’s so much more than we need to do this that we’re ready to go right now with a lot of these things.”
So, I don’t know how that will … Yeah, but something’s going on. I think we’ve highlighted a lot on the spending side and the capital allocation side, but I think that money date is going to make a big difference, because if you make that hard mental shift, your life could be completely different tomorrow, given your wealth right now.

Jeff:
Right. I also think part of it is also, it’s one thing to talk about it, but we need to action. And it’s not always, when you’re setting your ways, it’s not easy to start cutting things back and taking action. And I read your book, and one of the first things I did was, “Okay, IT world, I’m going to start focusing well on my career and making more to bring in, and then I got a certification.” And I ran to her, I said, “Hey, look, if we have more to save, you could leave your job doing something you’d like, for less.”
But it’s one thing to talk about it, you have to actually do it. And so, I think, that’s where we all struggle.

Mindy:
That’s really important. It is really difficult. It’s so easy for me to sit here and say, “You should do this, you should do that, I’d love to see you do this.” But I’m not the one who has to do any of that stuff. So, that’s a really valid point to say that it’s one thing to say that and definitely another thing to do. And over the course of just recording all of these shows, we’ve talked to people who have done cold turkey.
We’re going to cut everything out, and then that next month really sucks. They’re like, “Wow, I really want this back in my life. I want this back in my life,” but they feel like they can’t have it. And this death march to financial independence doesn’t help you enjoy the journey. And what is the point of getting to five, one year earlier, when every minute of your life until you get to five, is horrible.
So, it is definitely a give and take. And your wife really likes a nice car, great. She can have a nice car. You guys make enough money that for her to have a nice car is not going to kill your budget. What does Paula Pant say? “You can afford anything, you can’t afford everything.” So, look into what it is that is really important and really helps you enjoy your life, and focus on that, and the other things will fall off. And I’m just going to go back and say that, tracking that spending is really going to help.
And having a non-confrontational conversation with your spouse is the best way to get them on board. What do you want your life to look like in 5 years, in 10 years?

Scott:
I want to piggyback on that point. I just got married very recently, and me and my wife went on a honeymoon. And one of the things we did in our honeymoon was we said, “What’s our vision for the next five years?” It’s three to five-year vision. It’s a half page, it’s kind of … It’s just, here’s what we want to live, here’s how we want our life to look like, here’s what we want to be doing day-to-day, yada, yada. And we just put it up on paper, and then we took some time, another hour or so. We just set some goals, what are some things we do over the next year to move towards that vision right away, right?
And so, that can be a really good way to broach the subject and say, “Hey, what do I want to be in five years? Do I want to be commuting an hour, earning a high income and treading water really from my freedom perspective? Or do I want something different? Does she want to be … It doesn’t work all of a sudden magically improve for her, if she’s right next to the office and not commuting with that? Do you guys just want to not be working at all and want to be retired and living on a remote island somewhere, because with your wealth and a re-allocation strategy that is achievable at this moment in time.
Do you really think though that in a practical sense, given the way you’re spending, you really need about a $2 million or $2.5 or $3 million net worth to really be comfortable with that spending? That’s fine too. But that’s the conversation you guys have to have, and then it’s a lot easier to back into the tactics and begin eliminating systematically these big bucket items of spend, one by one, once you kind of back into that.

Jeff:
Right. And to piggyback on that, and just looking at the amount that we spent a month. I mean, for how much you make, it doesn’t sound like, “Okay, we make enough to spend that much great,” but then, if you had a plan, “Okay, well, how many… When you try to look at your number, let’s say, how many doors do I need at this much cash flow to reach our goal, right,” and then all of a sudden, you’re like, “Wow, we need $14,000 or $11,000 a month…”

Scott:
It’s a staggering amount of wealth. You have to build an empire to support that.

Jeff:
It is staggering versus if you were to cut it in half, how much easier it is to obtain? And so, when you look at it from that …

Scott:
And if you cut it in half, you’re accumulating 7000 a month, which is 84,000 a year in cash, how much faster you get to any wealth goal when you’re accumulating 84,000 a year more than you are today, right?

Jeff:
Right. Absolutely. Yeah. So, just looking at it like that, when you look at the numbers differently, it affects you different ways.

Scott:
The good news again is that, you’ve got a very high powered offense in your household, and offense in the sense of earned income. That’s your biggest advantage. Play around that. Don’t play around your weaknesses there. Don’t try to get your budget down to like, who is the guy, wait, well, Clayton Moss, who’s living basically for free at 26 with his girlfriend in a bottom of a duplex. That’s not what you need to do at your state, right? Clayton’s planning incredible defense because he doesn’t have your offense.
So, play around your strength and try to get that down to 4000 or 5000 a month in spending. That’s still plenty of spending. It’s a $60,000 a year lifestyle. That’s an upper middle class lifestyle, even 7000 or 8000, maybe in California. Then, now, you’re building a ton of wealth and, again, you don’t need to do the incredibly high power defenses that we sometimes hear about.

Jeff:
Make sense.

Mindy:
Okay. Something we haven’t talked about Scott, besides your ultra-romantic honeymoon looking at spreadsheets …

Scott:
It was. We didn’t look at a spreadsheet. We didn’t do any spreadsheet. We just …

Mindy:
Oh, I’m sorry.

Scott:
… got a piece of paper, wrote down a vision, and then put out some big goals for the next year. And it was wonderful.

Mindy:
Virginia is so lucky to have such a romantic husband.

Scott:
Oh, come on.

Mindy:
Okay. So, besides that, we haven’t talked about the timeshare, which Jeff said was his biggest financial mistake, and the duplex. So, the timeshare, you said you’ve tried to get out of it. I don’t know anything about exiting a timeshare, but I have heard commercials on the radio for timeshare exit team. Have you spoken to any company like that to try and get rid of the timeshare?

Jeff:
So, here’s the thing, so many of them. Okay. They’re treated like a mortgage, right? We’re paying 14% on the mortgage for this timeshare. So, the exit ones are basically, they just show you how to walk away. And so, if you paid 40 grand for a timeshare, and you owe 40 grand, they’re going to try to just get you to walk away. So, basically, you leave that debt behind. You’re not actually selling it.
So, to get out of that 14%, we use the HELOC to pay it off. But now, none of those timeshare exit strategies will work with us because we already … We paid it off. You can’t walk, I mean, it doesn’t work for them. So, we’ve tried to sell it on numerous websites. And granting, we paid probably maybe 40 something for it, and we’re trying to sell it for 5000, and we haven’t got a hit. It has been a couple years.
And obviously, COVID doesn’t help anything. And to walk away from it, to just say, “Fine.” You have to pay $1000 to the company to say, “Okay, don’t hit our credit score. We’re going to walk away.” You’re handcuffed and we have spent so many hours researching …

Scott:
When you walk away, you have to pay $1000?

Jeff:
Yes.

Mindy:
What’s the maintenance? The maintenance above it?

Jeff:
So, we pay about 2600 a year, which comes out to like, $280-ish.

Scott:
That’s a no brainer, man. Pay the 1000 bucks and get out of there. Too bad. They’re ripping you off. I know that sucks. But, man, that’s a 260% ROI on your spend, if you just pay them 1000 bucks to go away.

Jeff:
Yeah. And we so many points. I just like, can we just go on one good vacation, and then we walk away. And it’s been like, we’re just one year later, one year later, and next year …

Scott:
Dude, here’s the thing, you pay that, you pay the 1000 bucks, one year from now, you have $1600 more dollars to go on the vacation spending that.

Jeff:
Yup. You’re right, because we’re saving money each month, we’re putting money away to travel, and you cannot use these properties. They’re always booked up. And then it’s like, well, you can book a property way more out, but then we need $20,000 more to up your plan, it’s like …

Scott:
Guys, if you’re listening to this, don’t go to the timeshare presentation. It’s not a free lunch, okay? There’s always a probability that you get into this position with it. And I’m saying then just, but like, this is not a deal breaker for you guys, this is not a major component of your financial position. This is not a big mistake in the context of the earned income and network that you’ve built. So, don’t feel too bad about it. But pay the 1000 bucks and get out of it, is my advice.

Mindy:
I think it’s taking up a lot of mental space too because you said this is our worst financial mistake. It seems to be weighing heavily on you. And yeah, it sucks that you paid $40,000 for this. But I agree with Scott, if it was me, I would pay the $1000 and get out of it, and get the mental space out of my head.

Scott:
Yeah.

Jeff:
I agree. Absolutely.

Scott:
It’s sunk costs. And this is the thing that a lot of people have with rental properties and any other types of things. You’ve already spent the money, it’s out of the picture. Now, I’m going to assess my life right now. And guess what? If you pay, like, let’s say, forget the $40,000. How much does it cost to rent a space for a week in this area where the timeshare is?

Jeff:
Well, and it’s around the world. So, I mean, you can get a good deal, but it’s hard to actually find a place that’s available. That’s the biggest issue. And then yes, never go to the presentations. We’ve gone to enough. Each one of us walks away, and we’re just ready to can’t get out of there fast enough.

Scott:
So, I just went on a honeymoon, right? It cost me about 1500 bucks or something like that for a week. So, that’s the same price as the split between $1,000 and $2,600. And it was an all-inclusive, very fancy, that kind of thing. Like, I just think your ability to go on a good vacation outside of this timeshare, if you just zoom back out and say, “What does a good vacation look like without the timeshare in mind at all?” That you’re going to be able to find lots of good places that are fantastic for less than 2600 a year for the whole family. And it’s a onetime fee to break that $2600 a year cost. That’s easy math for me.

Jeff:
Absolutely. It stings a little bit.

Scott:
I know. I know.

Mindy:
It does sting. And yeah, that stings. But I would agree with Scott, cut the losses and move on. Now, let’s talk about the duplex. The duplex was supposed to be a good deal, and it didn’t turn out to be such a great deal now, and you just had to put in … Did you say a new septic system and a new AC?

Jeff:
Correct. So, that was about 9000.

Mindy:
Yeah. And you owe $135,000, it’s worth $160,000, and you bought it for $240,000?

Jeff:
Correct. And to carry 135,000 worth of debt, it’s not worth the income that we’re getting from that property.

Mindy:
Yeah. If that was my property, I would look into selling that one as well just because that’s another huge mental space that takes up. It’s not financially viable. And what are the outlooks for that? What area of the world is that one in?

Jeff:
So, it’s in California. It’s about an hour and a half away. When I bought it in 2007, I tried to manage it myself, and it went poorly. And so, I learned property management company, everything’s okay. It’s always occupied. So, it pays for itself until something breaks. And it’s just over and over again.
So, what I’m going to do is this spring or summer, when, hopefully, COVID has eased up over here, and lending standards are a little more relaxed, that I’m going to put it on the market and say goodbye. But it’s a small town about an hour and a half away from us called, Barstow. On the way to Vegas.

Mindy:
Barstow, that’s on Route 66. That’s in the song. That’s famous.

Jeff:
Yes.

Scott:
Well, let me just point out, again, zooming back out here, why this problem is occurring. You are a millionaire, and you earn. Your household income is over $250,000 a year. Okay, this property, you have equity of about, I guess, that’s $25,000. So, that’s 2.5% of your net worth and the income from it is probably no more than about 200 to 300 bucks a month for being generous because you haven’t allocated for CAPEX and vacancy, and that kind of stuff. We have 1,300.
So, even if we just say you have $200 a month in cash flow, which you don’t, that is less than 1% of your annual income, that’s coming from this property. So, the challenge here is, if you’re going to invest in real estate in the context of your financial position, I’d recommend a system of buying many properties like this so that the cumulative effect is a more meaningful percentage of your net worth. If you’re going to lose mindshare to real estate, it might as well be in the context of a meaningful investment relative to your position rather than a small, a tiny investment relative to your position, if that makes any sense.
So, that’s the key, I think, consideration for you guys here as well. And something a lot of people don’t think of, they’re like, “Oh, I bought this like $40,000 duplex, hooray. And now, I’ve got $200. Well, now, I got a lot of mindshare going into this 200 bucks, it’ll be much better to place, I would think, $100,000 or $200,000 in equity on a much bigger bet. That would have a more much more meaningful impact on your portfolio.
However, to do that, you’re going to have to create a financial position that allows you to have such a meaningful amount of equity in there. I personally try to stay away from investments that are going to require any mindshare from me that are less than about 5% or 10% of my net worth. Otherwise, I’m not being productive with my time on those types of things.

Jeff:
Right. Make sense. Also, I’ve been thinking about this for years now, whether I should or shouldn’t, but every year that I wait, I’m paying down the loan, right? And so, it makes sense during those years. But then when things happen, you take a hit and then now, you have to reassess whether it’s worth holding on to. But when you put it like that …

Scott:
If you’d spent the hours that you spent on this rental property, controlling your spending as a household and really mapping out between you and your wife where you want to be, you’d have another $100,000.

Jeff:
Yeah.

Scott:
It’s the thing, which I think is the context there is like, sure, if everything else was really tight, and you had plenty of extra bandwidth, then sure, go for it and start doing those kinds of things and build the system there. But in this context, I think it’s a really low dollar per hour activity to be owning and operating this rental property.

Jeff:
Make sense.

Scott:
Even if you sell it at a loss, even if you sell the thing for 155 or 153 instead of 160. But instead, now, you’re able to save $5,000, $6,000, $7,000 a month. I mean, it’s just immaterial relative to the position.

Jeff:
Right. That was one of the things when we got married is our … When I was single, I would get those depreciation write offs every year, but then we hit that threshold. And now, it just accumulates until we sell the property. So, I will get some stuff back to be able to reinvest.

Scott:
Okay. So, if you’re listening, if you’re listening, Jeff here ran into a really good problem. So, when you earn less than like $150,000 a year, and you have a loss on your rental property, that loss can offset your earned income producing a tax advantage. When you earn a large amount of income, you’re no longer able to use those losses to passively offset your earned income, which is the wonderful problem that you have now and why I think a further point compounding the problem to this property, while it could be giving a great ROI on it’s, in your case, $25,000 in equity, which is not $25,000 in equity, because you’ve got seller fees.
If you want to realize that you have to sell the property and incur agent fees and its closing costs. But in your case, I think, the little amount of equity is no longer … it’s producing some income. You know what? It shouldn’t be producing any income, because you’ve got a $1,000 mortgage. It’s probably producing a loss for you …

Jeff:
It pays the utilities.

Scott:
They do pay the utilities, but do you have maintenance or big CAPEX expenses? You just replaced the AC.

Jeff:
So, yeah. I mean, it is a loss when there is any sort of repair.

Scott:
Which is a given.

Mindy:
And it’s the last for a long time.

Scott:
Yeah.

Jeff:
Yeah.

Mindy:
If you’re making $200 a month, but you just spent 9000, what’s 9000 divided by 200? How many months is that going to cost you?

Scott:
Forty-five months.

Mindy:
So, it’s going to cost you 45 months of cash flow to pay for the AC and the septic system.

Scott:
Yeah. If we ran this through the rental property calculator, this would not be a cash flowing property, because you’d have to allocate about 200, 250 bucks to CAPEX and maintenance and then you’d also have to put in a vacancy allowance because you’re not going to have that property occupied nonstop for the next 45 months, unless you’re the luckiest landlord of all time.
Sometimes, some people do get that. But that’s rare when that happens. So, right now, it’s not a cash flowing property when we factor in those other costs that the Phantom costs of vacancy, and then the allocation for CAPEX that we have to consider with those.

Jeff:
Right. Sometimes, I’ve justified it because I have the income from the Memphis property to be, “Well, one income property got a loss, so I’ll take that income to pay for that.” But then, when you look at the end of the year where that rent went, it doesn’t go as far as because it’s going to the other duplex to try to help it out …

Scott:
Yeah.

Jeff:
So, it doesn’t make sense.

Scott:
Your Memphis property, if you bought it in all cash is probably doing fine. How much rent you’re getting there?

Jeff:
$1,000.

Scott:
And what’s your expenses?

Jeff:
$200-ish.

Scott:
That’s between the taxes and insurance piece?

Jeff:
Yep, without CAPEX.

Scott:
And we’ve got CAPEX. Let’s put in another 300, just to be conservative for CAPEX, maintenance, vacancy, those types of things. So, you’re probably making 500 bucks a month. But we capitalized with the HELOC and we think a five-year payback or even a 10-year payback is reasonable on the HELOC. So, now actually, I’m net negative with that, right?
So, it’s not a bad property. That one sounds like a winner, frankly, from a real estate investment deal, but the capitalization is sucking cash out of your life with it. So, don’t necessarily sell or recapitalize that one in the near future. But I think this other duplex is a problem for you.

Jeff:
Yep. Agreed.

Mindy:
Okay. Well, I think we’ve covered a lot today. I think there’s a lot of really easy, and it’s super easy for me, because I’m sitting here, I don’t have to do anything. But a lot of easy wins, if you just tweak a little bit here and there. And I think starting with a money date with your wife, put the kids in front of the TV, get a glass of wine, look at all of your numbers and say, “I think we can make improvements here and here, or in these three categories.”
I wouldn’t jump in with both feet and say, “Let’s cut everything,” because your life is going to suck, and you’re going to stop. But pick a category, pick a couple of categories. If I was in your shoes, I would look at food first, the car payment is maybe the fourth or fifth thing to look at, in my opinion, just because it is important to your wife, and you don’t want that to be, well, we need to get rid of this. Because then, that’s going to hit a wall that says, “I feel attacked, because you’re pointing out this one thing.”
So, look at the food and start your 1800 to 2000 right now, let’s cut that back to 1500. Let’s cut that back to 1250. Let’s cut that back to 1000. And just taking steps to actively think about it is going to be huge. But having the money date and getting both of you on the same page and working together towards this goal. I mean, you’ve got the income, the income is fabulous. And these expenses, once you trim those down, you’re going to be like, how much more can we trim?
It’s it starts to become a game, it’s actually kind of fun. How little can I spend this month? Like, once you start tracking it. And the notebook, the old school right in your face is my favorite method, just because it is so visible at all times. And as I started writing them down, I’m like, “Oh, I got to tell Carl about this purchase.” And I don’t have to tell him because he’s going to see it right here and why did you buy this? And it’s never like a confrontation, why are you spending money? It was more like, why did you buy this? “Oh, bored, I don’t know, I was just.” It wasn’t conscious.
And once you start thinking about it, then you’re like, “Oh, at the store, you’re stopping yourself from buying it,” which is really, really when the breakthroughs happen. And so, the tracking, the spending, the money dates, and start looking into selling those properties, and freeing up that mental space so you can focus. That’s another thing, Scott. I don’t think we’ve really focused on mental space in any of our previous finance reviews.
But the mental space in having all of this, the duplex, the timeshare, oh, I keep thinking about that. I’m not thinking about my money. I don’t have time to think about my money. I’m too busy on these big, big things that really aren’t that big. Let’s look at them from a financial perspective, from a purely numbers perspective, this doesn’t work. It’s a sunk cost. Let’s just get done, so I can focus on other things that will make more of an impact on my immediate and future.

Scott:
Truth all about is the money should be boring, right? My personal finances should be extremely boring, extremely simple, extremely as automated as possible, that I can spend my mental space on life, right? And yours are very complicated.
So, I think it’s a great point, and I think it all comes together, I think. These are not conflicting ideas, but to simplify your financial position to increase your savings rate, to build out liquidity and just have a very simple, elegant, beautiful model where you’ve got a few investment categories and allocations that are the most freedom creating, I think, is the general framework that we’ve discussed here. There’s a lot of tactics we went through, but I think that’s the guiding principle that we’re trying to get to with those.

Jeff:
Agreed.

Scott:
There’s a headspace.

Jeff:
Also, I mean, I don’t feel comfortable about having that much money in the stock market, just because it’s also me moving things around. So, that will come out as well, and that’ll help the liquidity portion.

Mindy:
Have you considered index funds?

Jeff:
I have, but …

Mindy:
They’re not sexy at all. They’re so boring.

Jeff:
No, it’s hard just because if you get lucky, and all of a sudden you’ve made 30% one week and you’re just like, yes, and then … So, I have considered them but I chase their games basically, and it doesn’t always work out but sometimes it does, so.

Scott:
I love that feeling as well. So, I play video poker on my iPad with fake chips and all that kind of stuff, right? That’s what I do, and I have my money in the index funds and those types of things. I don’t touch them. My system is making me wealthy, not my individual investments, whatever.

Jeff:
Yup, that makes sense.

Scott:
Okay. Well, should we get out of here?

Mindy:
No, we should not because Jeff has a joke for us Scott.

Scott:
All right.

Jeff:
Are you ready?

Mindy:
Yes.

Jeff:
Okay. How do you stop a bull from charging?

Scott:
Something about the horns.

Jeff:
Take away his credit card. It came from a 10-year-old.

Scott:
What a relevant joke.

Jeff:
Yes.

Mindy:
I love it. I love it.

Jeff:
Oh, I’m glad. I’ll take that one [crosstalk 01:15:50].

Mindy:
Oh, my God. He’s like this all day long.

Jeff:
That’s why you guys get along all the time.

Scott:
Mindy always laughs and claims to hate it.

Mindy:
I do. I do hate them. But they’re always super funny. Okay, Jeff, thank you so much for spending time with us today. I think this is going to be hugely helpful not only for you and your personal finances, but for people who are listening who might be in a similar situation with a high income, and they just can’t figure out where their money is going all the time.
I think listening to other people, and seeing their situation helps you feel like, “Oh, I’m not the only one who isn’t perfect.” I am the only one who is perfect. Scott and I sit here and we’re like, “Oh, you should do this, you should do this.” And every time we talk, I’m like, “Oh, there’s something else that I never thought I would say, sell your rental property. I am in the buying rental properties business. I’m not in the get rid of a business.”
So, it’s interesting that I find myself recommending things, but not every property makes a good rental property. So, cutting your losses and moving on can feel like a sting, like you said, but I really do think that you’re going to just feel lighter once you’ve made these small changes.

Jeff:
Yup, and I think a good point you guys touch on is, it’s emotional. It weighs on you emotionally every month for the losses and the gains, and all the bills to pay. I mean, it definitely does weigh on you.

Mindy:
Yeah. Once you can get rid of some of those, it’s going to just be freeing. I’m really excited for you guys. And I would love to check in with you in a few months and see how this worked out.

Jeff:
Yes, absolutely.

Mindy:
See what changes you’ve made and see how’s it going. So, great. We’ll bring you on then in a couple of months and have a nice recap show.

Jeff:
Okay. Sounds good.

Mindy:
Okay.

Jeff:
Thank you, guys.

Mindy:
Great. Jeff, thank you. We’ll talk to you soon.

Jeff:
All right. Bye-bye.

Scott:
Bye.

Mindy:
Bye-bye. Okay. Scott, that was Jeff from California. I really, really loved talking to Jeff today because while it seems like we were, oh, you need to do this, you need to do this, you need to do this, he actually has a lot of pretty simple things that he can do to really launch his financial picture.

Scott:
Yeah, I agree. I think, again, I said this in the introduction. But I think that again, this show, it’s not Jeff doing anything wrong, Jeff has done a lot of right things. His family is doing a lot of right things. Again, they have a high net worth, they earn a lot of income. Clearly, a lot of things are going right. I just think that this is a really good example of a problem that a lot of middle class in America is running into right now.
I just think it’s a shame to have so much net worth in home equity and retirement accounts when you have that level of income. There’s nothing wrong with having home equity and retirement accounts. But there’s no reason why his family couldn’t, over the next couple of years, build just as much, if not way more wealth outside of those areas, while continuing to be responsible about their retirement contributions, and paying their mortgage, those types of things.
So, they have wealth outside of that, that gives them freedom, options, flexibility, allows them not to feel … Like he’s living on one month of cash of spending right now, $10,000 one-month for Jeff of household spending. That’s not freedom. That’s living month-to-month, or almost a little bit better than paycheck-to-paycheck. And I just think that it’s so normal for that to occur.
Again, nothing wrong with what Jeff’s doing. There’s lots of things that he’s doing that are completely normal, but how do we change that mentality, Mindy, in society so that more and more people are doing it differently and saying, “No, I’ve got six months to a year of liquidity, I’ve got options in my life, I can take that job, I can start a business, I can invest in this asset, I can do that over there.” While, again, continuing to be responsible with their retirement account contributions and home equity.

Mindy:
You know, that’s a really great question, how can we change this in society? I don’t hear a lot of people in the personal finance space talking about current spent, not current spending, current after tax investments. It’s always max out your 401k, put it in the Roth IRA. But there’s not a lot of conversation about generate additional income outside of your work with after tax investments now.
So, I think having these money conversations, having these finance reviews is super helpful for me. I hope other people get something out of it, but I’m getting a lot out of it. Here’s a different way to frame it. There is no one blanket approach to finance. I can’t just say, “Yeah, do this, and you’ll be a millionaire,” because that’s not really how it’s going to go. But there are four principles, like you said, increase your income or reduce your expenses or both, generate additional income through investments or start a business, or do all four.
And it’s going to change the world if everybody would listen to me. I just wish they all would.

Scott:
That’s right. I think everyone should listen to Mindy.

Mindy:
Do you know anybody who needs this information? Share these episodes with them because this … Once you start hearing people talking about money, once you normalize the conversation about talking about money, it becomes less scary and less just for somebody else and it invites more people into your circle. But don’t be preachy, because nobody wants that.

Scott:
That’s right. Again, I’m getting all philosophical right now, we had a long episode. So, thanks for bearing with us, if you’ve continue to listen. But I just get all this philosophical, I think that this is a great example of, I think, what’s happening to middle class America right now. It’s the house, the cars, and the retirement accounts, and the inability to accumulate that meaningful liquidity are making people who either who earn more and more income feel trapped in their lives and their current state unhappy with a lot of the status quo.
And that, I think, is really unhealthy dynamic that is breakable. We just got to get out of this mentality that we have to keep buying the bigger and bigger home, the better and better car and figure out these retirement account contributions. If you earn over $150,000, $200,000 a year, and you’re not able to max out your retirement accounts, and still have a lot leftover, something’s going on. It’s time for a strategy overhaul. It’s time to figure out your expenses and say, “Why am I …” If you’re unhappy.
If you’re happy as a clam, nothing wrong with that. No one’s arguing with that. Some people are very happy with, like if Jeff and his wife were delighted in their jobs and are aspiring for financial freedom in the near term, they would have great careers and retire early, or retire wealthy at the end. And when it’s all said and done, no question about that. But if you want to retire early and get control over your time, what’s going on? Why am I earning a high income and not able to, high being over $100,000, $150,000, really anywhere in the country, and not able to both max out my retirement accounts or make a significant contribution and have this freedom and accumulation?
That’s a prioritization issue. And again, I think, it’s the whole bunch of reasons for the middle class problems in this country. But that’s one that’s within our control in middle class.

Mindy:
And I think that there are a lot of people who look at their individual expenses. I make $250,000 a year, I can afford a $400 month car payment. Sure, if that’s your only expense. And looking at your expenses, overall, is very helpful against your income. But also looking at the individual expenses, “How can I cut individual expenses?” But look at the overall picture too, “Oh, I make $15,000 a month, but I spend $15,000 a month, I’m not going to get ahead.”

Scott:
Yep.

Mindy:
I make $15,000 a month, I can spend $400 on a car payment. Make sense. So, it’s kind of look at the overall picture and also look at the individual expenses. And I stand by my recommendation of tracking your spending in real time, in your face, on a notebook, write there as you walk in the door, because that’s where you see it is in real time. That’s when you can make the changes in real time.

Scott:
Yeah, I 100% agree. I 100% agree. I think you have the right approach. It’s better than the way I do it. I think it’s the right approach for Jeff, in particular, in this instance. Again, I just don’t spend that much money. So, when I do, I’ll second to Mindy, but.

Mindy:
And you’re tracking expenses, in a few months, could be the best way because whatever you are doing, as long as you’re going to do it, is the best way for you. But when you’re first starting out, I think, that first couple of months, having it in your face can be the best approach because you can’t just, “Oh, I won’t have to think about this until the end of the month.” You have to think about it now.
So, okay, yes. Thank you so much, if you have been listening to us ramble on and on. Ladies, I want to call the ladies because we have talked to a lot of men here, and I love the men, but we need some ladies calling in and talking to us about their finances. So, ladies, if you would like us to look into your finances, please fill out the form at biggerpockets.com/financereview.
We are not here to make fun of you. We are not here to point out, “Oh, you did this wrong. You did that wrong.” We’re here to look at your finances from a neutral third party perspective and see where we can make recommendations for tweaks that will send you off on a financial success route.

Scott:
Yep, absolutely. We need more and more folks. Please reach out to Mindy, if you’re a lady interested in having us discuss finances.

Mindy:
Or a man, we’re not discriminatory, but we do want to tell every finance story, and we can’t tell every finance story if we don’t tell the ladies too. So, call me ladies.

Scott:
That’s right.

Mindy:
Okay. Scott, we get out of here?

Scott:
Let’s do it.

Mindy:
From episode 172 of the BiggerPockets Money podcast. He is Scott Trench and I am Mindy Jensen asking you to stay out of trouble.