Planning for Your Future Wealth with Megan Gorman from The Wealth Intersection

Mindy: Welcome to the BiggerPockets money podcast show number 106, where we interview Megan Gorman from The Wealth Intersection and get her story of financial independence.

Megan: So what you’re sort of hearing from me is, be reasonable on return assumptions but be aggressive on inflation assumptions. And really focus on your spend, because that, regardless of what asset base you have, those three things drive success.

Mindy: Hello, hello, hello. My name is Mindy Jensen, and with me as always is my wonderful cohost, Scott Trench. Scott and I are here to make financial independence less scary. Less, just for somebody else. And show you that by following the proven steps, you can put yourself on the road to early financial freedom and get money out of the way so you can lead your best life.

Scott: That’s right. Wherever you are in your financial or life journey, you can begin rapidly moving towards a position capable of generating a great income, saving a huge percentage of that income, and setting yourself up to make larger and larger investments on your way to financial freedom. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, or start your own business, we’ll help you build a position capable of launching yourselves towards your dreams.

Mindy: Okay. Today, Scott, I want to wish you a happy new year. It is January 6th, or that’s the day that it’s being released, and it is not only a happy new year, it is a happy new decade.

Scott: Absolutely, yeah. And this is a big time for goals. As you guys probably know, I’m a big goal setter. I start a new journal every single new year. I relaunch my goals. I revisit my five-year plan, all that good stuff. Definitely encourage you to go out and do that. And I’ll do a little shameless plug for our intention journal, which, if you’re looking for a physical thing to do that, you can use the intention journal, or you can use the free fire starter and goal tracker on BiggerPockets if you just sign up and create a free membership. You’ll want to do that online. You can also do that on a piece of paper, right? But just go out and do it somehow, however it works best for you, and set some goals and tackle them this year.

Mindy: Yes, and we have a new Facebook Group. If you go to facebook.com/groups/bpmoney, you can request to join. Please answer the questions so we know that you’re a real person and not some random robot just trying to jump into our group. And we also have a survey that we would like for you to take. We’ve been asking this the last couple of weeks. This is the last time we’re going to ask about this, but we just want to make a show that covers all the topics that you want to listen to. We want to make the show that you want to hear. So if you could give us five minutes of your time and go to biggerpockets.com/moneysurvey, that is going to help us out a lot.
Without further ado, Scott, let’s get into today’s show. We have Megan Gorman from The Wealth Intersection, and she is amazing. She is unbelievably qualified to talk about money. She is an attorney, she was a congressional page, she used to teach financial planning, or head of financial planning at Goldman Sachs, where she talked about taxes. Finance is her life. And she comes in today to share some really great information with us.

Scott: Yeah. She was an outstanding guest, really knowledgeable, really fun. Her money story is awesome. We talk about how she handles a lot of high net worth individuals. She’ll tell us about how those high net worth individuals, at least the percentage of those individuals who are self-made, got into that position, which I found is a very interesting part of the discussion, and very excited about today’s show.

Mindy: I’m super excited. Before we bring in Megan, let’s hear a note from today’s show sponsor.

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Mindy: Okay, huge thanks to the sponsor of today’s show. Megan Gorman from The Wealth Intersection, welcome to the BiggerPockets money podcast, and happy new year.

Megan: Happy new year, Mindy and Scott. I’m thrilled to be here.

Mindy: I’m so excited to have you. I met you on an episode of Kirk Chism’s podcast, and you were really, really, really knowledgeable about money. And then I went into your About Me page, and I see that Megan Gorman is the founding partner of Chequers Financial Management, she’s also an attorney, a former congressional page, a former VP of financial counseling for Goldman Sachs, where you worked on tax planning and estate planning. So this show is being listened to by a variety of people, our loyal listeners, and thank you so much for coming back, loyal listeners, are on their path to financial independence. But we’re also releasing this the beginning of January, and a lot of people are thinking to themselves, “It’s a new year, I want to get my finances in order, I want to fix my financial life so I too can be on the path to financial independence and live the best life that I want to live.”

Megan: Exactly.

Mindy: So Megan, let’s see if you’re qualified to talk about money.

Megan: Let’s try.

Mindy: Where does your journey with money begin?

Megan: So first of all, I love the idea of money stories. And my early interactions with money really started when I was about five. And so I’m going to date myself a little bit, but I was five in probably 1981, and I was obsessed with the Little House on the Prairie books. And I lived in a town that had a country store. And in the country store they sold little Prairie dresses that you could wear as a five-year-old. And I remember we went in this store, and the dress was $25. And in 1981, $25 was a lot of money. It’s still a lot of money today, but it was a lot of money then. And for a five-year-old it was an incredibly large sum of money. And I remember my mother looked at it and she was like, “Look, you’re not really going to wear this. It’s just going to be a waste of money. No.” And I was very persistent, I was like, “No, no, no, I really want this dress.”
So when you’re five, you really don’t have that many money-making opportunities. So my parents said, “Look, if you save your birthday money, if you do chores around the house like cleaning out the dishwasher, setting the table, putting water on the table for dinner, we’ll pay you for these chores, you can save your birthday money, your Christmas money, and then if you still want the dress, you can go buy it. So over the course of about 18 months, I saved my pennies, literally pennies, because I think my parents gave me like 10 cents to clean out the dishwasher. We had a whole chart. And I got the $25. I had some birthday money too. And I remember going down to the country store and going in and buying the dress. And my parents, I think, were so happy that I did this that they ended up buying me the bonnet that went with it. And I’ve got to tell you, I got my money’s worth out of that $25 dress, because I dressed up and played as Laura Ingalls Wilder for years.
So it was a great money story, but I’ll tell you one other thing that’s interesting. When I met my husband, I asked him his money story, just sort of curious. And he had the exact same story, except he wanted … He’s a little older than me, so it was like 1970, he wanted a 10-speed bike. And he did chores and worked in his dad’s store to raise the money. So I always found it was interesting that we found each other with very similar money stories.

Mindy: That’s really interesting. I also had a Little House on the Prairie bonnet, because …

Megan: You know what I’m talking about.

Mindy: Yes, I was fascinated with the show. So from a very early age, it sounds like your parents were not giving you everything that you wanted. Which is really the best way to raise kids, in my opinion. Because when you give them what they want, they don’t appreciate it. If your mom would have bought that dress for you, would you have appreciated it as much?

Megan: Probably not at the level that I did. And look, it was different times back then, and I grew up in a very small town that was not … Most people were middle-class. So it was not uncommon for people to be told, “No, we can’t afford this,” and so on. It was a very common childhood experience with my peers as well. It wasn’t like my parents were telling me no and everybody else around me was getting great toys.

Mindy: Yeah, let me tell you, as a mom now it’s really hard to say no, because everybody else is getting everything. I’ve got a 12-year-old, and she’s constantly asking for a phone. I’m like, “I don’t want to buy you a phone.” “I want a phone, Mom, when am I going to get a phone?” “I don’t know, when you can buy it yourself.”

Megan: It’s really hard. It’s hard to have these boundaries and know what’s right. Because you’re trying to figure out what’s the right values for yourself, for your child, and then you’ve got community around you. So it’s a tough thing as a parent.

Mindy: Yeah, it is.

Scott: How did your money story evolve over the next couple of years, in high school and college?

Megan: Well, it’s interesting. So I grew up in a beach town in southern New Jersey, so I literally, my hometown is the southernmost tip of New Jersey, it’s called Cape May. And when I was a kid growing up, Cape May had a three-month economy. So think about that, because it was a Victorian vacation resort. Now, today it has about a nine to 10-month economy. But what was very common was for us, when we were kids, to, when we finally got our working papers, to become busers at restaurants and work your way up to waitressing. And so for me, when I got to the point where I could start busing and then waitressing, my dad made it a requirement that I had to be able to contribute a certain amount of money to my college education every year.
And at a vacation resort where you’re making a couple hundred dollars a night as a waitress, I could save up about $5,000 a summer. So for me, I have always correlated working really hard with making money. And I’ve always liked the fact that I have that power to do it. Now, to be very honest, when I got to college, I had learned how to make money, I didn’t know how to manage money. And when I started college in 1994, I remember getting to my dorm room and I got all these credit card applications. And you’re like a kid in a candy shop because you’re like, “Wow, they’re offering me money.” And I applied for credit cards. And unfortunately, I created a huge credit card debt, and I did not have cash flow to manage it. And so eventually I had to do payoffs with the credit card companies. It was a really hard experience to go through, because up until that point I found money very empowering in how I interacted with money. And this was a shameful moment.
And I think today, what I find and when you read about people and their money stories, my experience was actually quite common. But I always learned from that experience, which was I always want to make sure that I didn’t spend more than I had. And so that led me to a path with money, because even though I’m a lawyer, I was attracted to tax law, and out of the gate I worked for a subsidiary of Goldman Sachs, where money was a very key component of what I did on an everyday basis.

Scott: So what was your position upon graduating college? Did that struggle to pay off the credit card debt come before, during, or after your graduation?

Megan: It came right before, and so I did the payoffs with the company, I worked a little that summer to help finish paying that off, and then I got rid of the credit card debt, but I am in that last group of people that came out with some student loan debt, but I was able to defer my student loan debt. And I actually took a year off between college and law school, before I went to law school, and I actually ended up picking a state university to go to law school to manage my student loan debt effectively. So that lesson in college taught me a lot for when I was in law school, and then when I got out of law school. Because when I graduated law school, I had, I think with gifts that I got from people, I had $2,000 in my bank account. And I had to figure out how to get an apartment in north Jersey, get a car, buy a work wardrobe, because back when I started work, you had to wear full suits. Today we’re much more business casual, but 18 years ago it was a different story.
So it was a lot of struggling and sacrificing. When I look back at my 20s I’m always like, “Gosh, women today, they dress so nicely and they have nice purses, and I was just really struggling to get by.”

Mindy: But you were struggling to get by because you didn’t want to incur additional debt, is that fair?

Megan: I didn’t want to … Correct, I didn’t want to incur additional debt, and also my student loans, when I graduated law school, started to have to be paid. And I had a very limited salary, and I had to make it work, and at that point in time I was living in Hoboken, New Jersey, which is one of the more expensive metro areas. And I think coming out of law school, when I think back to my starting salary, I think I was making close to $50,000. But with student loan debt, with paying rent, with getting a car, it ate into it very, very quickly.

Mindy: What was your student loan debt when you graduated from law school?

Megan: My student loan debt was about $85,000. So what’s interesting is, as I said, I’m that last group that came out … I graduated law school in 2002. And one of the reasons I went to Rutgers Law is, the tuition when I was there was $10,000 a year for law school.

Mindy: Oh.

Megan: In comparison, Cornell Law where my brother went was like $35,000 to $40,000. So I was getting a deal. But when I graduated law school, I’m the last group that was able to really consolidate their student loan debt at a very low rate. So what I did is, with my private loans, I aggressively paid them off within three years of graduating law school. But with my public debt, I refinanced them, and I have not paid it off. I still have, I think, $60,000 of student loan debt. But I pay an interest rate of 3%, and so my payments, they’re very, very low. They’re less than $500 a month. And so I look at it a little bit differently, and this is one path, I don’t think it’s the right path for everybody, but I always look at it as, these loans, because they’re public loans, at my death, they go away. My spouse does not inherit them. And I think I can make more money in the S&P 500.
So I have made a strategic choice to leverage my debt. But I only made that strategic choice after I paid off my private loan debt, which was much more expensive. So there’s a lot of nuance, I think, to debt planning. And I feel very comfortable with the debt planning I have.

Scott: When did you begin making that conscious decision in your journey with money after graduation from law school? Was that like, “I’ll plan it out from the beginning because I’m good with this right away and I have a clear plan”? Or did that evolve over time?

Megan: It evolved. So a little bit of back story how I got into money is, when I was in law school I had to take a tax course. It was a prerequisite at the time. It isn’t today for my law school. And I got to tax, and it clicked for me. And that opened doors and employers for me, because I looked at companies like Price Waterhouse, I looked at companies like Ernst & Young, I looked at companies like Goldman Sachs. And what drew me to Goldman Sachs out of all of them was, I was like, “Well, look, even if it only lasts for a year or two, I’ll learn about money. And I don’t know anything about money.” So once I started working there and understanding my budget and the fact of how the S&P performs and investing, I embraced investing and had a lot of comfort with it. I knew I had to get rid of the expensive debt, but the cheap debt, I was like, “Look, I’m not going to rush out and pay it off, because, one, I can’t afford to, and two,” at that point in time I was so desperate to try to fund my Roth IRA and fund a 401K, I really wanted to have actual assets.

Scott: Makes sense to me.

Mindy: Is there an interest rate that you recommend people do start paying off? You’re at 3%, and I am on your side. I think that a 3% loan is practically free. I am even older than you are, and I remember mortgage rates when they were 14%. And that’s unheard of now, nobody understands that we’ve got these ridiculously low rates. I would rather, like you, not pay off that 3% and put more money in the stock market. But is there a threshold where you recommend that they start payoff?

Megan: The thing is, I think there’s a lot of nuance to it. So one, you’ve got to think about, are you able to deduct your student loan debt, your student loan interest? Now, there’s an AGI phase-out on that. So I think for a lot of people, there are still tax benefits. And this goes to some of the things that I really truly believe from a personal finance perspective, which is, to really be financially independent and be financially savvy, you have to have active tax engagement. And so one of the things I would tell people is, when you look at your student loan debt, talk to your tax person. Are you getting any tax benefits from it? Because you might. Particularly for young people starting out, there is that student loan deduction.
But I would tell you, probably I would get nervous with student loan interest rates once they start crossing about 5%. When I build out my portfolio personally, I’m targeting on an annualized basis about 6% to 6.5% annualized return. So for me to win over the long term, 5% would be where I would start to get apprehensive about it. And then the other thing I would tell people is, I really did some studies on looking into my dispositive provisions of my debt, like what would happen when I died, because I wouldn’t want that to be a burden on my family. And I figured out really early on the private debt, my family or my spouse was going to have to deal with it if I passed away, based on the loans that I had at the time.

Mindy: That’s really interesting.

Megan: So I think it’s something … The student loan process, not to get on my soapbox, it’s so convoluted. And I’ve had to go through it. I don’t have children, so I’m someone without any skin in the game in this sense. But I’ve had to go through it with family members, with family friends, and there’s no counseling in the beginning, of what choices you’re making. And when I sat with family members and ran out numbers for them to make them understand what the repayments would look like, it was really eye-opening for them. And unfortunately, the system doesn’t do enough to get you counseling on your way in. And that’s a challenge, I think, for most Americans.

Scott: No, I love it. So you’re coming out of law school with $85,000 in debt and a $50,000 income. And you’re thinking, “How do I,” over a period of a year, a couple years it sounds like you’re evolving this process, and you’re saying, “How do I acquire assets, assets, assets?” And then evolving the thing from there. How does your career and wealth progress in that timeframe?

Megan: So one of the things I did, and honestly I think everyone needs to do it when they’re going into college, is I always knew that making money was important to me. I don’t think it’s shallow to say that. I always knew I wanted to have a big career, a big job. And I knew that if I invested my education, it would reap rewards. So I always knew by taking on debt I would eventually be able to build the asset base to sustain and manage the debt. And so that was something that was always in the back of my mind. So what I challenge people on, and I do this, and I work with high net worth individuals on a day-to-day basis, but when I sit down with their kids … Because a lot of times what we’ll do is we’ll sit down with my client’s child with their 529 plan, and we’ll show them some of the various schools they want to apply to to see how far the 529 money will go.
When it looks like that they won’t have enough in the 529 to cover the education, we start to talk about career choices. What is the career trajectory? How does one make money in that career path? And based on that, how do you take that back to your financial decision making on taking on student loan debt and using your 529s? And I think I came to that conclusion because I did a lot of that with my own process. I knew my 20s, my 20s were going to be about struggle financially, and I knew that. And it was funny, because literally when I turned 30, I got a very large salary increase and a promotion that started to change everything for me financially, where I didn’t have to budget every last dollar. I could do different things with my money.

Scott: Well, could you walk us through what that looked like in the workplace, then, from a career standpoint? What did you do to put yourself in a position to get that huge promotion and career boost?

Megan: Worked a lot. Some of it is just getting in there, finding a career path that you’re good at, and really learning all aspects of it. And at the time I was in my 20s, the gentleman I worked for at the time, I’d be like, “I am ready to take on clients. I’ve been working for you for three years, I want to take on clients.” And he would slow me down and say, “No, try to gain more experience. It will help you in the long run.” And it was frustrating, because I was struggling running paycheck to paycheck. And ultimately, what he said was right, because by the time I started to take on clients and work directly with clients and have my own book of clients, I had a lot of experience that propelled me quite quickly in growing my income and growing my asset base.
And I’ve got to tell you, I always think with financial success, a lot of struggle is a good thing. Having the ability to have to say … I remember living in Hoboken and wanting to go out in New York City and only having enough money to pay for my PATH ticket … I was almost going to say the BART, which is San Francisco. My PATH ticket and a cocktail, and that was all I had. I could not go out and go from club to club when you’re in your 20s, because I only had a limited amount of money. And so I feel I have a lot more appreciation today because I struggled so much in my 20s.

Scott: What was the relative size of this increase in pay and compensation?

Megan: Yeah, I moved into six figures.

Scott: Got it.

Megan: So that made a very big difference. And for me, the biggest accomplishment was when I could finally max out my 401K. That was a huge goal for me. And even today, I’m fortunate I get to max out my 401K and my IRA, I’m no longer able to do the Roth, but it’s such a big deal to be able to, for 2019 it was $25,000. But if you think about it, $25,000 over a decade, that’s a quarter of a million dollars. And to me that feels like such an accomplishment. And I tell people that all the time, because I work with really wealthy individuals. And people think the wealthy have it easy. It’s all the same problems. We all deal with the same issues. What they are able to do is do more of the piecing together of all the small savings that makes it seem big. And that’s the secret I’ve learned over the years.

Scott: So the surplus all went to maxing out the 401K and other assets? Or how did your piecing together of assets change after your income changed?

Megan: So first of all, I’m a total Gen-Xer. So what is the first big thing I did when I started to make money? I bought a house. And I bought a place in Hoboken. So I would always tell people, I love real estate, I have a lot of comfort with real estate, but it’s all about location, location, location. Because I ended up taking advantage of the first-time home buyer rules, which as you know, you could put 3% down on a house. Now, you have to take on PMI and so on. But I got into a place in Hoboken that had a parking spot. And as anyone can tell you, in some of these cities parking spots are where the real value in a property is. And I basically was cash poor with the house, this was right before I got the big promotion, and unbeknownst to me, I doubled my money in the house in about three years.
And that was a big eye-opener, because I was able to scrimp and save to get the house and have myself propelled forward. And that has helped me buy houses since then.

Mindy: We’re getting awfully close to 2008, 2009 in this timeline. What year did you buy your house?

Megan: So actually, I bought the house in 2004, sold it in 2006. And then I bought a house in California in 2007.

Mindy: Oh.

Megan: So I did go through the downturn, I did watch my house drop in value, but again … And this is really important. I’m playing the long game. And I didn’t have the money in 2008, but I was advising very wealthy individuals in 2008, and what did I do at that point is I said, “Well, if I had my client’s money, what would I do? I’d be buying.” And I had more clients buy second homes in late 2008, early 2009, than any other point in my career. Because they had the opportunity to do it. And so the thing that I did in ’08 and ’09 is, I was able to buy the S&P, I actually have it in my Roth IRA, and I like to look at it every once in a while because I can see the actual return on it from the piece that I bought. And I actually bought my Roth IRA in March, I think it was March 12, 2009, and the market had bottomed on the 9th. It was just accidental, but I’m very proud of the fact that I did buy at the bottom.
And I had a lot of clients do that. And some of my clients didn’t want to do anything, and then I had other clients that plowed a lot of cash into the market, and they were rewarded for taking on that risk. And so a lot of the work I’m doing right now with clients, and granted I’m doing it in the high net worth space, but I think this is true for everyone, is a lot of the economists see a recession coming. And so today it’s about batting down the hatches, making sure the allocation’s working well, that you’re at the right fixed income target. But it’s also about thinking about, okay, if we have a pullback and your fixed income allocation gets larger, where do you want to deploy to? Is this a time to take cash and buy a house, to buy a second home, to buy a rental property? Is it to deploy back into equities? For those of us who lived through ’08, it’s really important to remember the experience and learn from it, on how we can try to take advantage of when market valuations come down.

Scott: I think these are awesome points. With respect to your journey with buying the house, did you start buying other rental … What was your overall asset allocation? You were putting money into the S&P 500 on a regular basis, and then buying houses after you sold your Hoboken property? How did that journey go?

Megan: Yeah, so I have a big belief in real estate that I like to own in nice locations. I believe that any time there is a chance that the … If you buy in a good location, even when the market drops, you have a good chance of coming back. So I was very fortunate, I ended up being able to buy on the beach in southern California. I bought the worst house on the best street. So I literally, and I still own the house today, it is the tiniest house on the best street, but it has actually increased in value. And so that’s what I look for in terms of owning real estate, is location. Because I do believe that in certain places they’re not making more land. So today I own four properties in very different locations, but all of them are in locations that I believe over the long term will sustain themselves.

Scott: Got it. And so first of all, where are these properties? Are they places that you’ve lived, or are they …

Megan: Yeah, so they are in southern California, in the Bay area, in Lake Tahoe, and then I have a family member living in a house in the East Coast that I own, which I think is more common than people realize. Particularly being a member of the sandwich generation, as we go through the pension crisis, and when I say the pension crisis, meaning the elimination from the pension from the American financial system, I think more and more of us have to take steps to help family members, particularly older family members, live in their houses. And so that was one of the things I had to make a decision on. And I think, it’s funny, as I talk to more people in their 40s and 50s and 60s, a lot of us have taken those steps to help family members.

Scott: I think it’s an interesting perspective that will probably apply to a lot of people who are listening to this show, especially if you start putting away money and that kind of stuff, you’re going to have this power and this ability to help others. And that’s got to be something that’s on the radar in terms of how you’re planning and thinking.

Megan: Yeah, because just think about, most people … Sorry to interrupt, but most people can afford the monthly payments. It’s getting them in a property or helping them subsidize the monthly payments. And with interest rates so low, when you think about helping older family members like your parents, you can send checks home, but doing some things where maybe you can pick up appreciation on an asset over the long term is something to factor into your decision making. It’s not the right choice for everybody, but when we’re faced with these decisions, and particularly in working with our parents, I try to encourage people to be strategic and not tactical. And what I mean by that is, most people, when they’re handling issues from the generation that are above them, they’re making decisions to sort of stop a crisis in a moment, to fill in a little gap, to make it try to work.
And I think it’s good to take a step back and think strategically, which is, look, because we’re all living so longer, money is intergenerational. If one person is financially successful but the generation above them or below them are not, that’s going to pull on the person in the middle, and vice versa. If the person above you is financially successful and you’re struggling, you’ve got to work together. It’s an intertwined web. And so I think when you think about working with the different generations in your family, try to be strategic. Because you want to also take some benefit from it as well. Because sometimes it’s the use of your capital.

Scott: Yeah, I think it’s great. All right, hope you’re enjoying the show. We’ll be right back after a word from today’s show sponsor.

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Scott: In your journey, it sounds like you are clearly over this point where you are very comfortable with your financial position and how you’re investing your assets. I imagine you have passed a big [inaudible 00:35:27], you have an incredible career, all this kind of stuff. What was the point at which you maybe crossed the hump? It seems like in income it happened in your 30s, but [inaudible 00:35:38] when you said, “Hey, my asset position is going to snowball from here”?

Megan: I’m a worrier by nature, so you never fully feel that you are at a point where you’re in a great situation, because you’re dealing with things both big picture and then the day to day. And I would say probably around 36, 37 years old, because of how my career grew, I was able to do that. Now, I will tell you, what I have gotten more comfortable with as my asset base has stabilized is taking on risk. I’m far more comfortable to be … When I look at my investment portfolio, I’m pretty aggressive. There’s a lot of writing out there, particularly in personal finance, that women are not aggressive investors. I find that women, if encouraged, can be great, really aggressive investors. But it’s about getting comfortable with the risk. But I also then started to get into more complicated investments. So I’ve been very fortunate, I get to do some private equity, I do some angel investing, and then at the same time I was able to take some of my savings and I started my own personal firm.
So I wanted to make sure that in having my own business I always owned my own business. But these were things I thought long and hard about and took risks on. And I will tell you, I don’t have children. So that also changes the dynamic, because I’m taking risk that impacts me and my husband, but I’m not funding … Well, I do help fund 529 plans for nieces and nephews, but I do not have an education obligation to be worried about.

Scott: Right. What does a position capable of taking on risks like what you just described look like to you?

Megan: Look, when I start working with clients, I always want them to follow the traditional rules of cash flow management. So I like people to have six to nine months’ worth of cash in a savings account. Now, as your income grows, that number grows. So for me, the ability to have a significant amount of dry powder on the sidelines is important. And look, I say this because I think one of the most truest traits of being American is to be aspirational. And so when I started out in my 20s, trying to get a couple thousand dollars in the bank, that was a big deal. For me it got to the point of, okay, could I have $25,000, $50,000 just sitting in dry powder? Just to have cash. Because there’s nothing that feels better than opening your bank account and seeing a really lovely number there.
So that started to shift my mindset. And then honestly, it’s about talking to people. I’m fortunate I work with high net worth individuals, so I get to debate ideas with them all the time. And what I love about working with them is, they challenge me as much as I challenge them about how to look at the markets, about how to take on risk. And you start to do the math and you realize, “Okay, if I take on this, it’s 1% of my portfolio. If it went to zero, how would I feel?” And usually when I start to look at this, I say, “Well, if it went to zero, at least I’d get the tax loss out of it.” So it does have value. But look, it’s all about finding your comfort level. And the one thing I’ve always believed about myself and about money is, I’ve always wanted to be financially successful. Even when I was the five-year-old buying my Little House on the Prairie dress, I knew I wanted to be financially successful.
And I also know today that I’m probably going to live a long time. So at 43, taking the risks I take today by investing in asset classes like emerging markets or cannabis or things like that, I’m not expecting them to pay off today. I’m expecting them to pay off when I’m 70, 80 years old. And I’m willing to look at it from that perspective. And I think that it’s all about the long game.

Scott: Earlier in this program you said that you expect a 6.5% annual return on your capital, right?

Megan: Mm-hmm (affirmative). Annualized, yes.

Scott: Yeah, and you’ve annualized your [inaudible 00:39:36] growth rate. But it sounds like what you’re saying is, “I’m going to have a large bucket of cash and a really airtight financial position.” So I have a question, maybe I’ll just ask it bluntly. Do you really expect 6.5%, or are you aiming much higher than that and conservatively underwriting your performance to 6.5%?

Megan: So most of my clients are corporate executives, they own businesses that they sell. Great wealth is created by concentration, by taking on a lot of risk, high standard deviation. I believe diversification preserves growth over the long term at a reasonable rate of return. So I truly believe 6% to 6.5%, my target, that is the best way to approach it. And that’s because I have very reasonable expectations. Now, a year like this year, where we’re getting … I haven’t run my performance yet on my portfolio, but I would say probably, I know I’m in double-digit returns. Now, some of this, I have rates in my portfolio. This has been a fabulous year to be in rates. But it also makes me apprehensive because I’m like, “Okay, I’ve got to trim that position because there’s no guarantee that rates will continue at this rate of return going forward.” So it’s more about having a reasonable expectation of what my money will do over the long term that I think allows me to stay grounded and be practical.
And look, I’ll give you an example. My husband and I, the house next door to us in southern California came on the market, and it was a steal because it needed to be renovated. And we were like, “Wow, we could buy this and renovate it and then sell it, make a great profit.” But what we did is we actually ran the numbers. And what would it cost for us to buy it, renovate it, and actually sell it? And that net, when we looked at the return on our invested capital, we were like … For the risk we were going to take on, we were not going to be rewarded at the level we would want to be, net, once we factored in the tax.
So I just try to be very pragmatic about what I’m doing and set reasonable expectations. And that’s also what I do with clients. Diversified portfolios, it’s slow and steady wins the race. It’s the tortoise, not the hare. And I tell clients that. Anyone who comes to work with me and says they want constant double-digit returns, it’s unrealistic with how the markets work. It can happen on certain years, this is a great year, 2019 was a great year. But we don’t know.

Mindy: Yeah, this brings up a very interesting point. I don’t like to lose money at all, and I love to project that I’m going to have a 25% return. But that’s not realistic. Whereas if you project a 6.5% return and you get a 25% return, that’s amazing. I think that being realistic is the best course of action. And you’re doing this for returns 30 years down the road. I think that people need to keep that in mind, when you’re investing it is for the long term. You should use other vehicles to invest for shorter term cash flow, like you said.

Megan: Or have a play account. I work with wealthy individuals, and a lot of these people have a little account on the side that they have fun with. And they try to go for short-term return. But then the bulk of the assets are put in more long-term facing investments.

Mindy: Well, yeah, and what if … You said earlier, if I take 1% and I risk it, if you’ve got a $100,000 portfolio, that’s only $1,000 that you’re risking. And if it goes to zero, the lowest it can go is to zero, right? It’s not going to go negative and then you owe money.

Megan: Right.

Mindy: It’s just going to go to zero.

Megan: Right.

Mindy: [crosstalk 00:43:20].

Megan: Or you take the tax loss, and the tax loss is worth $400 to you, depending what bracket you’re in. So you’ve got to think about it in that context.

Mindy: Or the other $99,000 you have is presumably in safer assets or a mix of riskier and safer assets. So at 6.5%, which is, I feel, low, but I don’t have the money expertise that you do and all the tax expertise that you do, but at 6.5% you’ve already made $6,500. You’ve covered your loss on this riskier thing, but the risk has a greater reward. So I like … How much of your portfolio do you risk, or put into riskier …

Megan: So we’re probably … I’m thinking about the portfolio. We are probably about 33% fixed income, so I do believe fixed income is the ballast of the portfolio. I’m a Californian, so I do have municipal bonds, I do have high credit quality total return bonds. And then it’s about 70% in the equity market, both public and private.

Scott: When you talk about your high net worth clients, I’m sorry, I’m transitioning here.

Megan: No, no worries.

Scott: What is a high net worth client? What is the definition of that?

Megan: Well, first of all, when you tell them they’re high net worth, they’re usually like, “No, I don’t feel that way.” You know, it’s a really tricky situation. I think a lot of it depends also where you live in the country. Because someone could have an asset base here in San Francisco and not feel that they have a lot of money, and then move to a place like my hometown and it would be a large sum of money. I think that high net worth really starts about $5 million of assets and above and ultra high net worth, $25 to $30 million and above. And I’ll tell you one thing about working with that group. Most people find it surprising, is the biggest thing I spend most of my time on is cash flow management, which is just the high net worth way of saying budgeting. And people are always surprised when I tell them this. We call it cash flow management, it sounds fancier.
But everyone, whether you are making $30,000 or $3 million a year, everybody struggles with expenses. And I have to have some very difficult discussions with people where I say, it sounds crazy to most average Americans when I’m saying, “Look, you’re living on $700,000 a year, we need to scale it back.” And they’re saying, “I can’t.” But truth of the matter is, everybody struggles with this budgeting. And partly it is because it’s so psychological. The idea of self-sacrifice, the idea of working for the future self. But what I tell everyone is, and I talked about this on this right now, which is playing the long game. It’s also looking at your expenses over the long term, and when you run long-term modeling, you have to try to blow it up.
And what I mean by that is, right now we’re in a low inflationary period. Inflation’s what, 2%? I’m 43. If I make it to 90, we’re going to go through some high inflation periods. So what I try to show clients, and I suggest this to anyone who’s modeling out their money, is show periods of time of high inflation over the long term. And see on your spending how that starts to implode your asset base. And really, that’s what you’re … Some of the savings you’re doing is to help yourself in those tough periods of time.
So what you’re hearing from me is, be reasonable on return assumptions but be aggressive on inflation assumptions. And really focus on your spend, because that, regardless of what asset base you have, those three things drive success.

Mindy: Okay. So the financial independence, retire early movement is largely predicated on the 4% rule, the study that William Bengen did about past performance and all of that. What’s your opinion of the 4% rule?

Megan: First of all, and that’s the rule from the ’90s, I sort of subscribe more to the dynamic withdrawal theory, which is the evolution of the 4% rule, which is that there is a band of … You can withdraw from your portfolio within a certain band and be okay. Because not every year is going to be a static 4%. Give you an example, this year I had to get my roof fixed. Roofs are expensive. So that means my cash flow expanded this year. So I believe there’s a reasonable band of returns. Now, when I work with clients, what I work with them on, and I actually illustrate it out, is I find they can usually go as high up as 6%. Because remember, a lot of client portfolios we’re targeting between 6% and 7%. So I find that they can go about 6% a year annually on withdrawal before they start to implode or unwind the portfolio.
But I think for most people starting at 4%, what I like about it is it gives you some room for error. And life is uncertain. Things happen to all of us at all times. So you’re targeting 4% and it means you took 5% out because something happened like the roof, or your child needed something, or your parent needed something, you’re keeping yourself in a safe zone.

Mindy: Okay.

Scott: No, I think it’s great. I think that’s a great way to look at it, and it comes down to cash flow management or budgeting in relation to your return profile that you’re getting in real time, I think is what I’m hearing from you.

Megan: Yes, yes.

Scott: For these high net worth individuals, $5 million or $25, $30 million, what kind of percentage of that cohort that you’re working with is self-made? In the sense that they didn’t inherit it?

Megan: Yeah, so it’s interesting, because I do have a mix of both. I would tell you my firm is about 85% self-made. Now, what I don’t know is if I attract that, because I see myself as self-made. So you attract who you are. But I love the stories. So you talk a lot about money stories, and I focus a lot on money stories. When I get to work with really successful people, I love to hear how they made their money and what happened. And what I find is, what happens is, a lot of time it’s ambition, there’s smarts, but there’s always, to make this big jump, a lot of times there’s a moment of luck. It’s taking the right job at the right moment. A lot of corporate executives, it’s deciding to move overseas for a few years with your family. That often propels them forward.
But there’s always just one indescribable moment that makes a huge difference. But if that moment didn’t occur, they would still be financially successful, because a lot of them, one, had high income, and two, have discipline. And wealth is that intersection of opportunity and discipline. Because why people hire me, you can read a lot in a book about what I do. My job is to make sure you have discipline and put framework around the high income, and to coach you, and to say to the client, “Look, you really should be doing different compensation, saving your money this way.” Or, “Look, I know you just got that bonus. Let’s put some of it in the bond portfolio, let’s put some of it in the equity market.” That’s the discipline that I put around people.
And I think for everybody, whether you use a professional or you have a friend or a family member that you can coach each other with, or listening to great shows like this, that’s what you need, is you need at the moment to have someone inspire you and push you to execute on a financial plan. That is the hardest thing to do, is to actually more forward. And I’ll give you a great example. HSAs, health savings accounts, we talk about them all the time. They’re really cool vehicles. How many times do I run into people and I say, “Hey, we talked about the HSA. Do you want to do it?” And it’s a friend or a family member, and they’ll say, “You know what, we had open enrollment, but it just was too complicated, I didn’t have the time to really read it, so I just stuck with my regular healthcare plan.” The moment of execution is the hardest part in financial planning, to actually go forward and do it.
And what I give people credit for in the FIRE movement is that the movement, I love the camaraderie of it, but it’s about execution. They are believing to get to this point and they’re doing it. And that’s what’s so hard. And it should be commended that they’re doing it.

Scott: No, I think the way you just phrased that, these folks are high income earners, disciplined, and then a opportunity presents itself that they’re able to take advantage of that propels them to wealth. That is the best answer and the most believable answer to how people become wealthy in one generation that I’ve ever heard. And I’m very grateful for … That’s …

Megan: We’re going to hang up now, because it’s never going to get better than this.

Scott: I’ve never heard that phrasing before, but it’s perfect. And I’m just saying I can relate a little bit, because when I started this journey I was making a reasonable income and saving my pennies, and I house hacked, I bought a rental property, rented out the other rooms, those kinds of things. And I like to think that if I just kept that up for five, 10 years, that I would have built a reasonable position. I also happened to join a startup called BiggerPockets as the third employee and find myself as the CEO of this company now. And we went through a recapitalization with a private equity firm, all that kind of stuff, in the last year. And so I find myself perhaps on track to be in this cohort of high net worth individuals relatively early in life because of that moment and that particular catalyst moment in time, that one decision that I really propelled it and advanced to that.
And so I just wanted to … I was wondering how you would phrase how these people have gone on there, and I thought, that makes a lot of sense to me, what you described.

Megan: Yeah, no, and I have some clients that talk about the struggle. They remember the years where they and their wife or their husband and them were trying to figure out how to make ends meet, and now they’re sitting there and they’ve got $40 million. And it’s a crazy story. But the crazy part about it is, a lot of these people who have large asset bases, they still spend like they did when they didn’t have a lot of money. They have that discipline.

Mindy: Look at Warren Buffett.

Megan: Exactly.

Mindy: Warren Buffett lives in the same house. His one extravagance is to have a driver. When people say that he lives in the same house, it’s a nice house. But it’s still the same house from what, 60 years or something like that, he’s lived in that house? So yeah, my parents are … I don’t know that they’re high net worth as regards to your description, but they’re certainly ultra high net worth in their own minds. And they still are, let’s use the word frugal and say they’re extremely frugal people.
Now, something about Scott’s story that he’s not sharing is Scott also had that little bit of luck.

Scott: Oh, yeah, I joined a startup as the third employee. That was the …

Mindy: No, no, no, no, no. To join the startup was luck. You happened to be in the space that Joshua was working at, and you’re like, “Oh, wait, I know BiggerPockets, I listen to their podcast.” You introduced yourself. You offered to help him, and then Josh had … Wasn’t there something going on that weekend that screwed him up or something and he called you, and he was like, “I need you to be here, can you start?”

Scott: Yeah, I don’t remember that part, but he did call me in for the job after that. But I think that that’s the key to this whole thing, is you talk about risk profile. You have a large cash position, again, where you say, “Here’s where I’m going to … That’ll allow me to take these other risks, where I don’t care if I lose that percentage.” I think that’s what good financial habits do in general. Not just on the investment side, but maybe on the career side. You can’t go on and take that overseas position or that whatever if you’re living paycheck to paycheck and are unable to spend your money … Or unable to keep a budget or manage your cash flow, depending on how much income you earn, I guess that’s the terminology that evolves. I love that, by the way. But that’s, I think, a key to this, is how do you put yourself in a position for that luck?

Megan: Yeah, and I think the other thing I’ll say is, that’s where I think we also have to think about it along gender lines. Because I think women often have less moments to take risk, like decide to take a different job, because of so many of the different societal pressures and family pressures upon us, to have kids and so on. And so what I try to encourage younger women when I mentor them is, don’t be afraid in your 20s to be aggressive with risk. Because you’re trying to also keep up when you’re going to have to maybe take a step back in your 30s when you’re having kids and so on. And so women embracing risk earlier allows that luck to happen earlier.

Scott: Yeah. I think that makes a lot of sense. But I think the other part of it is, it’s a relational thing where it’s just, what is that number and that relationship to your psyche in terms of your risk profile? For you it’s six to nine months. For some people it may be two years, for some people it may be one month. And I think that’s where the psychology of this stuff comes in.

Megan: Exactly. You’ve got to find the right fit for yourself.

Mindy: What was your cushion when you jumped ship from worst company to work for in America to the best company to work for in America?

Scott: I was making $48,000 a year and I saved up about $20,000, $25,000 of that, depending on the exact timeframe of that.

Mindy: Oh, okay. So you had a good six-month cushion?

Scott: Oh, yeah. I think that’s absolutely critical to my ability to make that decision. So I would not have joined a startup with seven days’ PTO and no notion of their financial stability without having some savings. Yeah.

Megan: And Scott, when I started my firm I didn’t take a salary in the first year. I lived off my savings. Because again, I had to take the risk, I had to get it going. And we’re about to be five years old in March, and it’s been constant growth, knock wood, every year since. But that first year, if I didn’t have the savings I couldn’t have made the sacrifice to start the firm.

Scott: Yeah. Well, I think that’s the price of entrepreneurship and being able to take that risk, is whatever you’re comfortable with there.

Megan: That and gray hair.

Scott: [inaudible 00:57:36], I work on that.

Mindy: I will say having a red-headed father has helped me not have any gray hair.

Megan: Oh, you’re lucky, very lucky.

Mindy: I didn’t get his red hair, but I got the no gray hair genes. That was pretty nice.

Megan: Nice.

Mindy: Okay. Megan, is there anything else you want to share with our listeners before we move to our Famous Four?

Megan: Yeah, the one thing I’m going to say, because this is the first show of 2020, and a lot of the writing that’s going to be out there is what you should be doing for this year, and I think just remember, this is the long game. So I’d rather that, instead of doing financial planning for yourself for the year ahead, do it for the decade ahead. And really think about where you want to be in 2030. And I know it’s sort of hard to think that way, but if you look at just where the S&P was on January 1, 2010 and where it ended December 31, 2019, and see how much it grew and how much you participated in it, take that and apply it to where you want it to go over the next decade. Where do you want your asset base to be?
And write it down and send yourself a letter. Put it in an envelope and open it in 10 years. And really figure out, over this decade am I able to achieve the financial independence I was hoping for? And it could be as simple as, I want to make sure my asset base is worth this, or I want to make sure I continue to be focused on being organized. But have some goals for the decade, because it’s all about the long game.

Scott: Love it. That’s like the whole job of a CEO, and you’re the CEO of your whole life. What is my 10-year goal? What do I need to do consistently to take action towards that every single day this next year, this next quarter, this next month, this next week? And then you implement and implement and implement. And it compounds forever.

Megan: Exactly.

Scott: Absolutely.

Megan: Exactly.

Mindy: All right, so are we ready for the Famous Four?

Scott: Let’s do it.

Mindy: Well, we’re always ready, but now it’s your turn. Okay, Megan, what is your favorite finance book?

Megan: My favorite finance book? Oh, that’s tough. Okay, so you’re going to laugh, but I don’t really read finance books. I read a lot of books about people. And so I would tell you that currently I would say my favorite finance book is the book, right now, Hillbilly Elegy. And I bring it up because it’s not that I’m learning a lot about finance in it, but we’re at a very unique inflection point in American society. The generations before us had a lot of ability to propel themselves forward. And when you read that book, what it really tells me more about is how hard it is to propel forward.
Now, I’m sitting in San Francisco. We are overpopulated, we’re overemployed here, I could plant a quarter in the street and grow a money tree. But that’s not the case around the country. And so that really lays out to me the struggle to achieve the American dream, the struggle to save, and then also the struggle to get education. And I really believe that over this next decade the United States has to rethink our education system in terms of being able to recreate the American dream. It is not as easy today to succeed as it was 20, 30, 50, 100 years ago. And that’s a problem. So I would tell you that book tells me a lot about personal finance and the struggles we all have.

Scott: That’s very interesting, I’ll have to go check it out. I have not read that one.

Mindy: Yeah, I haven’t heard of that book, but I-

Megan: Yeah, J. D. Vance, it’s a great book. But the story of it, by the way, is, it’s about a boy who grows up in Appalachia, and his grandparents came over from the war, they took factory jobs in the auto industry and were able to move to the middle class. And then in the ’70s and ’80s, his parents dropped in social status, and it’s about that struggle.

Scott: What was your biggest money mistake?

Megan: Ask me in 30 years. You know, the credit card thing was probably one of the biggest. I don’t know if I feel that people have mistakes as much as, everybody has to understand that their money goes through … You have positive and negative experiences. And there have been some negative experiences that I wish I hadn’t gone through, but has helped me overall. Just trying to think. I think that one of the things that just came to mind when you asked me that question is, I got divorced about 10 years ago. And at the time I was very giving about the settlement, because I believed it was better to end things amicably. And at times I kick myself, because I’m like, “Well, did I pay too much?” So those types of things come to you at times. But beyond the credit cards, there’s nothing I really regret besides the fact, I wish I had started my firm earlier. Boring answer.

Scott: No, it’s a great answer.

Mindy: That’s a great answer. I wish I would have taken the leap sooner. Maybe somebody who’s listening now is thinking about doing something, and they hear you say, “I wish I would have done this sooner,” and they do it sooner. So there’s no bad answers. What is your best piece of advice for people who are just starting out?

Megan: The best piece of advice is, you need to start out saving and budgeting. And it should be made a ritual in your life. So carve out an hour once a month and sit down and look at what you’re spending and look at what you’re saving. And it’s really hard to do, but it will make a difference. And for anyone who’s in their 20s, start saving as early as possible. It is so integral. That money will grow and grow and grow, but it gets you trained to save. And that’s basic info, it’s basic advice, but it’s key.

Mindy: You know what, we hear this basic advice that you’re giving all the time, and eventually somebody’s going to hear that and say, “Oh, yeah, I should track what I’m spending, I should make sure I’m saving money.” And it’s basic, but it’s not like it’s not true. That’s what it is. There’s no easy budget.

Megan: And one of the things to keep in mind is, wealthy people have their kids start doing this in their teenage years and in their early 20s. They make sure that their kids start saving and having these discussions. So it’s funny, I write for Forbes, and any time I write an article about what the wealthy do, it gets so many hits. But a lot of it is, they just make sure the basics are covered with their kids.

Scott: All right, this last question is the most personal and challenging question. And I think you’re going to be surprised by this question.

Megan: Okay.

Scott: All right. What is your favorite joke to tell at parties?

Megan: Oh, God. I’m not really a joke person. I don’t think I have one. I’m not a typically funny person in that sense.

Mindy: Well, I have one for you.

Megan: You do? Okay.

Mindy: All right. I was writing something the other week and I got Yakuza and jacuzzi confused, and now I’m in hot water with the Japanese mafia.

Megan: Oh, that’s so cute.

Scott: Nice.

Megan: That is so cute. Oh my goodness, thank you for saving me.

Mindy: So Scott has 10,000 jokes. He is the joke master. But I thought that was very cute.

Megan: It’s so cute.

Scott: Where can people find out more about you, Megan?

Megan: Sure, so if you want to find out more about me, my writing and my speaking is at www.thewealthintersection.com. I’m on Twitter @WealthIntersect and on Instagram, TheWealthIntersection. And then my practice is Chequers Financial Management, and we’re in San Francisco. And Chequers is with a Q, because it represents a house in England that is the intersection of both family wealth transfer and self-made wealth.

Mindy: Oh, interesting.

Scott: Awesome.

Mindy: I was wondering why it was spelled that way. Okay, and we will have all of these links in our show notes, which can be found at biggerpockets.com/moneyshow106. Megan, you did not disappoint. This was fantastic. I was very surprised at the beginning when you said, “Oh, I didn’t know anything about money when I first started working, so I learned.” I’m like, “Wow, you didn’t know anything about money? You sure overcame that quick.”

Megan: Well, I always joke I’m a Taurus, so in the astrological world Tauruses are lovers of luxury and builders of wealth. So maybe it’s just astrologically preordained that I would be good with money, I don’t know.

Scott: I thought you said you were a tourist.

Megan: I am also a tourist, but I am a Taurus, the bull.

Scott: All right. Well, this has been awesome. I really enjoyed our conversation and the show today, and thanks, I think it’s going to help a lot of people.

Mindy: I do too.

Megan: Yeah.

Mindy: Yeah.

Megan: Thank you for having me on.

Mindy: Thank you, and happy new year, and may 2020 and this whole next decade just treat you phenomenally.

Megan: Well, you too, Mindy and Scott. Thank you again. Happy new year.

Mindy: Thanks.

Scott: Happy new year.