Finance Friday: How to Invest When the 20-Year Grind Pays Off

Mindy:
Welcome to the Bigger Pockets Money podcast show number 320 Finance Friday edition, where we interview Chris and talk about Zooming out three to five years and thinking about your future portfolio.

Chris:
I’ll tell you what I’m more challenged with than the leverage is the time commitment needed to do it properly and do it effectively. And we listened to the Bigger Pockets Real Estate podcast. We listen to the Rookie podcast. I have struggled with time management with all the different balls we have in the air right now.

Mindy:
Hello. Hello. Hello. My name is Mindy Jensen and with me as always is my Costco clothing wearing cohost, Scott Trench.

Scott:
That’s right, Mindy. My entire wardrobe is from Costco, except for my shoes.

Mindy:
Tip to, well, head to toes, right? Scott’s socks. Scott and I are here to make financial independence less scary, less just for somebody else. To introduce you to every money story, because we truly believe financial freedom is attainable for everyone, no matter when or where you 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 deal with the philosophical and good problem of earning a very high income and needing to understand how to allocate your time. We’ll help you reach your financial goals and get money out of the way, so you can launch yourself towards those dreams.

Mindy:
Scott, I am super excited to talk to Chris today. I really like his story about not having a high income for quite a while and having a mountain of debt. And then I don’t want to say lucking into, but kind of lucking into a big windfall when they decided to sell a business. And now they have the very fortunate decision, what should we do with all of this money?

Scott:
That’s right. It’s a popup moment. We’ve spent 20 years grinding away, building a strong financial foundation, and now it’s really strong. And we’re almost surprised by how, the options that affords. And I think a lot of folks, or I think many folks, hopefully, will experience a similar end state at some point. And it’s good to be aware of that, plan around it, and deal with the good problems that that presents. There are still problems. And there are still things that we need to address here in our personal financial situations.

Mindy:
Yep. And one of the things that they do need to address is how do we go from super saver mindset to, hey, we can loosen the purse strings a little bit and actually start to spend some of this money that we have accumulated. Okay. Before we bring in Chris, I must tell you that the contents of this podcast are informational in nature and are not legal or tax advice. And neither Scott, nor I, nor Bigger Pockets is engaged in the provision of legal, tax, or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal, tax, and financial implications of any financial decision you contemplate.
Chris and his wife, Carrie, have a clear cut set of financial goals, which means they’ve had conversations about money. Yay. Further, they’ve written down their goals, which tells me that they are discussing them on a regular basis. More yay. Some of these goals are rather aggressive, but they just sold Carrie’s veterinarian practice. And now they’re looking for ideas for what to do with this big old pile of cash they’re sitting on. Chris, welcome to the Bigger Pockets Money Podcast.

Chris:
Thanks for having us and really me. Unfortunately, Carrie can’t join us, but thanks for having us. We’re excited to be here.

Mindy:
I’m so excited to talk to you today. Normally, with this show, we start off, we jump right into it with what do you earn and where does it go? But I think we need a little bit of context about your financial situation. So let’s get a little bit of your money story.

Chris:
Sure. So Carrie and I have been married for about 20 years. We’re coming up on that in another month or so. And we’ve always been pretty conscientious about our finances. Up until the last couple years, we haven’t really earned a whole lot of money, but we’ve always been very conscientious. We’ve discussed it. About a year out of college, she decided she wanted to go to veterinary school. And we had met with a financial advisor and the advice was, if you’re going to do this, if you’re going to take on two, three, $400,000 worth of debt, do it now while you’re young and you have time to pay it off. And so we did. We jumped in and went to, I supported her while she was in veterinary school for a few years in the 2000s. She worked for a couple different clinics and then ultimately decided to buy her own clinic in 2011.
And just this year decided and for a variety of reasons, and I can go into a little bit of this. Being a veterinarian is a pretty tough job on top of being a business owner. And this year was the year she decided, I probably still love being a vet and still doing the medicine part of the work, but I really want to drop doing the marketing and the HR and the legal side of things. And so we looked at a couple different buyers. And in January, signed a contract to sell the practice and really made almost three times as much as we paid for the practice back in 2011.
So it was a great investment. I don’t know if we … I would love to tell you that we had all of this lined up. We knew exactly what we were doing back in 2011. That was not the case. A lot of this was trial by fire and trial by error, and we made a lot of mistakes along the way, but it did pay off in the end. She has worked very hard for the payoff that she got and I’m really proud of what she’s been able to accomplish and what she’s built.

Scott:
Awesome. So can you walk us through any other parts of the money story? How significant is this event relative to the combined rest of your story in financial position?

Chris:
Yeah, that’s a great question, Scott. I think for us, we’ve always had goals, but to be quite honest with you, for the last 15 years or so, the goal has been pay off the veterinary school loans and we have been really diligent about that. And then we had this moment, and we had about three months notice, where we said, oh, we’re going to be able to do it like that. Like, in a heartbeat, we’re going to be able to pay off all the rest of her loans. Any of the business debt that was with the business and start fresh, decide where we want to go from here. We have a lot of good skills that have been built up all over those years. But this was a significant payoff.
So we purchased the clinic for about 430,000 in 2011. And with all of the payouts … And so the way the deal was structured is she would get a certain amount of money, was about 1.2 million to when the practice sale closed. And then an additional, somewhere in the neighborhood of four to 500,000 each, broken up over several years if the clinic continues to hit certain revenue targets.
So that gives us a little bit of break on the long-term capital gains, which is nice. But it also gives us some runway now to try to figure out what we want to do next with that capital and how we can invest it for our future and for our children. We have two daughters. One is in the middle of high school; and the other is about to finish elementary school. So we’ve got those major college expenses, potentially, and other expenses on the horizon.
Maybe to go back a little bit further. So we came from different money backgrounds. My parents were both professionals. My father worked for the Federal Reserve Bank. My mother was a professor. They knew how to manage money and that was a part of my upbringing. On Carrie’s side, her father was a general contractor. Didn’t have the best skillset to manage money. And unfortunately, during the ’80s, the family went bankrupt because of some spec homes that they had. And I think that influenced certainly her, Carrie’s risk tolerance over the years. And just how, I think it manifested itself in that we were not really willing to invest the whole lot while we were paying down that debt. We didn’t want to take on that risk at the time, over the last 15 years. But fortunately, through a lot of hard work, it’s almost like winning the lottery, except there was a lot of hard work behind it. Fortunately, we’re in a position now where we can be a little bit more forward leaning.

Scott:
Yeah. Well, the practice is an overnight success in just 15 short years.

Chris:
Right.

Scott:
So …

Chris:
Right.

Scott:
Yeah. Nice lottery win for you and Carrie.

Chris:
You talk about this a lot on the program and I appreciate it. But her salaries through those years were less than $50,000 a year. My salary, thankfully, was able to carry a lot of our housing expenses and a lot of our other expenses. But we were paying almost $30,000 a year just to pay off the debt, just to service the debt. I wouldn’t even say to pay it off, but just to service it.

Mindy:
Was that in addition to her salary or was that basically her entire salary was paying off her debt?

Chris:
Basically her entire salary.

Mindy:
Okay. If you’re listening and you want to be a veterinarian, listen to that. Rewind it and listen to it again. Her whole salary was paying off the two to three. How much total debt did she have? Two to $300,000? What was the exact amount, do you remember?

Chris:
Well, the exact amount I don’t, but with interest and everything else, it was at least 300,000.

Mindy:
$300,000 in her monthly salary essentially covered her debt payment to be a veterinarian. And she was able to, very fortunately in 2011, which was a downturn. Did you get a deal on the veterinarian practice? It sounds like …

Chris:
I don’t think we realized we did, but we did.

Mindy:
So you were able to buy low and sell high, which is a very lucky series of events. That’s not something that you can study for and fortunate to get into, you luck your way into that just like … I don’t want to say just like with the stock market, but yeah, just like with the stock market. You luck your way into it over time, and then you were able to sell it because we are in a really great position right now. Again, the economics or the economy. So …

Scott:
How much did you sell the business for? How much cash did you receive and what is the term, what are the key terms for the earnouts on a go forward basis? Because this play is not over yet, right?

Chris:
It’s not. No. There’s still hard work to be done. So the way it worked, her practice was grossing about 1,200,000 when she sold it. So that’s a two vet practice, grossing 1,200,000. She was on track to add an additional veterinarian, wanted to do that, but it cost money to hire a veterinarian. And there wasn’t enough cash coming off with what we had to hire another full-time veterinarian at more like 80 or 90,000 a year. Still, not that, not a whole lot when you’re spending $300,000 on an education. If she hits that 1,200,000, there’s a payment of about 67,000 a year for the next three years that she could earn. Once she gets it to 1,500,000, there’s an additional 100,000 per year on top of that as well. It doesn’t have to be earned in the first year. It can be earned over the course of a few, by the end of that third year. And then she would be eligible for the entire payment.

Scott:
Are there any other guaranteed payments from the business?

Chris:
No. Well, no, there aren’t. So she has the ability to earn production. So in the veterinary world, your salary should cover about 20% of what your revenue is, as a vet. And if she earns, if she brings in more than that 20%, then she gets a cut of that above the 20%. So she can earn, my guess is she’ll probably earn in the neighborhood of about 100,000 this year.

Scott:
Interesting. I have no idea, at this point in time, how to factor in the value of your continued interests in this business, into your net worth statement. So I was wondering-

Chris:
Yes.

Scott:
If we’re missing a big asset. We have your net worth in front of us here from that. And I don’t think you are. I don’t think you can reasonably put any part of that business interest into your net worth at this point in time.

Chris:
No. It’s nice to work. It’s an important goal to hit and I have full faith that she and her team will. But yeah, exactly. It’s not a given. And if the economy takes a downturn, that could certainly impact the revenue that’s coming into the practice.

Scott:
Fair enough. Well, let’s go through your financial statements and get a good picture of where you’re at and what your goals are.

Mindy:
Okay. Now here’s the part where we say, so what are you bringing and where does it go? Let’s look at your salary and expenses.

Chris:
So if you’re okay with this, Mindy and Scott, I’m going to go with after tax income.

Mindy:
Yeah.

Chris:
Because I think that’s a little easier to narrow it down.

Scott:
Great.

Chris:
And this would be both after tax and after some of the other deductions. So my retirement account, life insurance, all the stuff that would come out of my check. So total per month is about 12,366.

Mindy:
And that is just salary or is that salary and additional income?

Chris:
Yeah, so that’s salary for me and Carrie. And then we have, we also sold, in a separate transaction, the building that the clinic was housed in. And we sold it into a real estate partnership that we earn a monthly dividend off of. And then ultimately we’ll have a … there’s a payout in five years, should everything go successfully with that. But it gets us out of the landlord business, which as you might imagine, being a busy vet, and another busy professional, we are small, short on time in our lives. So that’s about $1000 a month at this point.

Scott:
Awesome. And where’s that go?

Chris:
So mortgage is a little over 1800 a month. Utilities are around 400. Charitable giving is at 2000 or so a month right now. No car payments, but gas is about 300 a month. Food, which is inclusive of groceries in our restaurant, our restaurant budget, is about 1900. We save out of, so we have some savings that go from my paycheck, but savings is about 30. Yeah, 3167 a month. And then subscriptions, Netflix, you name it, 318 a month. I have a category I call miscellaneous and that is 2000 a month. And I can go into a little bit more depth on that. And then medical is 100 bucks a month and I wish I had a …

Scott:
Okay. So we got about 6,700, 7,000 in house, what I’ll call household spending, which includes charitable giving, mortgage, utilities. And we got about 3000 going in cash that you’re accumulating each month after tax.

Chris:
Yes.

Mindy:
I want to jump in because this doesn’t affect you, but we are going to publish this and people are going to listen. If your expenses are something that you are interested in reducing, then I would suggest going a little bit more granular. You have restaurant and food combined. So I would break those out. If you wanted to track your expenses to see how much is going to restaurant versus how much is going to food, because restaurant expenses are going to be more expensive than grocery shopping expenses. You have subscriptions as an all encompassing. How many subscriptions do you have? Is that truly all the subscriptions. Do you need Netflix and Hulu and, and, and, and …? I’m not saying Chris, you need to look at this, although you could if you wanted to, because I truly believe almost everybody has room to cut. And I’m doing that spending tracker this whole year.
So I’m just going to plug that again. You can see me and my expenses and how granular I get, because I truly do want to cut my expenses at: biggerpockets.com/mindysbudget. But you have a miscellaneous of 2000. I bet you could really cut that if you wanted to. You also have savings of $3,167 right here. So I’m not in here to say, oh, you need to cut. Your salary is 12,000, after retirement accounts and insurance and lots of other things. So you’re already saving half of your income, including $3,000. You’re doing okay, Chris.

Scott:
Yeah.

Mindy:
You get the stamp of approval from me.

Chris:
We were talking before the show recording started, Mindy, but it hasn’t always been this way. And that’s, I think, a valuable lesson. We really have tightened. We’ve followed our budget from the first day we were married, which has helped us significantly, particularly when we weren’t earning anything when she was in veterinary school. And so we’ve slowly grown it, but it’s never really gone off the charts for us, which has been really helpful. Particularly when this windfall hit our accounts this year. And when we’re saying, well, I don’t even know how to spend money. You know? That’s part of our challenge was trying to figure out how to appropriately spend. And luckily, a lot of this is automated, so we don’t think about it too much. It just goes where it needs to go and does its job.

Mindy:
I love that.

Scott:
How much do you have going to pretax, if any, as part of this?

Chris:
So pretax, so health insurance is pretty expensive. But I would say, let’s look here. So my retirement right now gets $1,700 a month. Carrie’s retirement, because we’re trying to catch that up, because she has really, literally, nothing except for the last few months is almost $3,000 a month for putting in, to try to max her retirement funds out this year. And then we have another 365 that goes to her HSA that she can invest in. So yeah.

Scott:
So once you’ve maxed out the retirement account for Carrie and you go into a more normalized situation, you have yet another 1000, probably, that you can add to your after tax bucket on a monthly basis.

Chris:
Yeah, that’s right. Yep. That’s exactly right.

Scott:
I might be off a little bit of the math there, but hopefully that’s in the ballpark.

Chris:
Yep.

Scott:
Okay. So we have three to 4,000 a month in cash accumulation, plus really healthy allocations filling up your HSA and your retirement accounts pretax.

Chris:
All right.

Scott:
Love it. Let’s go through assets and liabilities.

Chris:
Yeah. So assets, we have quite a bit of cash on hand right now and I’ll explain that. We have about 400,000 in cash. We have my 403B funds. I work for a nonprofit. It’s our version of the 401k. And 133,000. And that carries HSA. I have these backwards on our form, but her HSA has about 1500 in it and her retirement account has about 4,500 in it. And then we have our home, which is valued around 320. It’s probably a little bit more than that, but that’s a safe bet for now.
We have our after tax brokerage account invested in VTSAX at about 373,000. We have a, this is the real estate partnership that we’re in. That is 153,000. And then our personal vehicles, which I put on here, but I don’t really count them as assets because they continue to … Well, at least recently they’ve been going up in value, but that’ll eventually wane. Liabilities is a pretty short list. We have $190,000 or so left on our mortgage in our primary residence. So that’s our liability right now. We don’t have really have any … Beyond that, we don’t have any other debt. We paid the education loans off. We paid the cars off. All that stuff has been done.

Scott:
Awesome. And you and your mortgage is on a 15 year note, I believe?

Chris:
It is.

Scott:
And you’re paying that off earlier?

Chris:
Yeah. I think the intent is we’d rather not, if we can pay that off early, it’s not a huge amount and not a huge amount for us per month. So …

Scott:
All right. Now the most important question: goals. How can we help you? What’s the best thing? What are you trying to get to?

Chris:
Yeah. So, we want to have a good cash cushion, an emergency fund. So we’re going to keep 50,000 aside for that. Are going to have, I think both of our daughters are likely college material. Not that we’re pushing them in that direction, but they’ve both separately expressed interest in that path, so. That’s expensive as we all have known, and I’ve been listening to the podcast for a while and I know others see that expense as well. So I’d love to figure out a way to build some assets into our portfolio that would throw off enough cash to pay for college education. So the benefit that we have is that our older daughter and our younger daughter are separated by about six years. So we don’t have to pay for college for both of them at the same time. Now, again, that wasn’t planned. And I don’t think, if you talk to Carrie, she’d say yeah, it happened when it happened, and that’s how it worked. But now, 15 years on, I’m going, oh yeah, that was probably a good idea. So that’s one thing.
So we love our house. We had a house fire about five years ago, and thankfully everybody was okay. But we rebuilt. And so we have really what we want aside from one thing. We took our fourth bedroom and made it part of our master suite, which means we don’t have room for, really comfortable room for guests. So we have a garage. It’s a mess. We’d like to build a housing unit there that we could potentially use for an Airbnb-type rental; but really, for our guests, our parents, those who might come to visit us. So that’s on our plan as well. And that’s probably in the neighborhood of 100,000.
We’d love to have a place to go. Both of our jobs are pretty stressful. I refer to it as being “out of the zone.” If I am in the community here, I am always on call to a degree. So trying to find a place where we can escape to when we have time, but also to use as a short-term rental would be ideal for us. We love traveling. I think Carrie is more interested in retiring early than I am. But the idea is not a terrible one in my mind either. So … It’s a short list. It’s not too aggressive.

Scott:
Awesome. Well, I think a lot of those goals are going to be super achievable with the situation you’ve built here. Let me ask you another question. You seem very, your only debt is your mortgage. It’s on a 15-year note. What does that speak to about your overall tolerance for debt and investing in something like real estate, for example, with leverage?

Chris:
I think it would be best to describe my mindset is shifting on that. I think for so many years we’ve been grinding to pay off the $300,000 worth of veterinary school loans that we have a tendency to avoid debt, if at all possible. We don’t, we have credit cards, but we pay them off each month. We don’t overspend on that. And so I think we logically understand the value of leverage and what that can do. And certainly in the recent housing, boom, it really has paid off for a lot of folks who were in that. I think for me, though, it’s still a mindset shift. Over the past six or eight months, I’ve really tried to get more comfortable with the concept of adding a debt burden ultimately to achieve greater wealth in the end.

Scott:
Now, when does your oldest, potentially, go to college?

Chris:
So I have a sophomore, which so that’s three years. So what’s that 20, 25.

Scott:
So let’s start there. What does an ideal portfolio look like? You’ve got 1.4 million in cash. Your whole situation is converted to cash. What does an ideal portfolio look like in 2025? Let’s assume you stockpile another 200,000 on, well actually, I’m going to take a step back here because I have a cheating information. There’s another piece of information we need before we get into this, which is you are projected in future years to earn way more than what you’re currently earning this year. The 3,000, 4,000 per month that you’re saving will increase substantially in the next three to five years. Can you walk us through a couple of those key projections?

Chris:
Yeah, that’s a great point. And that’s where my brain has been spinning over the last few months. So with Carrie’s hard work and efforts with the veterinary practice, she has the potential to earn, basically, 167,000 a year, for each of the next three years. Whether she earns that all at once at the end of the three years or builds up, that’s how it should work for her. So she also has the ability to earn production bonuses. If she’s producing more in the practice, that could be a total of, I’d say, 20 to $25,000 a year. She’s able to keep a vet on board. She has the ability to earn a bonus from that. And I have a side hustle, which I’ve had for probably 10 years now, where I consult with some large international organizations on crisis management. And that can earn up to 40 to $45,000 a year for a couple weeks of work. So I’ve got some different levers to pull, to bring more cash into play.

Scott:
How much if, right now, your run rate is, let’s call it 40 to $50,000 per year. And after tax cash accumulation, what does it actually look like for 2023, 2024, in terms of how much cash you can accumulate?

Chris:
Yeah, we’re probably talking between 200 and 250,000 additional dollars per year.

Scott:
Before tax?

Chris:
Before tax, before tax.

Scott:
Great. So let’s call it 150 after tax.

Chris:
Yep.

Scott:
So we’re having, that’s $200,000 in cash accumulation per year for the next three, four years. That is a realistic possibility for you.

Chris:
Yep.

Scott:
Okay, great. So that’s the point I want to ask is you have 1.4 million in assets. You’re going to accumulate $200,000 in cash per year over the next three years. That puts you at 2 million bucks. Not counting any appreciation of your existing assets, any loan amortization, any of the 401k balances, that kind of stuff. Let’s call it $2.1 million in three years. Right? Now imagine you have a pile of $2.1 million in cash. What does the perfect portfolio that gets you those options that we just discussed, what does that look like to you?

Chris:
Well, that’s really why I’m here. I don’t have a huge sense for that yet. I think, Carrie and I have talked about our financial number, it’s probably between 2.1 and 2.5. So based on what you just said, it looks like three years, she can call it quits and get out of here. So she’ll be happy to hear that. I’m already joking a little bit there.

Scott:
Portfolio could go down.

Chris:
It could go down. That’s right.

Scott:
A year, in your case. But …

Chris:
Yeah. For me, I think we would both benefit from having more freedom to travel, more freedom to do certain things with our family and do things that we love with them. I think that the mix for our … I was doing the math before I gone on. Right now, we’re about 34% cash, 43% equity in the stock market, and about 24% real estate, including the equity we have in our home and the partnership that we’re a part of.
I would probably like to see the real estate be closer to 30 to 40% and probably earning us some regular monthly cash flow on that, so that we can transition from maybe what we do on a daily basis in our W2s to more of a part-time. I don’t think either of us envision ourselves completely getting out of the work that we’re in. We both love what we do. But I think we would benefit from not doing quite as much of it. And that’s a common theme that I hear on this podcast, and others, but certainly with your guests over the time that I’ve been listening.

Scott:
So let me try a portfolio and see how you react to it. Suppose your portfolio, you have $2.1 million. 100,000 is in cash. 1 million is in rental property real estate, generating a 5% cash flow on that; so that’s $50,000 per year. $600,000 is in stocks. And the imbalance is your paid off, your primary residence, which may or may not be paid off or on the track to get paid off. How does that portfolio feel?

Chris:
Yeah, at face value, it sounds pretty good. I would have to digest it a little bit more, but that is likely what we’re aiming for there. It probably goes without saying, but I’ll say it anyway. A lot of this thinking is new thinking for us. And so this has been a mindset shift in general that we’re still getting used to. I think we believed for a very long period of time that we would … Carrie was hoping she might be able to retire one day, given the debt that she had and the salaries that she was earning. I don’t think that’s a question anymore. It’s just a matter of when now. And I think she’s got a shorter horizon on that. And I’ll say this one thing, Mindy, you were talking about becoming a veterinarian.
The one bit of advice that Carrie gives to people who are interested in it is this is the type of career that you have to need to do. It can’t just be a want. If this is what will fulfill you in your life, then you’re probably cut out for being a veterinarian. But if it’s something you’re like, oh, that’d be fun to play with dogs and cats, it’s probably not quite to the level it needs to be in your desires to do it.

Scott:
Yeah.

Chris:
Because there’s a payment for it. She loves what she does, but it is not easy work.

Mindy:
Be a vet tech, if you just want to play with dogs and cats.

Chris:
Yeah.

Mindy:
But if you can’t imagine your life without taking care of animals and saving, then maybe talk to vets.

Chris:
Yes.

Mindy:
I think there’s a lot of veterinarians out there who will talk to you and give you the real scoop about it. Yes, there’s the amazing I saved this dog and it was this family’s whole life and yay. But there’s also a lot of … $300,000 loan payments that you’re making that don’t go away. And those aren’t eligible for public service loan forgiveness, are they? Or are they?

Chris:
In some instances they are.

Mindy:
Oh, they are.

Chris:
For Carrie, they’re not.

Mindy:
Okay.

Chris:
So at the time, they were not. Right, exactly.

Mindy:
Yay.

Scott:
But I think it’s a great point. Hey, we don’t think about these things, right? There’s a grind that’s been going on for 15, 20 years in your household to accumulate and get by, and figure those things out and be smart with money. And all of a sudden, as a result of that cumulative two decades of work, you now have options and can pop up and think, okay, what happens next? How do I think about that on a go forward basis? And that’s, I think, our job today is to help discuss that. And it’s, hopefully, fun and exciting, right? It’s also terrifying. There could be, there could certainly be, the decisions you make could put you at risk for certain things. If you decide, for example, take on a lot of leverage on something and it doesn’t work out or you’re all in stocks and the stock market will have volatility.
And that could be there, who knows what that volatility leads to in three years from now. But those are, this is where we have to make essentially a gigantic bet with your entire net worth. And the thing is, you’re doing that regardless of whether you do the exercise or not, right. Right now, your bet is saying, I want to be 35% in cash. I want to be this much in real estate, my primary residence, this much in stocks, so on and so forth. But either way, it’s a bet. It’s just, if you have complete control of that and you can live with the decision … and there’s no right answer to any of this. It’s an art.

Chris:
It is. And so, even though the clinic, working at the clinic was really hard work for Carrie. And again, she’s the one really driving that. I wish she were here to give you the insight that she has. But she guarded that asset. She controlled the asset. She was able to increase and pull the lever here and push the button there, and build it. This is scarier for us because there is limited control if we go into something that’s a more passive. And so I think both of us are sitting here going, how do we properly hedge against the risks that we’re likely facing? We’re in a great position, Mindy, you said it. I have a secure job. Carrie has a secure job. There’s always going to be a need for vets. The worst case scenario is we continue working like we are. But I think we both feel a responsibility to do right by this hard work that she’s put in for the last 15 years.

Mindy:
I have a few things that I want to talk about. You said that you have this ability to consult. At what seems like a fairly lucrative amount. I’m using your words. You said, “It’s a couple of weeks a year for up to $40,000.” Is there any way to grow that? Is that a guaranteed amount of work? Is there any way to … because that’s the kind of thing that I would suggest you just work for a couple of weeks a year, even after you quit your job, because that is, you’ve said that you want to, your goal is about $100,000 a year, maybe $80,000 a year. That’s half of your spend right there. So instead of needing 2.5 million, you need, or 2 million, you need 1 million, because you’ve already, you’re generating the other right there. Or maybe a little bit more because taxes and all of that. But that seems really lucrative.

Chris:
So I would love your input on this. So I’ve been doing this for about 10 years. I only consult with former colleagues and people that I know personally. So these are people that … I do have a website out there, but it’s not searchable in Google. I have to give you the exact website. It’s really for those folks to help them, sell it to their purchasing department. Here’s the challenge though. I can’t figure out how to scale it. What people are buying is my personal expertise, my abilities in a room, facilitating a group exercise. When they’re buying that service, they want me doing that service.
And there’s a certain … yeah, it’s a couple weeks a year. It’s a couple weeks that I take away from my family though. And that will … maybe in five or six years, that will be okay because the kids will be off in school and et cetera. But for now, it’s a real struggle for me to go. Do I really want to, is it worth the time and effort to do that? So yeah, I think that the challenge for me is a scalability one. The more I do, I could burn myself out on that pretty easily. It’s in high demand.

Mindy:
Oh, sure.

Scott:
But yeah, long-term, absolutely.

Mindy:
If you’re looking to generate $80,000 a year and these, let’s call it two weeks, makes $40,000 a year. Then you could do another two weeks, and now you’re working a whopping four weeks a year. Tim Ferris got nothing on you. Four-hour work week, four-week work year.

Chris:
Right.

Mindy:
Then you’ve got your $80,000. Then, I don’t want to say it doesn’t matter what your investments are because I still want to see a cushion, but then it doesn’t matter because you are generating the money that you need to live off of comfortably. $80,000 is a pretty comfortable live. And then if you don’t want to work four weeks a year, maybe you want to work five weeks a year.

Chris:
Yeah.

Mindy:
Then you’ve got your 100,000. So that’s something that I would definitely not give up. Even plan on continuing that into retirement because it’s so lucrative. But it sounds like you both enjoy your jobs.

Chris:
We do.

Mindy:
Carrie has a three-year plan to generate more income at the business and then step away completely?

Chris:
So I doubt that will happen. My guess is she’ll step back to maybe, she’s working four days a week now. She’ll probably step back to three days a week. And then a year later, maybe to two days a week. She has an interest in doing some international work and some volunteer work in the veterinary field. And I think this would give her some opportunity to do that. Luckily, she would have to get her license in different states, which is not impossible, but it does take some work and some financing. But she would have a broader capability of using those skills, if not volunteer, for minimal resources coming in.

Scott:
Let’s jump back to the big picture here, because I think that’s the major piece that you guys need to decide.

Chris:
Yes.

Scott:
On coming out of this is, what does my portfolio look like in an about right sense, plus or minus is 10%, in terms of total volume, in three years? And what are my outcomes from that? And I think you have a variety of choices and these, this all jives with all the goals you have here, right?
So, but if you went and said, I think, it sounds like estate is going to be a part of that. But I, for example, could see a portfolio that is a million dollars in paid off real estate producing five to 7% annual cash yield on that, at that point in time. I could see you having a paid off primary residence at that point in time, if you chose to do that over the next three years. I could see you having six or 700,000 in stock assets with that. And I could see that real estate being in both short-term and long-term rentals.

Chris:
Yeah.

Scott:
Per your desire to have a vacation property with that. So all of that’s possible. Do you think that you want to have … but you have to make a fundamental choice. Do you want to have leverage and go with that? Or do you want to not do that? Because I think that has a major impact on how you go about this. Whether you finance your house, which is going to get you the best rates and the best terms and use that to buy the investment real estate, or whether you go out and just get everything paid off in cash. And I think that’s going to be a hard decision for you based on what we see about your position right now.

Chris:
Yeah. I’ll tell you what I’m more challenged with than the leverage, is the time commitment needed to do it properly and do it effectively. And we listened to the Bigger Pockets Real Estate podcast. We listened to the Rookie podcast. I have struggled with time management with all the different balls we have in the air right now. And I’ll tell you a quick story. Earlier this year, we were looking at a short-term rental property, potential property, in outside of Western North Carolina. A community we’re familiar with. We know with there, we found a great real estate agent who knows investors, went down the path. We put a bid in, on a house. And in North Carolina, they have a due diligence period. And so we, with a little bit of investment, we could get a little bit more information. But we could, for any reason, say, no, not us, not now.
And we went through the process. We were in the due diligence period for maybe 60 days almost. Had a contractor come in. The house needed quite a bit of work. Ultimately, we couldn’t figure out how to do the work ourselves. It would’ve meant more weekend trips there. We just, we don’t have the weekends, right. We’ve got busy schedules. My work is not a 9:00 to 5:00, five day a week job. Nor is Carrie’s. And we ultimately, we paid a little bit of money and got out of it. It would’ve made a great deal. It was a good deal. And I think it still would’ve been. We couldn’t figure out, from the time perspective, how to commit those resources there. So I don’t know if you have any feedback on that angle. Leverage, I don’t think bothers us as much. I think we’ve gotten over that hill.

Scott:
Well, you have to think about your time management at this point, right? So right now your portfolio is not, is not large. It’s a large portfolio, but it’s not huge relative to your combined income. Right. Which is probably in the ballpark of 300-plus thousand dollars. Right. Pre-tax. So the value of your time, let’s say that the value of your time is probably north of $100 an hour, right? And managing a property of that size is probably not that valuable from a use case standpoint. But when we think about backing into your $2.1 million portfolio, you’re going to have in three years, if we’re still aligned on that thinking, okay, that portfolio should generate eight to 10% per year, most likely. Or five to 10% per year, depending on what your projections are. That’s $100,000 on the low end and $200,000 on the high end. Right?
So dedicating the time to getting that portfolio right is another full-time salary on top of that. And I think you need to factor that time value of that activity into the way you’re thinking about that. Because it may not be worth that right now, but it will be worth that in three years. And that will be, that will eclipse any one source of income that your family currently has soon. Maybe not exactly by that point in time, but that’s the framework I would give to you. And if you want to get exactly what you want out of that portfolio, time needs to be invested in it. And you got to treat it like the asset of that I think it is.

Mindy:
What other index funds would you be interested in? Or are you just interested in VTSAX? Jim Collins says, “VTSAX is the way to go.”

Chris:
Right.

Mindy:
He’s got a lot of money in there and he’s doing real well. So that’s a great place to put your money. But VTSAX goes up and down as well. So if you’re comfortable with it going up and down, that’s a great place to continue to put after tax dollars. And if you’re not, that is something you need to take into consideration when you’re looking at where your money should go.

Chris:
Right.

Mindy:
I know where you live because we had this conversation before we got on the phone, or before we started recording, and you live near the coast.

Chris:
Mm-hmm (affirmative).

Mindy:
There’s a lot of vacation opportunity spots where you are at. I think that your desire to have a cash flowing asset or assets that generate $50,000 a year by 2025 is viable with your income. With your debt situation, which is practically nothing, with your mountain of cash that you’re sitting on, and with your future income that’s available. I think you have a lot of opportunities to get several short-term rentals.

Chris:
Yeah.

Mindy:
What do you think about renting out your auxiliary dwelling unit when your folks aren’t in town?

Chris:
Yeah. So it’s up for discussion with Carrie. She’s not thrilled about that idea. But honestly, I probably would leverage that build. We’re right in the process of getting the designs completed on it. And if I could just convince her that a couple months, a couple weeks, a month, or a week a month, we rent it out and cover the mortgage on it, then that’s where I think we could be right now. So at least covering our costs on it. But yeah, I’m a little bit more interested in that than I think Carrie is. It’s still up for discussion. Maybe she’ll listen to the podcast and tell me one way or the other.

Mindy:
Okay. Carrie, this is for you. What is it about renting out the ADU that gives you the heebie-jeebies? Is it just, you don’t want to do the cleaning. You don’t want to have people there. I’m assuming it’s going to be a rather small item, a unit, like a one bedroom or maybe even a studio unit. So there’s not going to be the opportunities for a lot of parties because there’s just not a big space for it. You don’t have to have people in your space all the time. You could have somebody there just one weekend a month, or maybe there’s a big festival in town that you have, every apple picking or whatever.

Chris:
Yeah.

Mindy:
There’s a lot of opportunities to have short-term, just do it when the high dollar-

Chris:
Right.

Mindy:
Days like 4th of July and Christmas and Thanksgiving, and you don’t have to have them.

Scott:
With the short-term rental for your primary residence at this point is you’re going to generate $330,000 in household income this year. And you’re going to be generating $500,000 in household income within two or three years. Right. And so that income is irrelevant to your financial position. It’s nice.

Mindy:
Yeah.

Scott:
It’s a nice bonus. But it’s irrelevant to your financial position. And so you have this incredible luxury that I think is what you’re grappling with as a family right now about this immense amount of income generation and optionality that comes with that. And it all comes back to backing into three, five, seven years from now saying, what does my ideal portfolio look like? And you have the option to, for example, have that paid off portfolio that produces 50, 60, 70, $80,000 a year, work a little bit part-time and live your life for the rest of your life. You’re going to give up $400,000 in income.

Chris:
Yeah.

Scott:
In order to have that. And at that point, renting out your auxiliary unit makes a big difference, right. And that may enable that freedom. But that’s the luxury choice that you guys have right now. And that’s why I think you’re struggling with a real estate investment, right. Because you’re like, good God, I’m going to earn 350, $500,000 over the next five years. What am I doing dealing with this right rehab around the corner here.

Chris:
Right.

Scott:
Well, that’s highly relevant to your future state portfolio.

Chris:
Right.

Scott:
And that option you want. You just got to have, you have to figure out, okay. No, no, the life I want in three years is this what? And if that life says I’m working my full-time job and Carrie is not working anymore. And we have some passive income and we’re able to comfortably save, and I can begin the transition of leaving that, maybe you go with a more passive option that has less stuff there. And go with that.
If we’re both done and we’re just going to chill, you can do that because you’re going to have a paid off, you could have a paid off mortgage. You could have, most of your spending is flexible.

Chris:
Right.

Scott:
With charitable giving being a quarter of your spending right now.

Chris:
Right.

Scott:
Which I imagine you would decrease with lower income, to a certain extent. So that’s the crux of your issue right here.

Chris:
Right.

Scott:
I don’t have the answer for you. Do you want 500 grand or do you want a lot of free time, right. Do you want 500 grand a year or do you want a lot of free time? That’s … Congratulations. I think a lot of people are happy to have that problem. But that’s, I think, the crux of it. If I can get to it, of the issue that you have, or that we’re discussing today. Do you think I’m right?

Chris:
I think you are. Again, it’s getting used to seeing numbers like that on a regular basis and just try to put it in the right context because it hasn’t been like that. Maybe for the last two years. Maybe. But it hasn’t been like that for a while. So I think you’ve hit the nail on the head, Scott.

Scott:
I think not a lot of people, but many people, will come into a situation like this at some point in their lives. Especially if they have a variety of interests. In investing, entrepreneurship, side hustles, those types of things. And the value of your time begins to compound and overwhelm you to a certain degree.

Chris:
Yeah.

Scott:
I’ve had an issue like this to a certain extent, and something to just consider.

Chris:
Yeah.

Scott:
I think it’s a great issue to bring up. All I can give you from the advice standpoint at that point is, is determine what you want in three, five, seven, 10 years and say, here’s what it is. I’m writing it down. I’ve got a draft outcome of what that looks like, and begin making those moves. And if you decide you want the portfolio and the passivity, then invest the time at the expense of other income opportunities to set that portfolio up. If you decide, I want to keep working, then you’re right to be more passive and forego the opportunities like that real estate deal you walked away from. But I think that will put it in context and help you appropriately prioritize the way you invest your time. And then, obviously, the big portfolio you’re going to have.

Chris:
Yeah. A lot of what we’ve been doing is continuing to educate ourselves. And it seems like the more passive syndications are on our … We’re thinking through syndications now; these other partnerships, we have a couple opportunities. Through my work, I do have the opportunity to see entrepreneurs, successful entrepreneurs, building their own companies. And there may be a possibility of doing some angel investing locally, where I have a deeper knowledge of the widget or the process that they’re engineering or building. So those are other options that we have in our toolkit right now. But it’s a lot of education. I’m not going to lie.

Scott:
If you like those investments and want to keep working. I would do that instead of real estate, frankly. Real estate, there’s a learning curve associated with this business. It’s 300, 500 hours. And that includes both time invested in that, in podcasts, in books, and looking at properties and all that kind of stuff. And your value of your time is pretty high. So paying that price is really expensive for you.

Chris:
True.

Scott:
It’s really cheap for $50,000 a year earner, Scott Trench. When I started my journey, I was making $25 an hour. That’s a cheap education to invest that time. It’s expensive for you. And so the passive option may be much better if you decide to work for 10 years, if you don’t, then the value of your time, you can put, oh, I’m going to pull that down because the value of my time is actually going to be, $40 an hour or my $80,000 year in passive income, that I’m going to have in three to five years. And that’s how I’m going to rationalize.

Chris:
Yeah.

Scott:
The way I connect that.

Chris:
Yeah.

Scott:
Hopefully that’s a helpful framework at least.

Chris:
It is. That was what I was hoping to get out of this call today is context, thinking about things in a slightly different way than I have been.

Scott:
We have no specific advice then, it sounds like. Maybe a couple times right in there. Just get some really good questions and hopefully reframing them.

Chris:
Well, maybe one area that you can give me some advice. Specifically on, we haven’t had the opportunity to really save a whole lot for Carrie’s retirement and pretax retirement accounts. Is it worth us doing that? We have the opportunity to do it. We probably could use the tax help in the near term. But is it better just to put it in more flexible investments after tax given where we are on the retirement side of things?

Scott:
I like moving into the after tax investments when you’re starting out and earning $50,000 a year and trying to get your first house hack or your first entrepreneurial pursuit. When you earn 300, $500,000 a year and have this flood of excess cash flow coming in over the next couple years, I think you’re wise to shield it, to play the tax advantage game, and do that.

Chris:
Okay.

Scott:
Personally. That’s my thought on that. So I like exactly what you’re doing. I wouldn’t change a thing about it.

Mindy:
Well, I’m looking at this 2022 salary of $325,000 and thinking what is $20,000 of tax savings going to get him?

Scott:
Yeah.

Mindy:
Or 40,000.

Scott:
Yeah.

Mindy:
I love not paying taxes.

Scott:
It’s going to get you 40,000 in tax savings.

Mindy:
Yes. I love not paying taxes, but it’s not hugely moving the needle.

Scott:
Deferred tax saving.

Mindy:
It’s not like-

Chris:
It’s deferred. Yeah.

Mindy:
Well, and yeah, it’s deferred. And then, but they’re already paying boatloads of taxes.

Chris:
Yeah. And, and so that’s the lure of real estate, right? If you do real estate correctly, then you can limit your tax liability, but it does per our earlier part of this conversation, it does take effort, work, time, commitment, all those, all those other things that at this point we have limited.

Scott:
Real estate will not help your tax situation because you’re high income earns. So if you earn less than, I think it’s like $150,000 a year, I got to double check that, but I think it’s, if you’re only less than a certain amount, then you can use the passive losses from real estate to offset your income.

Chris:
Got it.

Scott:
But with your income, you won’t, I don’t think, I don’t believe you will see those tax benefits.

Chris:
Okay.

Scott:
From real estate. The real estate income, the passive income from your real estate, will be lightly taxed, most likely.

Chris:
Yeah.

Scott:
Depending on how much income business produces. But I think that … This goes back to the Roth 401k debate. And I will say that even though I like what you’re doing, I actually contribute to the Roth in spite of also having a fairly high income.

Chris:
Okay.

Scott:
Because Roth 401k.

Chris:
Yeah.

Scott:
You can’t contribute to a Roth. You’ll have to do a backdoor or something like that in your circumstance. But I contribute to the post-tax retirement accounts because I like to think that, or I like to think that I’ll have a high income when I hit retirement age.

Chris:
Right.

Scott:
And perhaps tax rates and inflation will be very high at that point, in making an impact. But that’s a major bet. I like the tax advantage to play in your case, because you have way more cash than you know what to do with, in terms of an income right now.

Chris:
Right.

Scott:
That might change next year when you figure out your portfolio.

Chris:
True.

Scott:
Yeah. So that’s my high level take on that, frankly.

Mindy:
Chris, this has been a lot of fun. I think that there’s a lot of things that you and Carrie need to sit down and talk about and just like your-

Chris:
Yes.

Mindy:
Document that you sent us with your salary and projections and investments and all of that is very well laid out. I think that, you didn’t do that in one day. I don’t think you can just sit down in one day and say, ooh, we’re going to have this big old plan, but it gives you an idea of what to think about. I love Scott’s idea. What do we want our portfolio to look like in three years, when your daughter starts college? What do you want your portfolio to look like in five years? In 20 years?

Chris:
Yeah.

Mindy:
And back into it that way. But I do really want to caution you that the market, the stock market is unpredictable. So what would you do if your portfolio lost 50% of its value and then, start to …

Chris:
Yeah.

Mindy:
Hedge your bets. Maybe you have bonds because you are getting into the age of bonds. I don’t think …

Scott:
Well, here’s what I think on the bonds thing. Here’s what I think you should do on that. You want to save up for daughter’s education.

Chris:
Yeah.

Scott:
And that’s in two years, right. We just had a conversation about I bonds.

Chris:
Yes.

Scott:
The other day. Why don’t you put that money into a 529 Plan since you know you’re going to use it for college education.

Chris:
Right.

Scott:
And then earn the interest on the I Bonds, which is going to be ordinary income. And now you can shield that income from taxes. You got a fairly safe perhaps overall investment, with that. That’s going to meet inflation. And that might be a really good tip for daughter’s education is to contribute to. And you’ll have a business, you potentially have a side business, you potentially have a real estate business. They have the two of you. You might be able to put a good chunk into the 529 Plan or in very … Actually, I’ll have to think about that. There may be an opportunity to put money into a 529 Plan.

Chris:
Yeah.

Scott:
At least 10,000, maybe more. I got to noodle on whether you can actually do what I just suggested and use multiple businesses to contribute to the 529 Plan and get the I Bonds that way.

Chris:
Yeah.

Scott:
But either way, even if you just do that with one bucket, that’s a few thousand bucks.

Chris:
Yeah.

Scott:
That you’re saving in taxes for an expense you believe is highly likely to occur.

Chris:
Right.

Scott:
In two or three years.

Chris:
Yeah. I listened to the I Bond episode a couple days ago. I didn’t realize that the business could also contribute. So we’ve got, between the two of us, have three or four businesses, each of them could contribute.

Mindy:
And a trust.

Chris:
And a trust. Right. And then each of us. Do you know if our children can? Can we put I Bonds in our children’s name?

Scott:
This is a good question for our Facebook group.

Chris:
Okay.

Scott:
I don’t think we know the answer on the show. Let’s put that in the Facebook group and see what our listeners have there. Because we don’t have the research at the top of our fingers.

Chris:
Okay.

Scott:
But I think, I wonder if that would be a really good way to think about it. Is there a way to put the money into the 529 Plan? If so, how much? And how much can we, is it just, can I inside the 529 plan, can I just use one I Bond to save up for college or can I put multiple in there? And if not, can I, should we use additional I Bonds to be a savings vehicle for an expense we know is coming, even if it’s outside of the 529 Plan?

Chris:
Helpful. Thank you.

Scott:
So that would be where I’d use bonds.

Chris:
Yeah, yeah. Yeah. Well, we were always planning on using a 529 to legally launder that plan. We don’t need to put it in there for long-term, but certainly to help us pay for college. We can do that a year in advance, and then because we know we’re going to use it versus hoping that we-

Scott:
Legally launder? I love yeah. We’re going to use that phrase more frequently. We’re stealing that one.

Chris:
I’m glad I could contribute to your lexicon.

Scott:
Thank you.

Chris:
No, I really appreciate the time. This is always useful to talk about and I will make a … I know Mindy, you talk about the money dates quite a bit. We do those pretty regularly, have for a long time. They’re super helpful. It keeps us on the same page. And we throw in a little parenting date there, too, where we say, okay, how are we going to manage this with the kids? So we try to mix it up a little bit.

Mindy:
Okay. Well Chris, I’m sorry, Carrie couldn’t join us, but it was lovely discussing this with you today. Thank you so much for sharing your financial situation with us. And I think there are a lot of things for you to think about. I would love to hear what options you guys have chosen.

Chris:
Sure thing. We’ll keep in touch.

Mindy:
Okay, fantastic. I’ll check back in with you in a few months.

Chris:
Sounds good. Thank you both.

Mindy:
Okay. We’ll talk to you soon. Bye Chris.

Chris:
Bye-bye.

Mindy:
All right. That was Chris. That was a really fortunate series of events that he has found himself in. And now he has, he and his wife have a lot of decisions to make. And Scott, I think you gave them a really great framework to look at. Look, you are making a lot of money and you are looking at investments that aren’t going to be generating so much cash. And that’s, I’m in the same position they are with this whole, ooh, how should I invest to generate this amount of money? No, keep working at your job and generating this big, big, big amount of money that you’re generating because that’s where your true value is right now.

Scott:
Yeah. Well, I think that’s just a shift that everyone has to deal with, right? If you save 50% of your income or more, then mathematically after, a period of about 10 to 15 years, your portfolio is going to be a bigger source of wealth accumulation that 8%. I think. This is the math behind early retirement in general. It may be a bigger portion of your wealth accumulation than your income at that point. Right? And so that’s a part of the journey that you should just be aware of. That’ll be really hard for folks to deal with. If you’re, following the basic rules here and saving a big chunk of your income, investing for the long run, have a couple of lucky breaks or windfalls down that stream. You may face that problem earlier than you, but, and have to kind of make some trade offs about whether you want to earn money or invest and manage your assets.

Mindy:
Yep. And that’s an interesting conversation to have, and I don’t think that’s a five minute conversation that you can just flip the switch on.

Scott:
Nope. Only on this show. Well, I have one.

Mindy:
Okay. You should just totally flip that switch. Bam. Next problem.

Scott:
I have one challenge or one question I’d like to ask the community for our Facebook group at: facebook.com/group/bpmoney. And that’s the question I was asking earlier about the 529 plans. How much money can you put into a 529 Plan and use that to invest in high yield bonds, like the I Bonds that we talked about last week? I’d be really curious to know that and any other strategies for short-term, shielding short-term income or gains like that when you know you have an expense like college or a health expense or those types of things. What can you do? What are applications of that? I’d love to get a discussion going and get some ideas churning.

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

Scott:
Let’s do it.

Mindy:
From episode 320 of the Bigger Pockets Money podcast, he is Scott Trench, and I am Mindy Jensen saying, be sweet, parakeet.