Finance Friday: How to Hit $10M Net Worth in 10 Years (Or Less)

Mindy:
Hey there, as The BiggerPockets Podcast network grows, we’re always on the lookout for talented people who think they have what it takes to co-host a show. Is that you? Do you want to be just like me? Well, you can make a submission to our system at biggerpockets.com/talent, so we can get to know you. That’s biggerpockets.com/talent. You’ll see a few questions and a place to submit a video reel. Again, that’s biggerpockets.com/talent, if you’d like to lend your voice to the growing BiggerPockets Podcast network. Welcome to the BiggerPockets Money Podcast show number 260, Finance Friday edition, where Scott and I talked to Madison out too many great options.

Madison:
So it’s kind of like, what kind of ROI are we going to get on which routes, and I think that we have so many opportunities and possibilities. But for me, it’s which direction we want to go in studying it and understanding those directions is where I’m kind of at my crossroads right now.

Mindy:
Hello. Hello. Hello. My name is Mindy Jensen and with me as always is my Most Charming Smile Award-winning co-host Scott Trench.

Scott:
That’s right. Co-host of the BiggerPockets Money Podcast, and five times winner of the Most Charming Smile Award. And I don’t like to talk about that.

Mindy:
Scott and I are here to make financial independence less scary, less just for somebody else. To introduce you to every money story, because we truly believe financial freedom is attainable for everyone, no matter when or where you are 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 choose from all of the above as options. We’ll help you reach your financial goals and get money out of the way, so you can launch yourself towards those dreams.

Mindy:
Scott, I love today’s show. Madison and her husband earn a super awesome income and they want to start investing for their future. They want to have a very high net worth, and they got a great net worth right now at age 30, but they want to grow it. So they are trying to decide between 412 amazing options.

Scott:
Yeah, I mean, I think what came out of… We actually ended up having a great discussion today. I think a really fun episode with all this kind of stuff. And then ended up to saying, you know what? I don’t think that Madison and her husband are clear yet on what they want out of their lives over the next couple of years. And that dictates what you do with your money and what financial approach you want to take with this kind of stuff. And so I think we, as the discussion evolved, we could talk about ways of like, hey, if you want to work for 10, 20, 30 years, you do it this way and that’s fine. If you want to retire in three to five years, you got to do it this other way, and there’s trade offs and consequences of that.
If you want something in the middle, there’s a third… there’s other approaches there. But it’s what do you want and how do you develop a financial plan and a financial approach that gets you towards what you want and determining what you want I think is maybe the hardest part. So I think it’s a really a valuable episode. End of the day, Madison, we’re going to invite her and her husband to come back on the show sometime in early 2022, after they’ve done a little bit more vision work and kind of have a little bit more clarity in their long term goals.

Mindy:
Before we bring in Madison now, we have to hear a note from my attorney who says 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. Okay. Now, Madison, welcome to the BiggerPockets Money Podcast. Madison had been living in a super high cost of living area, the San Francisco Bay Area, but she and her husband just got new jobs and moved to Texas. They’re looking for advice for maximizing investment returns and focusing on long term goals rather than short term wins. They’d also like to be financially independent tomorrow, but wouldn’t we all. Madison, welcome to the BiggerPockets Money Podcast. I’m so excited to talk to you today.

Madison:
Me too. Thank you for having me.

Mindy:
So you have a bit of a big change coming up because the San Francisco Bay Area is a little bit different than Texas.

Madison:
Yes. Yes. We decided to move out of state, out of California and taken adventure to Texas.

Mindy:
Wow. Texas will be.

Scott:
And what prompted that move?

Madison:
Cost of living, mostly. We get paid a good salary here, but the cost, we have one, two year old and we have a baby on the way. So the cost of living plus with children, it was adding up. And so we were, yeah, eager for a new adventure and thought that we would have a, I don’t know, more financial freedom elsewhere right now for us.

Mindy:
Yes, you will. San Francisco is very, very expensive, and congratulations on the baby on the way. Yay, babies.

Madison:
Thank you.

Mindy:
We love babies. Okay. So moving to Texas, you’re going to take a bit of a pay cut.

Madison:
We are not going to be taking a pay cut. We were planning on potentially taking a pay cut. We were trying to keep it no less than 10% of a cut, but we were fortunate enough to find opportunities that we will be getting paid the same.

Mindy:
Okay. So you’re making San Francisco money and living in Texas. I see a bright financial future. Wait, let me look into my crystal ball. I see a bright financial future for you.

Madison:
[crosstalk 00:05:54].

Mindy:
Okay. Well, let’s jump into those numbers. What is your monthly salary?

Madison:
Yeah, our monthly salary, so this is joint take home for both my husband and I, is around $12,000 a month.

Mindy:
Okay. And what does take home mean? Is that after just taxes or is that after taxes and health insurance and 401k contributions and that sort of thing?

Madison:
Correct. All of the above. So after 401k, after our FSA, our medical and then taxes.

Mindy:
Wow. Okay.

Scott:
That’s great. So we’re looking at somewhere north of like 200, 250 in combined total salaries, right?

Madison:
Correct.

Scott:
Before all that. Awesome. So anything else on the income front?

Madison:
No, that is our income, no other side hustles or anything.

Scott:
Okay, great. And any annual bonuses, stock options, things like that?

Madison:
Oh, yes. Sorry about that. We do have annual bonuses and take home annual bonuses are around 12,000, annual.

Scott:
Okay, great. And what do you guys do?

Madison:
Yeah, so both my husband and I work at the same company and we actually work at a general contractor here in the bay area.

Scott:
Okay, great. And then where is that money going? And maybe it’d be good to get a quick kind of idea about where it’s going today and where it will be going post move or what you kind of anticipate post-move.

Madison:
Yeah. So we do, we max out our 401k and then obviously that was included in what I shared with our income. And then the first thing we do is we pay ourselves. So we max out our IRAs, we have a brokerage account that we put some money in each month and then we have a 529. We do some in crypto, and then we also save about, let’s see, what is it? 900 a month in our just personal savings. And then after that, it’s our expenses. So rent, childcare, insurances, and then our variable costs. We call them essential variable costs and then our non-essential variable costs. So the rest kind of goes there and then anything remaining, we will just put back into our savings.

Scott:
I love the pay yourself first concept. How much would you say that you put into the pay yourself first?

Madison:
Yeah. Annually, so what we’ve been doing, what we’re talking for 2021 is about 30, let’s see, 35,000.

Scott:
Awesome. And then what do you expect that to change to with the move?

Madison:
Ooh, that’s a good question. So we’re still, since the move is so fresh right now, we’re still kind of breaking down our budget and our spreadsheets of what that new cost of living is going to be like in Texas. We haven’t really gotten all the numbers detailed out yet, but we’ll probably be figuring that out. I’m hoping it goes up quite a bit, at least 10 grand or more per year, but something I still need to kind of jump through.

Scott:
Well, let’s dive into a couple of the big ones. What were you paying for housing previously and what we’d be paying post?

Madison:
Okay. So for rent right now, we pay 2,900 a month and our estimated mortgage post move will be 2,600 a month.

Scott:
Okay. So that’ll be cheaper from a cash outlay basis. You’ll have some maintenance you’ll have to assume on top of that. You’ll begin building equity and all that kind of good stuff.

Madison:
Correct.

Scott:
Is it more square footage?

Madison:
It is. It’s double square footage.

Scott:
Yeah. That’s always pretty nice. So, the two bathrooms was huge, when, for me, we moved out of the house hack a few years ago. If we have two and a half now, very luxurious. What are some other one? Like you mentioned childcare, do you expect that to change?

Madison:
Yeah, that should be more than half of a decrease. So right now we pay, with our FSA, we pay about $1,800 a month and we’re looking to pay about a thousand a month or less per child there.

Scott:
Okay, awesome. So it’ll actually be, you’ll actually pay more in childcare shortly because you have another one on the way, but in the short run, it’ll be cheaper by about 800 bucks [crosstalk 00:10:37].

Madison:
Yeah. But that was about per child here. So 1800 a month per child here versus 1000 there.

Scott:
Yap. That makes sense. What about any other items that you expect to change meaningfully with the move?

Madison:
So I know groceries goes down. We’re actually going to be begin getting one car with our new company. So we won’t have any of the maintenance or car payments for that. And then gas, we get gas cards with both of our new jobs in Dallas, which we don’t have currently here. So we won’t have any gas expenses, which is very high in California right now and increasing. So that will be helpful. Other than that, I think, we probably could cut out some fat elsewhere, but I think the other buckets of money, what we have, it will probably decrease by tens of dollars just living in Texas, just being cheaper. But I don’t know how much that will decrease by.

Scott:
Okay. So, well, I think this is interesting, right? You think, oh, I’m moving from San Francisco to Texas, there’s going to be a huge decrease in savings. What we’re finding is one, well, the biggest thing is there’s a big, what I would imagine is going to be a quality of life improvement. You probably get a really nice neighborhood and a really huge house for less than what you’re paying previously. And as an owner with that. So that’s a pretty big improvement. On the childcare front, we would’ve saved $800 a month give or take, but because there’s a second child on the way, that’s going to actually go up or stay about the same with that. The income stayed flat with the move, on that front. And it’s pretty interesting to think, oh, you actually have to get a car now because most cities that are not probably New York or San Francisco, it’s probably a good thing to have at least one car for a family with this kind of stuff.
That’s not something I usually consider when talking to folks, but I’m always reminded of when I hear about folks who live in places like New York or San Francisco. So really interesting to hear those kinds of puts and takes and also, you think you’re going to save about 35 to $45,000 per year in this, through these pay it yourself first mechanisms that we just articulated.

Madison:
Yeah. That sounds about right.

Scott:
Okay. Awesome. And then where are your assets and liabilities today?

Madison:
Yeah, so we have, let’s see. So we’ve been saving for our down payment for quite a while. And so currently that’s about 16%, but with closing on the house, that’s going to all go to that down payment. We have about 65% of our net worth in our 401k. And then let’s see. We have a little bit in crypto and then our IRAs and brokerage accounts in 529, we have about, let’s see, I think that’s about 15% of our assets there.

Scott:
Awesome. And where would you pick that net worth at?

Madison:
Yeah, we’re looking at 640,000 right now.

Scott:
Okay. So 640,000. The lion share is going to be in the home equity down payment and various retirement accounts.

Madison:
Correct. Yeah. Our 401k is a majority of that.

Scott:
Okay, great. What is the best way we can help you from this position?

Madison:
Yeah, I think our expenses seems very high currently. We pay, right now, our expenses are fixed, plus our variable expenses are about 9,500 a month.

Mindy:
You live in San Francisco.

Madison:
That is true.

Mindy:
[crosstalk 00:14:49] going to be high.

Madison:
But I do like to shop.

Mindy:
Well, stop.

Madison:
Yeah, I know. I need to stop. So I think when cutting out the fat a little bit and having clear, we’re really good at having short term goals of we want to have X amount for a down payment, or we want to have X amount in our 529 or setting aside, paying ourselves first each week or each month. But our longer term goals, I feel like me, maybe me personally, I struggle with conceptualizing that. I’m a very competitive person. I want things done now. And when, the financial game, I feel like is very much of a long term kind of game. And so sometimes I struggle with that. So I guess one of my questions would be if you were in our shoes, in me and my husband’s shoes, how would you go about creating a longer term goal for that financial freedom down the road? Like retirement.

Mindy:
Okay. Scott, I’m going to jump in here. I have a couple of things to say. So what does long term mean to you? Is that 10 years? Because you’re 30, 31, 32.

Madison:
I’m 31, yeah.

Mindy:
Okay. So 31. Are you talking about at age 40, age 50, traditional retirement, age of 65?

Madison:
Yeah. I think that’s a good question. I mean, longer term 65 for sure. But even, I would say 20 years from now.

Mindy:
Okay. So at age 50, you want to be retired. At age 31 and one day you want to be retired, but that’s probably not going to happen, but we’re working on it. So in 20 years you want to be retired. Do you want to be retired in 10 years?

Madison:
That’s the thing. I don’t know. I enjoy working. I enjoy what I do. I know my husband does not want to retire early. He really enjoys working and that’s who he is. He is all about work. And I love that about him. For me, on the other hand, I don’t know. I would be open to not retiring early if the financial gains at the end and I could leave my kids more money than I would not, but I also want to enjoy that time and maybe retire early. So I struggle with that. I honestly, I struggle with. I’m not sure what I’ll be like at that time. I want all the money now and then I can make my decision-

Mindy:
Okay, it’s super easy.

Madison:
… but that’s not how it works.

Mindy:
I am hearing that you and your husband have slightly different outlooks on your working life. And that doesn’t mean that you can’t retire early. My husband doesn’t have a job. He’s retired and I still have a job, and that’s okay. But we’ve talked about it. He worked for a long time while I stayed home with the kids. And now I want to work. I’ve got this amazing job and I get to work. I get to do this thing. And there’s nothing wrong with enjoying your job. I think that you and your husband need to sit down and listen to episode 157, where Scott and I talk about having a money date. And it’s a no confrontation money date. It’s just, hey, what do you want to do in five years? Or if we had 12 million, we won 12 million dollars, ow would you spend the next month? Oh, I’d like to go on vacation.
Great. Let’s plan a vacation for next year. What would your vacation look like? Oh, well, if money was no object, I’d love to sit on the beach. I’d love to travel around the world. I’d love to… whatever it is that you guys want to do, start looking at things like that. And then while you’re on that vacation, talk about if we were both retired, this is something we could do, all the time, or this is something we could do more frequently. Or, hey, this is nice every once in a while, but I don’t want to be on the beach all day long. I want to go back act to work. I enjoy creating and furthering my career and building things and whatever. But having the conversation is really, really helpful to seeing what you want.
In 10 years, if you don’t want to have a job, then work towards not having a job. And what does that look like? You’re financially independent, what does that look like? Do you have a financial independence number? Have you sat down and said, we spend $9,500 a month. So that means Scott do the math quickly, we need $120,000 a year. I did that myself.

Scott:
Yap-

Madison:
[crosstalk 00:19:51].

Scott:
… that was good.

Mindy:
$119,000 a year. That means, oh, now you do the math, times 25. Scott, what is that? Quick, quick, quick.

Scott:
120 times 25, that’s 3 million.

Mindy:
3 million. So now you have 640,000. You have a goal now of 3 million, but if you start living in Texas and you realize that you’re only spending $6,500 a month without giving anything up, you don’t have to give up anything. You’re 31 years old, 3 million is pretty realistic in your lifetime.
3 million by age 40 is going to take a little bit more work. Scott, do the doubling for me at 640 in eight years, that’ll be 1.28 million. And in what was that, eight? So in 16 years, that’ll be.

Scott:
A little over 2.5.

Mindy:
So 2.5 million in 16 years, if you don’t contribute anything else to your 401k, assuming a 10% return, past performance is not indicative of future gains, all those disclaimers, but you have a very real chance of getting to 3 million within 20 years. So in 50, at age 50, you’ll have the money to retire.

Madison:
Yeah, no, that’s.

Mindy:
Let’s bump that up a little bit by putting more money in or investing in cash flowing assets or creating passive income or other things that we can do to… You said you worked at a general contractor, like a building general contractor.

Madison:
Yeah. Commercial building.

Mindy:
Okay. So there’s opportunities for real estate investment. I don’t know if you know that, but-

Madison:
Yes. That was another question.

Mindy:
… Texas is a good market.

Madison:
Yeah. Yeah, absolutely.

Scott:
Look, I’m just hearing you say with all this that you don’t really know what you want. You don’t really have like a plan or a thought process for three to five years out.

Mindy:
Which is okay.

Madison:
I know.

Scott:
You kind of have some ideas for 10 to 20 years out, and like Madison just said, that’s okay. You guys are doing great. You earn an incredible income, you pay yourself first, you have a number of investments. You just made a move to what sounds like dramatically improve your lifestyle with all this kind of stuff. You got another family member on the way, like you’re winning. Life is got to be pretty good. I would imagine, a lot of thing’s going right, to a general sense. Is that how you’re feeling about things right now?

Madison:
Yeah, absolutely. I think my husband and I, when we met, we started our money journey or financial journey together. So we have a lot of learning to do. And I feel like right now we have kind of the world that our fingertips and we have so many possibilities and opportunities ahead of us. And it’s just now diving into that which direction do we want to go, and what’s going to be best for our family? So, yeah. Is it like buying rental properties next? That’s really big. My brother is into rental properties. He has a brother that has six rental properties and he is 27 years old. So is that something that we want to dive into or is it something my husband has been studying the stock market a lot.
Do we want to jump into more of the stock market? So it’s kind of like, what kind of ROI are we going to get on which routes? And I think that we have so many opportunities and possibilities. But for me, it’s which direction we want to go and studying it and understanding those directions is where I’m kind of at my crossroads right now.

Scott:
So yeah, I think that’s what it comes down to. It’s what do you want? And you got to start with life and then map the finances to that, right? Because otherwise you’re going to get what I want instead of what you want or whatever with that, right?

Madison:
That’s [crosstalk 00:23:40].

Scott:
So, I think that’s where we have to start with. And that money date on episode 157 that Mindy referred to, that’s a good place to start. And this is this kind of like, kind of cheesy vision stuff that I think can be really helpful with that. Like what do I want? What’s a perfect day for me in three to five years, right? My kids will be this old, what do I want to do? I want to wake up and do this. Do I want to go to a work. I want to do this. I want my kids to be behaving or achieving or having fun like this or whatever it is that I’m looking for.
This is how I want to do vacations. This how I want to do Christmas. This is how I want to do my career. This is the impact that I want to have. These are the things that I want to be doing on a regular basis with that. And from there, you can map into that, right? If you’re saying, because if I’m… And it depends, there’s no right answer to that. But if you’re saying, no, I want to continue advancing, me and my husband both want to continue advancing our careers for the next 10 to 15 years and kind of push that as far as we can go with of that while having some sort of the balance that we like with our family, then I wouldn’t change essentially anything that you’re doing right now. Not in a big way with that.
We can always argue the Roth versus the 401k, which is always fun. But I think you’re doing it right, right? You’re piling up a bunch of money, you pay yourself first, you’re saving well over 10% of your income, you’re going to be rich and you’re going to have a plentiful retirement. Most likely when it’s all said and done, because you have two strong income earners that are working full time and bringing in a great income with that. That leads to a more passive potential investment approach, and like when you said, even without further contributions, you’ve got a good chance of being worth two and a half to three and a half million inside of 20 years. Probably much more, because you’ll continue to contribute of course there.
And you can still go shopping and do all this kind of stuff. You don’t need to control those expenses. But if you’re like, no, I want to stop working for a period of years in this and go that way. Okay, now you’ve got to shift those assets away from what is right now, disproportionately, a position that’s got a huge… You’re disproportionately skewed towards retirement accounts and home equity, or you will be with this approach over the next five to 10 years. And you will have very little in the way of funds that you can actually spend or use to start businesses or by real estate and that kind of stuff with your current savings approach. So it just depends on what you want and how you want to go about that. Do you have an inkling with that or do you have a direction you could kind of steer [crosstalk 00:26:16].

Madison:
Yeah, after you mentioning that, I definitely see myself working and advancing my career for the next 15 years, at least, 15, 20 years. I’m in a very good spot. My husband and I are both project managers. And so we love what we do. And so I don’t foresee myself taking any time off as of right now. We definitely want to… I want to advance my career as much as he does as well. So with that said, I think like you said, we’re going to continue to invest in ourselves, maxing out our 401ks and in living a lifestyle that is good in what we like, but it’s where we’re going to start. Since we’ve been saving up for the down payment and buying our first home, now, what can we be saving up for? Is it a rental property?
Do you suggest paying down a majority of our primary residence? It’s kind of like, our next step is kind of unclear right now because we just accomplished our first goal of buying that first home. So now it’s like, okay, we’re going to be making this money. We’re going to be in a lower cost of living. What’s our next step going to be?

Scott:
Yeah. So here’s why I don’t like rental property investing. Not to say you can’t, but here’s why I would steer you away from rental property investing in your situation with this. With rental property investing, to get started in it, I think you need to invest 500 hours, at least in learning about this kind of stuff. Books, podcast, networking, YouTube, blogs, whatever it is, to feel comfortable with it. There’s so many mental models about how to screen a tenant, how to pick the property in the right area, how to think about cash versus appreciation and those trade offs, how to estimate all the expenses and those different types of things, how to get comfortable hiring contractors or property managers with that kind of stuff. You guys are working professionals and your goal is to crush it in that career for the next 10 to 15 years, right?
That means that the opportunity cost, let’s say that you guys each earn $150,000, annualized with that. That means your time is worth 75 bucks an hour each with that. So to get that $500 investment, that’s a pretty significant investment. It’s like 35,000, something like that. $35,000 in opportunity cost that you could be plowing back into your rear or some of these other things that you’re more excited about. And then if you buy a rental property, let’s say you buy a $250,000 property that rents for 1900 and with a mortgage of 1300, I’m making these numbers up. I don’t know how Texas would work with that. Maybe you’re getting a $300 per month cash flow, right? Well, you guys bring in $30,000 a month or $25,000 a month. So you would need to stack up 100 of those before you are bringing in equivalent income to your salaries with that.
And so the only way to make a investment that’s meaningful enough relative to your income, I think is you’re going to take on a tremendous amount of leverage or really go all in, on real estate, one after the other, over a prolonged period of time. And so not to say you can’t do it, I just think in your situation, that’s a big opportunity cost considering that you’re most likely going to get rich, going the more passive route here. And not to say real estate’s out, but I think that passive real estate, or as a combination with stocks or something like that, might be an alternative if you still like the asset class or real estate, and learning about and thinking about investing with that. But I’ll let you react to that.

Madison:
Yeah. I guess I’m a little shocked. It’s something that we’re definitely interested in. We are even thinking our first home could be turned around in about two or three years and we use this as a rental property down the road. And then we go to our next home.

Scott:
That could be good.

Madison:
Yeah, as an option. We are also were looking into duplexes, but there wasn’t anything that we found that was a good fit for us in the Dallas area. Yeah. So I guess it is something that we’re interested in. So I get what you’re saying, is as long as it’s kind of our passive, like our kind of a side thing is what you’re saying, correct?

Scott:
I think you’ll take on a lot more risk or you will sacrifice a lot of return if it is actually passive in the first couple of years of getting started, right?

Madison:
Got it.

Scott:
It can get passive and it should, at some point with that, or it’s always a… it’s a sliding scale. It’s a semi-passive business, but it is an active pursuit, I think, to learn what you need to learn, to get started and make a quality decision on this kind of stuff to get in, in general, to give yourself the best odds of success with it. And I’m just challenging whether you guys, given your profile may want make that investment. It may not be worthwhile because you have to invest so much for it to be meaningful compared to the hundreds of thousands of dollars that you’re able to just sock away in these 401ks with that. I mean, it sounds like you have 300 to $350,000 in these 401ks and other investments [crosstalk 00:31:40].

Madison:
Yeah. Our joint 401k, we have out 420,000 currently, and then our IRAs, we have, let’s see, we have about 85, 86,000. So we have a good pile up, but they max out. So that extra cash that we’re saving, we were putting a lot of it down for a down payment, but now it’s like, we have that house now. So now where are we going to invest and try to get more return on that investment.

Scott:
Did you buy your current house with the intention of converting into rental in the future? Was that a forefront of the decision making process?

Madison:
Yes. So we looked at multiple homes that, a forever home, and then we also looked at like a starter. Let’s live in it in a few years and then rent it out after a few years. So that was our intention with this home. And we actually got kind of our investment home style first right off.

Scott:
Great. I think that’s a really smart way to go about it. That’s a good exit option that you’ve given yourself. You can probably live there for a while and enjoy the double square footage from the old place. And hopefully, one day sell it, if prices go up and then also keep it as a rental. But those are three good exit options, I think for that. So I can’t argue with that approach, with it, and the fact that the place and have lived there and probably have a few years to go and find a property manager, that makes a lot of sense to me with that. And by the way, I don’t want to say you can’t invest in real estate. If you decide, hey, I want to go in real estate, we’ll help you with that.
I just wanted to kind of say, for your kind of profile is kind of the classic one that I’m like, I don’t know if real estate is exactly the right choice for a couple earning $300,000 a year, working full-time with two small kids to get started in. And your goal is financial freedom in 15, 20 years, the real estate’s a really good option for somebody who’s trying to get the financial freedom in seven to 10 years, with that, willing to use the leverage work, fix up a couple of things themselves as a first couple of times, make it passive over time, invest those couple hundred hours that you can still do it with that. But I would think you would just want to be shooting for a bigger portfolio. If you’re saying, I want to get the seven to 10 million dollars in net worth in the next 10 years, then working this job and going into real estate makes a lot of sense to me. You could certainly have a chance at doing something like that.

Madison:
Got it. So. I mean.

Scott:
You’re too rich to invest in real estate [crosstalk 00:34:25].

Madison:
I don’t think that at all. It’s funny to hear you say that, and I appreciate that. I mean, we’ve worked really hard and I’m proud of where we’ve come from and where we are currently. But my mind goes, I feel like I’m challenging a little bit you a little bit, because I would like to get your advice on yeah, seven to 10 years, having seven to 10 million dollars sounds fantastic, and that’s what I want. I want to.

Scott:
Great.

Madison:
So those are the things I want to learn about, I want to do, and so does my husband. And that’s we don’t know what we don’t know, right. So having these conversations is super beneficial and why I’m here. So if you, I guess if you two were in our shoes with the income that we’re making, with the decisions that we’ve made of leaving California, moving to Texas, what would be your next steps?

Mindy:
Well, first.

Scott:
With the goal of getting to seven to 10 million in the next, seven to 10 years.

Madison:
Seven, yeah. 10 years. Let’s call it 10 years.

Scott:
Okay. That one’s fun. We can work with that one, here as well.

Mindy:
Well, you’ve already saved yourself a ton of money. We didn’t even mention this, but Texas has no state income tax, whereas California does. And so you just gave yourself a whopping race. I would take all of that money and put it into the stock market. Personally, this is what I would do. You have an after tax brokerage account. Where are you putting that money? Are you individually stock picking or are you putting it into index funds?

Madison:
Index funds right now. My husband and I have been studying a little bit more about picking stock options, but we’re planning to roll that out. We were going to do it December, but we pushed it out to March.

Mindy:
I would say, read the book, The Simple Path to Wealth. Is it the simple or A simple either way. It’s by J. L. Collins, Simple Path to Wealth. It is fantastic, and basically, it is boiled down to invest in index funds and don’t pick stocks. Oh, but he flushes it out into a book about this thick, which can be boiled down into invest in index funds and not individual stocks because, the individual stocks can rise and fall. But as the index goes up, all the stocks… He says it better than I do, but it’s hard to pick a good stock. You can get lucky by doing a ton of investing, I’m sorry, a ton of research and really knowing whatever genre you are… Technology, what is it sector, not genre, sector, really knowing the sector that you’re investing in really knowing the specific company that you’re investing in.
That’s a lot of the Scott mentioned and 500 hours for real estate investing. This is more. Or you can buy every single company in the whole index and be better.

Madison:
Yeah, no, totally.

Mindy:
Make a better return. There are very few people who are making better returns than the stock market. That’s what I would do. I would put it into all of my income tax money is now going into the stock market. I would check my spending. And I’m only saying this because I recently have noticed that my spending is going insane. And also you mentioned that you like to spend money, so check, what are you really spending money on? I find that it’s very interesting to be like, oh, healthcare was this much, and childcare was this much and groceries. Yeah, that’s probably right. But when you track every single penny, you find that, oh, groceries is way more than I thought it was, and gas is way more than I thought it was. And I forgot about these things that I was not categorizing as groceries because I didn’t buy them at the grocery store. But Costco is groceries, but it’s also oil changes and tires and random, weird stuff.
So some of it gets categorized as groceries and some of it gets categorized as other things. I might just categorize it all as other things. And I’m not really honest with my actual spending. And this is, I’m a nerd, I love winning. I really love winning. And this is another thing that you said you want to win, get yourself a spending tracker on your phone and track every penny for several months. And be like, after you start tracking, you’re like, oh, I have to put this in the spending tracker. I’m not going to buy this today. I wonder how low I can spend on gas this month. So I’m not going to fill my gas tank because it’s the 30th, then I’m just going to plan all of my errands for next month. And you really start thinking about your money when you’re trying to win.
And the game is how little can I spend? And it’s, like I said, I’m a huge nerd. Scott, you’re going to argue with me and that’s fine too. I’ll give you a moment to argue with me. But that could be… I mean you could very easily from your $9,500 in expenses, I think living in Texas, you could very easily cut 3000 out of that without feeling a pinch. And I think you could cut 4,000 out of it if you wanted to tighten your belt just a pinch. But if you really wanted to go whole hog, you could cut a lot out. And that’s not saying that you have to all the time, but that could juice your after tax investments, and then all of a sudden next year you have 7 million dollars.

Scott:
Yeah, look, let’s reframe the goal as, I want an all out approach, given my context to getting to north of 5 million dollars in the next five to seven years, I’m going to call it that. That’s how I’m framing this. There’s four ways to do it. You can spend less, earn more, invest or create. Those are the four options that you got with that. Your expenses, I think are a good place to look, because you’re not generating enough after tax cash flow to make large investments at the pace that is rapid enough to get to that $5 million mark inside of five to seven years. Like I said, you’re going to get rich over a 10 to 20 year period. No problem with what you just stated there, if you keep on that career. But if we’re reviewing with the new aggressive goal, we need to do that.
I think Mindy’s right. You probably have like two to $3,000 per month in incremental savings that you can squeeze out by just getting some controls in place and a budget review, basic budgeting processes and controls over those expenses, and working on a couple of those fixed expenses. And especially with the next move you make in your housing with that and seeing if you can do some things there. So there’s probably two to $3,000 in the next couple of months, that’s probably maybe another 500 to a thousand over the next year or two with that. But then you’re going to be starting hitting a floor where it’s going to impact your life would be my guess in terms of that, of on the expense side. Okay. But that frees up, we’ve now got $30,000, 30 to $45,000 a year before those changes.
And that might add in another $35,000 a year. So you have $70,000 to play with per year. After you’re maxing out your 401ks, your HSAs, and the other things you’re doing with that. You guys are probably, if you’re both working full time and given the income profile that you just described are going to continue you to get raises over the next couple of years with this. So you’re probably going to see that number creep from 70 to 85,000 a year, to a hundred thousand, to $115,000 per year over the next five years kind of deal. So, okay. What do we do with that? That’s a reasonable amount of a free cash flow, and I’m probably even understating it a little bit based on what you were kind of describing about where your money goes there with that.
You probably have somewhere in the ballpark of 70 to a hundred thousand dollars a year. That’s enough to make a meaningful real estate investment or two every year. And now you can begin building a portfolio. But again, because you guys each probably earn $150,000, this portfolio to be meaningful needs to generate like… You need to buy a lot of real estate. It can be a few large properties, or it can be a lot of small properties, but you need to be thinking a pretty big portfolio for it to be relevant to your current income with this. So Texas is probably a fine place to go, but if you’re looking at $200,000 properties or $250,000 properties, you’re probably going to need to buy two or three a year in the first couple of years and snowball that to five or six a year in the out years with that.
And that’s going to be, what do we just say, we have $500,000 in savings over the next five years, that could purchase about two million in residential real estate in the Fort Worth. You’re in Fort worth, right?

Madison:
It’ll be Dallas.

Scott:
Dallas. Okay. In the Dallas area, that seems like a pretty reasonable market, as far as I can tell, as an outside observer looking in. Texas has got a lot going for it. Right now, you’ve got high property taxes and a couple other things, but people are moving to Texas because they want to move to Texas and they don’t want to be in the areas that they’re coming from. You’re a perfect example of that. So that’s at least a pretty good fundamental starting point to think there’s something here for that. Of course, I’m a big Eagles fan, so [crosstalk 00:43:50] the Cowboys. I can never get down there. Okay. But that would get you probably about, I don’t know if I can get you to five to 7 million on this front.
So that would be an approach to doing this. Why would you do that versus investing in the stock market? It’s because you think you’re going to get some sort of ROI that’s in excess of what you could do passively. If you invest passively in the stock market, I like to assume a 10% rate of return. Now, some people will say that that is way too aggressive. Some people will say it’s way too conservative, but I think when comparing stocks as an opportunity cost investment to real estate, it’s a pretty reasonable one. So here’s a framework about how real estate could be better. If I buy a property for $300,000 in average year. This is not an average year. I don’t know what it will be like in the next couple of year years, but in average year we see about 3% annual appreciation on that property.
So we’ll go from 300,000 to $309,000, at 3% appreciation, usually about three and a half. So let’s call 310,000. And I’ll get cash flow on top of that investment. So on a $300,000 property, maybe you’re getting $2,000 a month in rents and you have some $700 a month in expenses, cash free, debt free without the mortgage. And that brings you to $1,300 a month in cash flow. That could get you another, maybe, I don’t know, six, five to 6% in cash flow with that. So three plus five, 3% on appreciation and 5% from cashflow is only 8% return on your investment. That’s worse than the stock market. And what you’ll find, I think is over long periods of time, unlevered real estate does worse than stocks. But leveraged real estate is what helps you get that extra return, because if I put down 20% or 60 grand, then that $10,000 or $9,000 return, that 3% appreciation on a $300,000 price point boosts my return.
It’s a 15% return when I’ve put 20% down on a rental property, plus then the cash flow, right? The cash is partially offset by the mortgage payment, but I might get a 15% ROI on the appreciation front and I might get six or 7% on the cashflow front. That’s a 22% return. And then I’m also amortizing the loan, which adds in another couple of points, right? And that is why real estate’s more powerful than stock investing on this front with it. You get less cashflow at first, but over time, your rents increase. Your mortgage payment stays flat, the property price increases. And that’s how you’re able to compound these returns with that. If you’re willing to balance that return and say, hey, great, I’m going to use leverage, but because I’m using leverage, I have to now operate the property very efficiently. I’ve got to spend that five hours learning how to screen tenants.
I’ve got to learn which area of the market, why that part of the neighborhood’s really good for investing and why that part is not, whether short term rentals are a good idea in this area versus that area to change that cash flow. Whether I want to do rent by the room or another creative strategy in this part of town, how to hire a property manager, if I don’t want to manage it myself, which I don’t think you guys will, because you need to buy a lot of real estate to supplement your… to be deferred, to be relevant relative to your income position. All of those things can help you sustain that spread. Maybe a 15 to 17% return on your investments versus the 10% average you might get in the stock market over a long period of time. But you first have to believe that you can get that.
And then second, be willing to put in that effort. And where I was kind of coming from is, and this is going back to calculus and I’m probably going way over a lot of people who are listening said zero. So, I am sorry, because I’m going to go in here with this. But if I were to take that 10 years and say, there’s a spread between that 17% return and the 10% you could get in the stock market with that. And are you willing to put in the work by making real estate your hobby in a very big way over the next couple of years in order to get that return? Well, that pile’s got to be pretty big. And so that’s the point I’m trying to make with the real estate investing piece on this is, yeah, it was a hundred percent worth it for me to do real estate when I was making $50,000 a year, I’m just getting started.
It may not be worth it for you at $300,000 year, unless you badly want that five to $7 million position. And that brings me all the way back to what do you want. If that five to 7 million bucks, if you think you can make that five to 7 million bucks over a 5, 7, 10, 12 years and that’s a big enough spread. That’s an extra couple million, what are you going to do with it that’s going to improve your life. Okay. That was long range. Hope that was helpful.

Madison:
That was very helpful. Thank you. A lot of things to think about and to ask ourselves. Mindy, it looks like you have something that you wanted to say.

Mindy:
I was just going to say, yeah, I think the two of you should sit down and listen to this episode, listen to episode 157, where we talk about the money date and just, you don’t have to decide today. You don’t have to decide by the end of next year. Just talking about it with your spouse, looking at the different options. If Scott can scare you away from real estate so easily, then it’s not for you. If all that he says doesn’t convince you that real estate isn’t where you should be, maybe you should look into real estate. We’ve got this little website called biggerpockets.com. And if you need to know anything about investing in real estate, I bet you can find it on our site. And reach out to me if you’re looking for a specific thing, because it can be a little bit difficult to find, we’ve been around for 17 years.
And we have so much information that I can give you, links to great articles about how to buy a rental property, how to screen a tenant. It isn’t just, oh, you want to rent my property? Great, let’s go. There’s a lot more involved in it, but it’s not this super daunting task. But if Scott can talk you out of it really easily, if Scott can talk your husband out of it really easily, then start looking at the stock market. Look at different ways to it. There’s so many ways to make money. There are so many ways to make money. I, again, really think that peeking at your finances with a… not peeking at it, really staring at your finances with a microscope will show you a lot of little holes. And I mean, you’re still doing really great.
You have a net worth of $640,000 at age 31. You’re going to be just fine. But if you want to grow it, if you want to really have all the options, be financially independent tomorrow, paying attention to where your money is going. And was it episode 11 with Frugalwoods? She said, when we first discovered financial independence, we sat down and we cut out everything. And then the next month we’re like, well, that was awful. We want to add some things back, but they added some things back. They didn’t add everything back. They looked… She, I mean, her name’s Frugalwoods, she looked for ways to do it cheaper. She discovered that she really likes yoga class that she had cut out, and if she could go in early and sign people in, she got a free $20 yoga class. She’s like, I’ll do that instead.
So she got yoga every week for free. And there’s lots of ways to cut your expenses or… And like Scott said too, you’re making, what are we calling it? $75 an hour for the purposes of this conversation is a $20 yoga class and an hour of your time worth it? Probably not. But maybe there’s something that you’re doing that’s $150 an hour that you could cut out by spending a little bit of your time. You’re in this really weird space where you have probably more money than time. So, and with another baby on the way, let me tell you for sure, you have more money than time. But everything is a give and take, and maybe you really enjoy checking people in for yoga. So you don’t care that you’re not making money on it. It’s a game.
It really is. You said both you and your husband were athletes. This is a game and you guys are going to win together because it’s you two against the world. It isn’t you against him, it’s the two of you against everything else. But yeah, you’ve got a lot of options. So sitting down and listening to this episode, sitting down and listening to the other episode and just starting to have a conversation. You talk about it at dinner. The baby’s not listening to you. The baby’s just going to bubble and keep stuff at food in her face and she’ll be fine. And you guys can have the conversation. Hey, I was thinking about this. I was going to make a purchase, just being open and honest with the money. And if you’re spending too much money on Amazon, get rid of Amazon Prime because I don’t know what that is about that.
Oh, it’s free shipping. I’ll buy it instantly. Oh, $5 shipping. I don’t know. I’m going to have to think about it. I mean, what’s five bucks, really? If you can afford the thing, you can afford the $5 in shipping, but that was one way that I got rid of spending so much is thinking about the shipping costs, which is dumb, but it’s all a game.

Scott:
Yeah. Again, I just kind of come all the way back to what do you want, right?

Mindy:
But that’s where I was too.

Scott:
Yeah, no, I agree, but I just don’t think you’re clear on that. And if you can say like, no, I want to be fully retired traveling the world on a boat in three to five years, okay, we have a completely different game plan that’s needed to do than to be sitting really nice in about 15, 20 years after working full-time careers with all that kind of stuff. And one’s going to get you richer than the other with that. One’s going to get you a different lifestyle with that. And you have to move the money differently with that. I just think that you’re in, if you like what you’re doing, you’re doing all the right things.
And I don’t have too much in the way that I change other than like we mentioned getting control of expenses and putting in place the blocking and tackling with that. That said, if you like real estate, it definitely can be a great way to add a lot of net worth and cash flow to your position outside of those retirement accounts that can give you freedom. You’re just going to have to either rethink your, really how you’re fundamentally setting up your expense profile, because you need a lot of money to sustain this lifestyle with that, that you’re going to get from the stock investing with this. You need a lot of real estate in order to make that work. So just be prepared to go in and put a lot of chips in with that and spend a lot of time self educating about that. We certainly have a place for you to do that if that’s what you’re interested in doing. So I won’t discourage you from going down that path, if that’s what you’d like.

Madison:
Yeah, absolutely. Absolutely. No, I think you guys nailed it as far as having more conversations about kind of our individual goals and then discussing how we can accomplish those individual goals together, if they are different. And then from there, determining our short term goals to get to that longer term goal. And like you’ve said and mentioned is it could be… It’s going to be different if it’s a three to five year goal, or if it’s a 10 to 15 to 20 year goal, of what we want. So yeah, we have a lot of conversations and work to be doing. Can we do this podcast again with me?

Scott:
I think we have a lot to talk about here and again, as we’ve discussed, I think now a couple times, the root issue, I think that’s delaying strategy or delaying certainty on the strategy is you guys aren’t, I think, sure what you want yet. You’ve got this big, exciting move from San Francisco to Texas, probably a huge upgrade in your lifestyle, I’d imagine with that move or additional spending money, more space, all that kind of stuff. A little one on the way, life is good with all these kinds of things. But fundamentally, I don’t think there’s been a decision yet about how you guys want to manage your money and what end state you’re working towards. As we kind of discussed a couple times like, oh, that sounds pretty good to make a lot of money and to build a lot of assets outside of work, in as efficient way as possible.
While we were talking, I think during a quick edit break, you mentioned that maybe entrepreneurship might be something that could be or I was able… I think I brought up entrepreneurship. Maybe that would be one to potentially be worth exploring. Plan A of continuing the career track and both having these higher powered careers sounds pretty good.
And you were happy with that. So I think that it’s about kind of aligning around those different types of things or aligning around, hey, we’re not sure yet, and we want to just build a flexible position so that we can decide in 1, 2, 3, or four years with that. Any of those I think are good outcomes, but I think what we’d like to do is invite you to come back on the show in a couple of months or whenever you’re ready, and you’ve kind of decided on that next step for you guys, and that end goal, and we can probably revisit and then help build a, maybe some sort of financial plan that could help accelerate progress towards that goal.

Madison:
Yeah, absolutely. We would love that. And I think having my husband join as well, where we can kind of then discuss our conversations that we did have together and the outcome of those and what our goals are jointly, that would be great.

Mindy:
I think that would be really awesome.

Scott:
Awesome.

Mindy:
Okay. Well, I’m looking forward to talking to you in a few months and congratulations on the baby. Congratulations on a killer financial position, and we will talk to you very soon.

Madison:
Thank you very much. Sounds good. We’re looking forward to it.

Mindy:
Okay. Bye-bye Madison.

Madison:
Bye.

Mindy:
Whew, Scott, that was Madison and her fantastic, amazing options. And I can hear somebody listening who may not be in the same, quite same position as Madison and her husband saying, wow, what a really big problem they have. But it kind of is a really big problem. She’s not got any debt. We didn’t talk about this, but she and her husband were both athletes in college, so they didn’t have any debt from coming out of college. They’ve been living in the high cost of living area of San Francisco and have recently moved to Texas. So they’ve got money kind of… They’ve got housing figured out, they’re in a lower cost of living area. They’ve got this great income and now it’s where do I direct the money to go? And the, I don’t want to say the wrong move, but moving this way means you can’t also move this way.
So if you move this way, maybe you don’t realize some of the great returns that a different option can have. I really liked that you pointed out that real estate, isn’t just jumping with both feet. I mean, you could, but that’s not the right way to do it. The right way to do it is to spend 500 hours learning about it. And that’s not as easy as throwing money into the stock market. So clarifying what their goals are, I think it was really, really spot on for you.

Scott:
Yeah. I think that real estate investing, investing in general is a decision about cost benefit analysis, right? And the cost benefit is a time and money component. And these guys, because they’re doing really well, have a high dollar per hour value of their time with this and have a winning formula in hand with what they’re doing. So again, I think it comes down to what are you or long term life goals, how do you back that in there? And I think this was a super valuable episode because figuring out what you want is not like an easy task. And it takes a lot of people, a large amount of time. And it can be really hard. And this might sound like a good problem with them, but because they’re very talented and they have so many options that sounds like available to them with the heightening careers, and both of them on strong tracks, that gives them too many options with that.
And that makes it even harder to figure out what you want, because you have so many good options in front of you. And I think that there’s hopefully a large number of people out there listening that might be going through the same thing. What do you want? And if I’m on this track, what’s going to happen with that? And that brings me all the way to one philosophical point. If you’re not sure what you want, and you think you’re going to have a ton of really good options in your life, then maybe one logical approach is in the short run, build a flexible financial position with that. Don’t dump all the money into the retirement accounts necessarily, but begin diverting some to that after tax stuff.
So you have a pile of money there ready for you. If you do decide you want to exploit an option of starting a business, joining a startup, joining a nonprofit, investing in real estate with that. So maybe flexibility is the right theme, if you’re not sure on your life, long term life goals, and you want to spend a year figuring that out, because there’s nothing wrong with that. What do you think about that, Mindy?

Mindy:
I think that’s a really great bit of advice, Scott. Yeah. Create a financial flexible position. You don’t have to have all the answers today. But the same first two levers apply. Spend less than you earn. If you’re earning a good income, this is going to be fairly easy. Just don’t spend every dime you have. Earn more income. If you are earning lower income, look for ways to generate additional income, a side hustle, a second job, ask for a raise. There’s a lot of ways to earn more income, but you have to look for them. They’re not just going to plop into your lap, hey, do you want more money? You have to figure that out. Take the money that you are saving, the Delta between your earned income and the spending income, the spending, and invest that wisely, at the index funds.
Low cost index funds is a great place to invest when you’re not sure what you want to do, unless you’re thinking about investing in real estate, in which case, Scott, this is a topic for another decision or another, oh my goodness, Scott, this is a topic for another day, another show entirely, but maybe the stock market isn’t the best place to park your money if you’re looking to buy a house in the next one to three years. But there’s a lot of options available. And just because you have a lot of great options doesn’t mean that that makes the problem any less. A good problem to have is still a problem. You still have to solve it. It’s just not as daunting a problem as, oh, how am I going to pay off my debt?

Scott:
Yeah. I wish I had kind of come back to this line of thinking while we still had Madison here, because I think… And I’ll send her a note with this, but I think that’s kind of, I think, how I would be thinking about it. If I’m truly unsure, I’m going to build a flexible after tax investment position with this, give myself that runway from a financial perspective so that there’s assets out there that I can tap that are not inside the 401k. And I’m going to have to access through penalty or inside the home equity that I’m going to have to borrow against in order to access with that. There’s stuff that I can harvest right now to go and pursue some of those great options that may materialize in the next couple of years. That’s probably the right approach as a theme in that situation. Not to an extreme extent, but just to kind of tend towards that.

Mindy:
Okay, Scott, this one went a little bit long today. Should we get out of here?

Scott:
Let’s do it.

Mindy:
From episode 260 of BiggerPockets Money Podcast, he is Scott Trench and I am Mindy Jensen saying in a switch witch.