The Money Show’s Guide to Personal Finance for Beginners

Mindy:
Welcome to the BiggerPockets Money Podcast, Finance Friday edition, where we interview no one and instead talk about how to think about and set up your finances for success.

Scott:
I think this is where we have to get really philosophical, but I think that’s right. I think that my car is not an asset, right?

Mindy:
Nope.

Scott:
I do not intend to sell it any time in the near future. I should disregard the value of the car essentially, entirely, but the loan is real, and I’ve got to pay it every month. And so that’s a drag against my monthly expenses and my ability to become financially independent, for example. And so I should count the loan against me and not count the asset value for me if I’m a serious student of financial independence and trying to get ahead.

Mindy:
Hello, hello, hello. My name is Mindy Jensen, and with me as always is my spreadsheet loving co-host, Scott Trench.

Scott:
Being good with spreadsheets is a formula for success, Mindy.

Mindy:
Oh my god. That was horrible.

Scott:
I excel at rebuttals to your interests. Yeah.

Mindy:
Oh, you do excel. Wow. That’s terrible too.

Scott:
Let’s pivot to our intro.

Mindy:
Oh my goodness. Just keep him coming. See, I said he was a spreadsheet loving co-host. Holy cannoli. Do you have any more?

Scott:
No. Let’s table this for now.

Mindy:
Oh my God. I quit. I quit. Scott and I are here to make financial independence less scary, less just for somebody else to introduce you to every money story because we truly believe financial freedom is attainable for everyone no matter when or where you’re starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business or just get better with money in a general sense. We’ll help you reach your financial goals and get money out of the way, so you can launch yourself towards those dreams.

Mindy:
My attorney makes me say the contents of this podcast are informational in nature and are not legal or tax advice. And neither Scott nor I, nor BiggerPockets, is engaged in the provision of legal, tax, or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal, tax, and financial implications of any financial decision you contemplate. Now, before we get started, let’s take a quick break. And we are back. We’ve had several recent guests who have had some questions about their numbers, and it seems that we haven’t really sat down and shared the proper way to set yourself up for a financial success.
So today Scott and I are going to run through some fictional numbers with income expenses, debts, and investments. We’re going to discuss the difference between a personal expense and a business expense. We’ll talk about debts and Scott’s theory about when to pay them off as fast as you can, and when it’s okay to let it ride. And by let it ride, I mean pay the minimums, not just don’t make any payments at all. We’re even going to chat about investments and our thoughts surrounding what order you should contribute to them. All right. Let’s jump in with expenses. Scott, let’s talk about the difference between a personal expense and a business expense, especially with regards to a rental property. Even more pointedly when I just have one.

Scott:
Yeah. We get a lot of folks coming on the Finance Fridays over the last year or so, that say, “Hey, my expenses are this.” And then it turns out that a bunch of those expenses are their rental properties expenses. And I think it’s just really important to separate these two, your personal and your business expenses at least in some way that makes sense to you. I think there’s going to be an art to this. I don’t know when the cutoff point is, when the business becomes an actual business and more of us away from being a personal expense. That can be tricky with house hacks. That can be tricky with live and flips in some situations. So I’m really interested in hearing your thoughts on that, Mindy. But at some point when you’ve got a true rental property, it’s time probably to start set up a new bank account, put all these things in a different place and track it like a business, even if it’s listed in your personal name and not in an LLC.

Mindy:
So here’s something that I was thinking about when our producer Kailyn and I were going through this document yesterday. Scott and I both work at BiggerPockets. BiggerPockets generates income and then pays us. Scott doesn’t pay any of my expenses. I don’t pay any of Scott’s expenses. So we are two separate entities. Stay with me because I swear this makes sense. Similar to the home that I bought recently. I make money. My home currently doesn’t because it’s in the rehab phase. I am funding that rehab because I own the property, but once this property starts generating income, that property is actually going to be paying me back for the loan I gave it to be rehabbed. That property now owes me some money because that was my money, not the property’s money. Just like if Scott was going to help me out with an expense, I would have to pay him back.
So I have a property, once this property starts generating income, it is paying its own bills, it has its own bank account. Just like I don’t share a bank account with Scott, my property doesn’t share a bank account with me, it has its own bank account. All of the bills get paid out of this bank account, and all of the income goes into this bank account. So when you have a business expense, you should have a business bank account, and all of the money should go into and out of this account for that property. This helps your accountant not hate you. This helps with figuring out how much you made or lost on this property, and it helps keep your finances completely separate. You’re not commingling, if your property’s in an LLC, it’s a lot harder to pierce the corporate veil when there is no commingling of funds with personal and business.

Scott:
Yeah. I couldn’t agree more. I think you’ve got to separate the two and you’ve got to be able to do that mentally because I mean the goal for most of us is financial freedom and your rental property that is currently losing money because your house hacking in a section of it is not going to be that way in two years. And so to separate those things out and really understand your financial position and understand that this business is currently requiring cash inflows to get started but will soon be producing cash outflows, you’ll be able to track that and think through that mentally. And it helps us understand the financial position because when most people look at their financial position, they’re looking at it last three months. That’s what my financial position is. We’re trying to… Our job on the Finance Fridays is to think about, no, no, what’s this position look like in the next two years? And how do we make that trajectory look really smooth? And not having a clear picture that not being able to separate these things out makes that very difficult.

Mindy:
I don’t remember who the guest was, but there was a guest who was a little unsure if they were actually losing money or not on their rental property. And because they still had money to cover all of their expenses and we were able to ascertain that yes, the reason that you have money to cover your expenses is because you’re putting personal money in every single month. And really this isn’t such a great property because it’s not making any money. It is costing you money to own this property every month. So having separate finances will tell you very quickly, “Oh, this is a great property,” or, “Oh, I have to keep lending my property money every month. Maybe there’s a problem, maybe there’s something I could be doing differently, or maybe as Scott pointed out just a couple of weeks ago, you need to sell it.” Not every property makes for a good rental.

Scott:
Yeah. I mean it comes down to there are two basic skills that every individual and every business needs to do. Many people don’t do them and that’s why they’re struggling with money, or don’t have a profitable business, or nearly as profitable as it could be. And those two functions are accounting, and FP&A, Financial Planning and Analysis. So this would be, for an individual, it’s budgeting and then reviewing and planning your finances for the next year and comparing and contrasting those. And if you can’t do those two things in both your personal life and your business, you’re not going to know where you’ve been. You’re not going to know where you’re going.
And I think with rental properties in particular, we find that folks rarely have quite as much trouble actually tallying up all the expenses. It can be cumbersome because it’s all in one jumbled bank account with their grocery bill or whatever. So that’s not good. But you can parse that out and get a picture of your rental property over time. But I think where people get really into trouble with rental properties is in the FP&A piece in forecasting what will happen over the next couple of years because there are so many phantom expenses, like vacancy and big maintenance or CapEx projects, that if you’re not planning for, are not going to show up in your historicals. They’re not going to show up in your historicals, you’re not going to plan for them and you’re going to inflate how profitable those properties are, or dismiss the expenses when they do the big expenses as one timers when they do come up.

Mindy:
Be very generous with your expenses, your expense forecast for your property. Because if you don’t have any vacancy, that’s awesome. But if you’re planning for very low vacancy and you have a month or two of vacancy, your numbers get all screwed up. If you’re planning for low CapEx and all of a sudden the roof blows off, you just wasted… Blew your budget, not wasted, blew out your budget for years. So be very, very generous with your expense forecast because you can always pull back on that.

Scott:
And another area, and to provide a parallel on the personal side, folks generally have a good idea of where their money is gone. We kind of force them to, “If they want to come on the Finance Fridays here.” So they have a good picture of where that’s going. But we’ll hear folks say things like, “Oh, here’s my expenses in great detail, this much on rent, this much on groceries, this much on entertainment, this much on this, and okay that that’s total totaling $3,000 a month and I bring in $5,000 a month, therefore after tax, therefore I’m saving $2,000 a month. No you’re not because I don’t see your car insurance on there that comes up every six months or every year on that. I don’t see your reserve for your medical expenses when you go see the doctor or whatever that is, once a year or maybe less frequently or that ER visit you’re going to have, right?
There’s no allocation for the CapEx of life if you want to use the real estate thing, these life emergencies. And so you’ve got to plan for that, and I think you’re going to find yourself in trouble if you’re not planning for $250 to $500 a month, that’s $3,000 to $6,000 a year for those types of emergencies. I think you’re going to be becoming up short. On the flip side of that, I think folks also really underestimate the fact that a lot of people find winners or opportunities that come up over the course of the year that they weren’t planning on, that could be a bigger than planned bonus at work, or an opportunity for a side hustle over here, or something like that, that comes up for a lot of people that they’re discounting. Probably healthfully, but it’s a reality of a lot of people’s money situations that there are windfalls of hundreds or thousands of dollars for many people throughout the course of a year.

Mindy:
What would you recommend people do with that extra money, Scott? And there’s no such thing as extra money, but the unexpected windfalls, let’s call it.

Scott:
You plow it towards the next thing on your investment list. So if that’s down the stack of your retirement accounts, they do it there. If it’s towards your emergency reserve, you do it there. If it’s towards your next real estate property, you plop it on top of that.

Mindy:
Okay. Let’s talk about budgeting really quick, Scott. Is rounding numbers okay?

Scott:
Yeah. For planning? Yes. For the FP&A piece, the planning piece? Of course. For the budgeting or for the accounting piece, looking back in time? No, you got to know your exact numbers on the accounting side.

Mindy:
Okay. I tracked my spending for the first part of this year, and you can see how badly I messed up at biggerpockets.com/mindysbudget. I did this purposely so I could show people that even finance professionals mess it up. It is always going to be a guess to track your expenses. But I found out patterns, I saw things that were unexpected. I should probably have an emergency fund, which I don’t for several reasons, and I thought it was an interesting experiment for me. So if you are feeling a little bogged down by your budget or feeling a little bogged down with tracking expenses, please go and see that I was kind of a disaster too. So I hope that inspires you to plow through and continue on because not knowing your numbers is way worse than getting them wrong.

Scott:
But you don’t need a budget. So I don’t budget necessarily, I track all my expenses, my wife go over them once a month, but it’s not necessarily in the context of a firm budget. We want to know where our money’s going. Is that aligning with where our values? Are we wasting any of it? Okay. Nope, we’re good to go.

Mindy:
Whew. It’s hard to even say that word. You don’t need a budget. However, you need to be conscious of your money and where it’s going. So a lot of times the budget is how people can stay conscious of their money and where it’s going.

Scott:
We’ve tried it in the past, that’s where we settled up currently.

Mindy:
Yeah. And that’s a decision that two of you came to together. Based on conversations that you had, you didn’t just say, “You know what? This is too hard, I’m not going to do it.” Okay. Let’s talk about what is and is not an expense. One of the things that I will see frequently on the Finance Friday application, so in the application there’s a section for you to share all of your expenses, all of your investments, all of your debts. And I will frequently see contributions to retirement accounts as an expense. And I don’t consider this an expense, but I’m struggling with where to put this in the context of those categories.

Scott:
Yeah. So this comes back to accounting and FP&A. If I can use an example in a work context, right? This is a balance sheet item. You’re moving money from your cash position in your balance sheet or your net worth into your investment position. So it’s not an expense, it’s merely a transfer or something like that. You should exclude those things from your budget because they’re not expenses. That’s just cash generation that’s going on in your life that you are choosing to then allocate towards these investments.

Mindy:
Yep. However, if it helps you to think about that as an expense, it’s okay to think about it like that. It’s more of an expense than like a debt or an asset, but it’s not an expense, and it’s kind of hard for me to articulate why. I think you did a good job there.

Scott:
Here’s a harder one, which is okay, I just bought a car, and I financed it. What was my expense?

Mindy:
Give me your FI card, that’s your expense, Scott.

Scott:
Well the interest rate was 3%, so I was like, “I can pay cash for it if I really want to.” But I think that financing it makes sense because of the low interest rate, and I can invest the cash that I would’ve used to pay it off and something else or keep it on my emergency reserve and stay comfortable with that. So anyways, what’s my expense in this situation?

Mindy:
The monthly payment is your monthly expense, and then the-

Scott:
But part of that’s going to principle reduction. So if we take my strict argument, if it’s just a balance sheet transfer going on there, all the payment that’s going to principle is not actually an expense.

Mindy:
So that comes into… That’s forwarding ahead, Scott. I don’t think a car is an asset.

Scott:
I think that’s the answer.

Mindy:
Or I’m sorry, I don’t think it’s an investment. I think it is a depreciating asset and therefore I don’t consider it principle reduction. I consider it an expense. Your car payment is an expense because if you don’t pay it then they’re going to come repo your car. So your entire car payment is your expense every month, the month that you purchased it, the down payment if any, goes into that car payment category the month that you purchased.

Scott:
Yeah, and I think this is where we have to get really philosophical, but I think that’s right. I think my car is not an asset, right?

Mindy:
Nope.

Scott:
I do not intend to sell it any time in the near future. I should disregard the value of the car essentially, entirely, but the loan is real, and I’ve got to pay it every month. And so that’s a drag against my monthly expenses and my ability to become financially independent for example. And so I should count the loan against me and not count the asset value for me if I’m a serious student of financial independence and trying to get ahead. So it’s a double whammy on that. Still I need the car, I’m fine with my decision, but that’s how I should account for it. I think mentally, even though there’s some technical problems with the way that would happen on a corporate balance sheet for example, I think that’s the right way to think about it if you’re trying to get ahead in life from a financial position.
And I think the same thing is true from your primary residence. If you don’t intend to house hack it or use the equity any format, it’s all dead money that’s going into it in the sense of moving towards financial independence until the whole mortgage is paid off or until you move and harness it. So you just dismiss it and you call it an expense, rightfully so, principle and interest.

Mindy:
That’s interesting. I include my home’s equity in my assets, but I don’t include the whole value of the house because they don’t own the whole house. I’m still paying it off.

Scott:
I think most people will include their home equity in their net worth calculation. And I’ve argued and I argued in set for life that you shouldn’t, if you’re serious about becoming financially independent because unless you intend to harness that home equity, for example, your house hacking and we’ll move out in a year or two and keep the properties a rental that is cash flowing, and you’re willing to sell that. You’re just looking at it as an investment asset, a choice between stocks and that. Your home equity is typically not used that way. You’re living in the home as long as you want it, and then you sell it, and then exchange it for another house. So the home comes with a mortgage taxes and insurance that count against you, but really does not provide… It’s not really a real asset.
Robert Kiyosaki would argue, I think rightfully so, your home is a liability. If your home is your largest asset you are in trouble, and that should make you very uncomfortable. It sucks money out of your life. When you have a paid off poem, it’s still a liability because it still requires taxes, insurance, and upkeep. It’s just your cost of living dramatically reduces and is much lower risk for the rest of your life because you don’t have any debt on it. So I think there’s a lot of paradoxes to think through there, but I think the short answer is I don’t think you should include your home equity in your net worth calculation if you’re a very serious student of financial independence.
If you want to get real about your net worth position, I think you should exclude things like your cars, your home equity and those types of things that are not cash flowing or appreciating… Cash flowing assets that you can… Are appreciating assets that you intend to harvest to spend, to finance your financially free independent lifestyle downstream. I think you should exclude the equity value from your net worth calculation, but include the debt against it because that’s the reality of those types of expenses.

Mindy:
Okay. So I include the debt, I include the equity because I live in flip, so I am growing it. It is going to be an asset because it isn’t just going to sit there forever. I am buying low, improving it greatly, selling high ,and then doing it again.

Scott:
Yeah. Then great. I think in that case you can’t include it because you intend it to harvest it to move towards your financial goals there.

Mindy:
But I think both of us are on kind of the same page because we are thinking about it, we’re considering it, we’re giving it thought. We’re not just, “Oh, my house is worth this, so therefore that’s my asset.” Another thing to think about is expense-wise, miscellaneous category in excess of a hundred dollars is not the correct way to categorize those expenses. I think your miscellaneous category, if you’re spending more than a hundred dollars in there, you can figure out a category to put those funds into. I think a slush fund, the miscellaneous fund of a small amount is fine. Random things pop up, “Oh, shucks, I forgot about my homeowner’s insurance payment this month,” or, “I forgot about this one thing.” And then adjust to your budget for next time, but miscellaneous should not be $500 a month.

Scott:
Yeah, I think that’s fair. We could have one month where it’s $500, took the pet to the vet or whatever it is.

Mindy:
That’s a pet expense. That’s not miscellaneous.

Scott:
Yeah, but I’m going to disagree with you slightly. I don’t think you should have more than about 10 categories that you’re bucketing things into. You have too many categories. It becomes very difficult to keep track of all those things and do a good job with all that.

Mindy:
No, it doesn’t.

Scott:
Yeah. I don’t even put an entirety of BiggerPockets, which is a business that spends tens of millions of dollars a year into more than about 10 high level categories. There are hundreds of smaller categories that we do have for the accounting team, but I don’t think about it from my seat and you are the CEO of your personal finances of course, in any more than about 10 high level buckets.

Mindy:
Woo, that gives me the heebie-jeebies.

Scott:
I’m not going to deal with it personally if it’s less than 1% of my position.

Mindy:
And I will say one last thing, you don’t need 47 streaming services. Pick one, pick two, watch all everything on there and move to the next one. Okay. Scott, let’s talk about debts.

Scott:
Let’s do it.

Mindy:
How do you pay off debt?

Scott:
I let it slowly amortize if I’m comfortable with it, or I lump some pay it off, or refinance it if I am not comfortable with it at the highest level, what do you do?

Mindy:
Okay. Well, I don’t have debt, but when I did, I would prioritize paying off the highest interest rate first. I haven’t carried a lot of debt in my life, mostly because I’m cheap and I don’t want to. But I have prioritized paying off the highest interest rate first because that makes me mad that I have to pay so much interest to a bank. That’s called the debt avalanche. There is the debt snowball that helps you get the psychological win of paying off the smallest balance first. So you’re like, “Woo. Now, I’ve paid off an entire debt.”
And I didn’t need that for me, but I can see how somebody who is mired in debt and has finally decided to buckle down and pay off their debt would want to get a win to keep them going. I came up with my own… It’s called the Mindy Method, and it is a combination of the debt snowball and the debt avalanche where you list out your debts in order of smallest debt to largest debt. And then another line in order of largest interest rate to smallest interest rate. And you go over here to the snowball method and you pay off the first debt, then you go over to the avalanche list and you pay off the highest interest rate, and then you go back over to the snowball method and you pay off the next debt. So you’re getting the wins while also paying off some of the highest interest rates.

Scott:
Yeah.

Mindy:
I don’t know if anybody else did came up with that too, but I call it the Mindy Method. And you can see a whole video on that biggerpockets.com/mindymethod.

Scott:
I think that’s fantastic. It’s a balance of both, and I think this is all comes down to personal preference with that I’ve seen folks do it in a number of different ways, and the one that I’m most familiar with now is the snowball method from Dave Ramsey because I’ve taught financial peace at a local nonprofit of the last couple years, and that does seem to work for a certain segment, and then other folks it does not work for you don’t really hear from them anymore after that. But they’re a powerful concepts. Whatever’s going to keep you motivated. I mean, when you talk about the trade-offs between these things, you’re talking about a month or two over or three years of timing if you’d use the avalanche method, paying the highest interest rate first versus the snowball method, paying the lowest balance. For most people it’s really almost an immaterial decision. So it’s whatever is going to keep you motivated and keep you rolling. I love the Mindy Method of getting the best of both worlds.

Mindy:
Yep. I agree. The best method is whatever works for you. Scott, I would like you to explain your debt payoff thought process.

Scott:
Yeah. So there’s two components to this. One is the interest rate component, and the other is the type of the debt, the amortization period and its payoff schedule. Look, for interest rates, it’s all about what is a good interest rate in the current environment, right? I think that anything under, let’s call it %5, 6% is probably pretty good debt, that’s lower than mortgage rate interest at this point in time on a 30-year mortgage. And so there’s no need to pay that off early for… And if it’s a manageable amount of debt, if it’s 6% to 8%, you’re kind of in this gray zone where it’s might be advantageous to pay off the debt. It might be, it comes down to personal preference. You could arbitrage it and maybe invest, for example, in stocks or something else and maybe come out ahead on average over 30 years, but it’s going to be a wild ride versus the guaranteed return there.
And if you’re over 9%, 10%, there’s very few things that you’re going to get in life that are going to be better than a guaranteed nine or 10% return, which is the return you get by paying off that interest rate early. So I think that’s one way to think about it. The other thing that I think is a bigger mistake that people make, and we’ve come across this a good amount in the Finance Fridays, is using the wrong type of debt to finance and investment. And the most common example of this is the HELOC versus the 30-year mortgage.
The HELOC, the home equity line of credit is a short term tool. It’s like a credit card, it’s a line of credit literally. And you should not be, in my opinion, using this type of debt to make long-term investments. This is a great tool to use to buy a car, for example. Instead of getting a five-year loan from the Toyota dealership, use your line of credit and has slightly better interest. Great if you want to do that, right? Although you probably get really good terms from dealerships, that’s probably a bad example. Or if you really want to buy the boat. We’re not promoting buying boats here on the BiggerPockets Money podcast, but the home equity line of credit is probably a better vehicle to finance the boat than maybe the light of credit you get from the boat dealership. I don’t know. I’ve never bought a boat. But those are the types of purchases that a line of credit is useful for, something that’s going to be paid off in two, three, four, five years at maximum.
But people get in trouble because they’ll use these HELOCs to buy investment properties. And that to me is a huge killer that they don’t understand this going in that while that it can work, you can win by doing that. You’re putting yourself in an incredibly risky and uncomfortable position for a long period of time when you do that. Let’s use an example of buying a $240,000 property and putting $60,000 down using a HELOC from your finance, from your primary residence.
That HELOCs going to have a variable interest rate. So rates are now 6%, 7% on that thing. Okay. That’s gone up considerably. You bought it at a 3% few years ago. Okay. That’s pain in the rear, number one. The second is their interest only. So people think, “Oh.” And people don’t even consider that in the context of their cash flow. They may be saying, “Okay, that rental property’s going to rent for $2,000 a month. My mortgage is $1,600 a month. Woohoo. I’m good to go. I’m getting $400 a month in cash flow.” While we know that’s not the case and there’s other expenses, the real kicker is their HELOC that they used to purchase this thing, which is going to come with another $200, $300 a month in interest at the very minimum, and they got to pay the thing back. $60,000 is over five years is a thousand dollars a month. You’re paying back off that HELOC, okay?
So this property, instead of kicking $400 a month into your pocket is going to be taking out of your pocket close to a thousand dollars a month. That’s a huge swing. And people just don’t realize this. And so for five years this thing’s going to suck a thousand dollars a month out of your life until that HELOC is paid off one way or the other. It could come in lumps, it can come month by month because you get to choose, how you want to pay it back? But it’s sucking cash out of your life. Once it’s done, maybe you’re in a good spot, maybe you have appreciation and cash flow at that point in time, but that’s not how I want to live the next five years of my life is having cash get sucked out. So I think the biggest mistake people are making that I’m finding is not the, which debt do I pay off first? How do I do that? It’s using short term debt to finance long-term investments and finding themselves in really uncomfortable positions where cash is getting sucked out of their lives.

Mindy:
So when can I use a HELOC to invest in real estate?

Scott:
Use it on a short-term project. So if finance your next flip with a HELOC, right? Because it’s a really good low interest rate debt source compared to hard money or bridge debt, for example. So use that to finance that. Use it for your burr project, finance the burr with your HELOC. Then once it’s completed, take out a 30-year mortgage on the finished property, pay off your HELOC and then repeat the process. Use it as a vehicle for short-term financing, not for long-term financing in my opinion.

Mindy:
And what does short-term mean to you?

Scott:
I think it’s less than five years, preferably less than three.

Mindy:
Okay. Perfect. Scott, what is good debt versus bad debt?

Scott:
I think that good debt is that low interest rate range that I mentioned. Debt that is appropriate to the use that it is being assigned, right? Short-term debt with short-term project, long-term debt with long-term project. And yeah, I think that’d be my definition.

Mindy:
Yeah. I just want to make a comment. I don’t really know of a great place to insert this, so I’m just going to say it here. Savings accounts are now paying more in interest than some mortgages are costing you. If you have this kind of inverted mortgage savings account scenario, it doesn’t make any financial sense to pay down your mortgage when you could make more money by putting anything that you would normally put towards your mortgage into the bank account. Let’s use real numbers and talk about this. I have a 2.25% interest rate on my house. My bank account pays 2.5%. I am making 0.25% every dollar that I don’t pay towards my mortgage and instead put into my bank account, I’m sorry, every dollar that I don’t pay extra to my mortgage, I’m still paying my mortgage, I’m not ignoring my mortgage. It doesn’t make sense to me to put this money into my mortgage because once I pay it to my mortgage company, I can’t get that money back.
If I put it into a bank account where I am making money off of it, albeit not a much, but I’m still making money. If I need access to those funds, I can just grab that money back out again. If you feel like you need to pay down your mortgage and your savings account is paying more than your mortgage is costing you, in my opinion, throw the money into the savings account and just consider it gone so that you could throw it all at your mortgage if you decide that’s the best choice for you, but you still have access to it down the road.

Scott:
Yeah, I completely agree. I think a lot of homeowners and a lot of real estate investors are stuck right now. A year ago, if I wanted money out of my real estate portfolio, I’d refinance my mortgage and pull cash out of it, or I’d sell the property a 1031 exchange the property and move the equity into a new property. There’s a number of ways to get that. Now, it’s really expensive to do that. I’m swapping a great interest rate for a much higher one. So folks are stuck. And that leaves us with only one really good option that I can discern right now, which is hold on to your property, whether it’s your primary or your… And this is not universally true, but it is tending to be more like we’ve told some folks that are in maybe a little over their skis, go sell this place from that and cash it out, right?
But if you’re a well capitalized position and you’re not in a rush, and you like where you live or you like your rental properties, their cash flowing and all that kind of good stuff, you have really only one option that’s good right now, which is to keep the property and let your 2%, 3%, 4% low interest rate mortgage slowly amortize. And what that does is it really depletes the money supply in this country, which is exactly what the Federal Reserve wants, right? Because previously, a year or two ago, if there was a good deal, I’d cash out and refinance my rental property and be all over that, right? Now, I’m not going to do that. I’m going to be much more cautious about that. So that’s money that has been sucked out of the money supply, all that equity. I’m not using it to do that. And that’s what helping dampen price growth in this country. It’s the goal that that’s happening across the board. That’s a real estate example that’s happening across the board in businesses and personal balance sheets all over the country.

Mindy:
Let’s move on to investments, Scott. What is the first investment a Finance Friday listener should prioritize?

Scott:
Wow, that’s definitely a question. I think that comes with an, it depends.

Mindy:
Every question. It depends. It depends. It depends. Let’s jump to goals. A couple of weeks ago we released an episode about an investment plan where we walked people through the investment plan that you have created. And I think it’s really important to understand what your goals are before you can start thinking about investing and where you want your investments to be. So your goals, you need to think about this. Where do you want to be in 10 years? And you don’t recommend doing, where do you want to be in one year, five years, 10 years? It’s you walk backwards. Where do you want to be in 10 years? Oh, in 10 years. I mean, a lot can happen in 10 years. Holy cow. 10 years ago I had a three-year-old. Now I have a 13-year-old, and she is mouthy, but I digress. In 10 years I want to have a house, or three rentals, or 27 rentals.
Start thinking about what you want because then in 10 years, if you want 10 rentals, well, that means that in five years you should probably have five rentals, or three rentals, or at least enough money to buy one. And then in five years, that helps you set your three-year goal, which helps you set your one-year goal, which helps you set your six-month goal, which helps you figure out what tomorrow you should be working on. So yes, the first investment of Finance Friday listeners should prioritize is, well, what? That depends. What are your goals? So let’s talk about your goals. Go to biggerpockets.com/investmentplan to download your very own copy of Scott’s Investment Plan. It is a fill in the blanks investment plan with a example sheet. And you can listen to our investment plan episode where Scott and I walk you through the entire document.

Scott:
Yeah, I love that. And I would just say I have this journal that I use every year to frame my goals and those types of things. And there’s an example that comes with it. And this is a journal by Darren Hardy, who’s a success guru who I have been following for a while. And Darren Hardy’s example, I’m not sure if it’s even his, maybe come from something else, but it’s like there are three boys in the forest, and they challenge themselves who can walk the straightest line, and two of the boys, they do really careful calculations of each step and try to keep it perfectly straight and do it one step at a time. Boom, boom, boom. And the third boy walks three times the distance perfectly straight. And how did he do it? Well, he looked at a tree in the distance and walked straight towards it.
And I feel like that’s what we have a lot of problems with on the BP money show here is people are like, “What’s the next step I should take? Help me out with this very tactical maneuver in my financial position. Help me move that.” Well, in the pursuit of what, right? Because there’s no right answer to these financial questions. If your goal in 10 years is to have $3 million in your retirement accounts, okay, we’ve got a very clear path forward. If your goal is to have 10 rental properties, we’ve got another very clear path forward. But it’s very hard to tell someone with $300 in net worth across 50,000 in their home equity, a hundred thousand in their retirement accounts, 150 in rental properties, and 50 in an after tax brokerage. What they should do next because we don’t know what that long-term goal is. Once you know what the long-term goal is, you can make a beeline towards it and a lot of decisions become very clear and you can move very quickly.
So what’s the first investment of Finance Friday listener should prioritize, write down what you want in great detail and put together an investment plan, that will pay you back a million dollars over 10 years and it’s free. So that’s a pretty good ROI.

Mindy:
Yeah. And this is not something that you do in five minutes. You don’t just sit down and bang it out. This is something… We’re talking about the rest of your life here. Think about what you want and start keeping notes. Start keeping a journal, start keeping a little notebook where you write things down. “Oh, you know what? I think I would like to have rental properties,” or, “I think I would not like to have rental properties.” It’s okay to not invest in real estate. It’s okay to not invest in the stock market if real estate is your jam. It’s okay, whatever you want to do. But having a plan is what’s the most important. Scott, when does someone know when they are real estate ready? If that’s the asset class that they choose?

Scott:
So there’s a spectrum of being real estate ready. There’s no like actual moment in there. There are only mental states with this. So I actually did an hour and 10 minute long deep dive into this topic on the Real Estate Rookie podcast with Ashley and Tony. It was episode 200 for folks that are interested. And I have a checklist that I put together that has a bunch of different areas that I think you should be able to answer yes to in order to feel prepared. So I’ll briefly summarize that there. So the first one is not surprisingly based on what we just discussed, I understand my end game and long-term goals. I know exactly what kind of portfolio I want to build over the next five to 10 years, and what kind of life I will lead when I build that portfolio. And real estate will be the pathway to help me get there.
I won’t go through every item in the checklist, but they’re like this, right? Second, you have to believe that real estate is a good long-term investment for you compared to alternatives like stocks, bonds, and cryptocurrencies. These are very simple, but they’re very powerful statements. I know I need to know where I’m going, and I need to believe that real estate’s better than these other asset classes. Also, why am I putting in the work to learn real estate, right? Third, I don’t have to go all in to purchase at my first property. I’ve got a strong income and savings rate or a financial partner or two who have those strong financial positions for me. So I earned a strong income. I could feasibly cover the investment expenses even if I received none of the rent from the property for a prolonged period of time. I can sustain that for indefinitely.
And one more point, and before, I won’t go through the whole rest of the checklist here, but I’ve got a strong cash position, good credit score, and I’m going to have the ability to commit enough time to learning about real estate and managing the investment in the early days. So there are other things here, but I think you should be able to say yes emphatically to most of those points before you buy that first property.

Mindy:
I could not agree more. I also want you to be incredibly financially stable. I want you to have an emergency fund that you can pull from for the unknowns because real estate is ruled by Murphy’s Law. And as soon as you buy a property, something breaks, like as you’re driving home from the signing the papers, and the cost of that broken item is inversely proportionate to the amount of money you have in your bank account. You have no money in your bank account. That’s going to be a very expensive repair. You have a lot of money in your bank account that’s going to be a broken light switch or a new light switch cover.

Scott:
Yeah. The other way to phrase that is if you don’t have an emergency reserve, it is called a disaster when something goes wrong in your rental property and when you do have an emergency reserve, it’s called capital expense.

Mindy:
Exactly. All right, Scott, this was super fun. Thank you so much for joining me today to share with our listeners how to think about their finances, how to set up their finances for success.

Scott:
Awesome. Well, thank you for the great conversation. This was a lot of fun.

Mindy:
That wraps up this episode of the BiggerPockets Money podcast. He is Scott Trench, and I am Mindy Jensen saying, fluff your pillow armadillo.

Scott:
If you enjoyed today’s episode, please give us a five-star review on Spotify or Apple. And if you’re looking for even more money content, feel free to visit our YouTube channel at youtube.com/biggerpocketsmoney.

Mindy:
BiggerPockets Money was created by Mindy Jensen and Scott Trench, produced by Kailyn Bennett, editing by Exodus Media, Copywriting by Nate Weintraub. Lastly, a big thank you to the BiggerPockets team for making this show possible.