How to Achieve Financial Freedom Even Faster

welcome to the bigger pockets money podcast show number 314 finance friday edition where we interview rebecca and talk about tracking actual spending generating income outside a traditional nine to five and finding your true monthly needs i've learned that the money's out there you can get it um it just i've changed this job that i've had for three and a half years that's the first time i'm ever doing it i when i walked in the door three and a half years ago i had no idea i even have a background in it so it's just like but but up until this point i was just kind of throwing all this money away i didn't know what to do with it so now that i'm on this track now now that i'm thinking about it in a different way you know 10 years ago if you would have said that i'd have been like eh that's too far in the future hello hello hello my name is mindy jensen and with me as always is my goal reframing co-host scott trench that's right if the goal's too far away just move those goal posts closer to you scott and i are here to make financial independence less scary less just for somebody else to introduce you to every money story because we truly believe financial freedom is attainable for everyone no matter when or where you are starting 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 simply establish clear goals that give you more flexibility we'll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams scott i love today's guest she is in a great position financially she just wants to speed up retirement so we have a lot of fun talking to her about her different options today yeah i i mean we've we've had a number of guests uh recently who kind of all have a similar profile in the sense and they're all there's a ton of differences so i think we had a really unique show today but the the similarity or the theme that i keep harping on is this concept of you can't have all your wealth in retirement accounts and home equity if you want flexibility before traditional retirement age you must do something different there and that means hard choices of capital allocation that are not going through this 401k and ira ladder and to your home mortgage payment it means an intentional shift to putting that money elsewhere and or redeploying what is likely to be a massive amount of home equity for a lot of listeners into something that can deliver that flexibility so hard choices but i think i think you have to confront that problem frame your goal very clearly and say what do i want and then begin actually making those actions towards it even at the cost of perhaps some more tax advantaged wealth at the end of the journey 25 years from now it's all personal all these options are personal to your journey and your specific position but there's a lot of suggestions here scott today i specifically like your reframing goals conversation that you had with her you took her 7 200 monthly goal a monthly passive income goal down to 4 000 in about 45 seconds and that was i think hugely helpful to her i think it'll be hugely helpful to other people that are listening to this show who may not realize why they have chosen their specific monthly goal oh i need this much money and income why follow scott's steps and when he was talking to rebecca today follow his his suggestions and see if you can't reframe and cut down your goal and you know get where you really need to be yeah you know it's this paradox i think where if you can cut the goal dramatically you know if you can spend two thousand dollars a month um which was something that i was getting i was able to do when i was starting out because i was house hacking right and i had a paid off car and you know and all this other stuff so i i'm spending very little on my lifestyle and now i'm financially free in some very lean sense well now you can begin piling assets on top of that and then things begin to expand right you have the option to work or not work or do all these other different types of things but you can also pile assets on top of your position and then if you want to spend three thousand four thousand five thousand ten thousand dollars a month you just wait until your asset base grows large enough to be able to do that but if you can if you can make the sacrifice now or reframe the game the rules of the game by house hacking or whatever it is to lower your expenses achieve financial freedom realize those benefits and then pile on the assets from there you might be able to get some huge benefits at the cost you can't have everything you can't spend twenty seven eight thousand dollars a month and get to financial freedom in 15 years and have it be totally uh passive in rebecca's situation but you can reframe the goal make make a huge amount of progress in one year dramatically jump start your savings rate have introduced a lot of flexibility and then begin piling assets on top of that that give you more and more optionality each passing year that's an achievable goal and i think that folks kind of struggle to see that if they can make those changes that are unusual like the house hack in the short run and then use that to leverage a lot of wealth later on you can have essentially all of the things that the huge amount of passive income and the life flexibility and not have to work down the line you just can't have it all up front so you got to prioritize yes oh i could not have said that better myself so i'm not even going to try and now let's make our attorney happy by saying the contents of this podcast are informational in nature and are not legal or tax advice neither scott nor i nor bigger pockets is engaged in the provision of legal tax or any other advice you should seek your own advice from professional advisors including lawyers and accountants regarding the legal tax and financial implications of any financial decision you contemplate also let's bring in rebecca rebecca and her boyfriend make more money than they spend even after contributing to retirement accounts and brokerage accounts so that's good right they also have a big challenge and i quote we spend a ridiculous amount on unbudgeted things as of right now spending is trending downwards this year but last year we spent almost forty thousand dollars on grocery amazon eating out amazon travel amazon pet care did i say amazon so rebecca i think i see an area to work on even before we start talking but welcome to the bigger pockets money podcast i'm very excited to talk to you today good thank you so much for having me okay first off yes amazon everybody should cancel their amazon prime account because it is way too easy to click buy they i mean they set it up on purpose to make it so easy to buy so you would continue to buy however it's so easy i don't have to go out it's so easy to just buy so it's hard to cancel that i understand where you're coming from i don't want to see how much i spend on amazon so i just don't look at it i try not to what a great plan no it's a terrible plan because i have no idea how much i spend on amazon so i am going to give myself a research opportunity which is going to make my heart break and look and see how much i am spending on my amazon purchases i'm going to ask people in our facebook group which you can join at facebook.com groups bpmoney to ask i'm going to challenge them to look and see how much they spend in their amazon accounts as well and i'm an amazon shareholder so i don't want anybody to cancel their account but also i care about people more than the bottom line so if you're spending a lot on amazon a really great way to stop is to cancel your prime account because there's this thing in your head you're like oh it's free shipping i can just click buy and but if i have to pay for shipping i'm gonna say maybe i don't need it that much so i don't know maybe other people have that same barrier maybe they don't but maybe i'm just cheap but i don't want to pay for shipping and amazon prime makes it super easy so i'm going to go i will let everybody know when this show airs i will let you know how much i am spending on my amazon prime i now have a little bit of heart palpitations saying that because i've got to go look that up okay this is not about me this is about you let's start over here rebecca welcome to the bigger pockets money podcast how are you today i'm doing so good so good uh let's jump into your finances not mine and let's look at your income and where it's going okay um so i make about a hundred thousand dollars a year as a salary w-2 income from my job i work in local government um my income i also have a second job as a contract technical writer and that income varies significantly between thirty five thousand dollars a year and a hundred thousand dollars a year um now something that i may have a question later on is i don't budget for that income so everything comes from all my expenses are covered by my first uh w-2 salary job what do you do with that income the contract income well uh with my local government job i have a 457 plan that i'm able to max out with this second job i have a 401k and i also maxed that out i actually just maxed it out on friday was our final payday for yay um so so up until this point those paychecks have been i i want to say relatively small but going forward they'll be bigger and usually um i take about 75 of that and stick it into our brokerage account um and then i'll use the rest for unbudgeted i guess sinking funds like we need a bathroom remodel um i need new sliding doors on the back porch stuff like that that i just don't want to finance then i'll i'll just have the cash laying around magically after working your second job yeah exactly how money appears i love it awesome any other sources of income um yes my boyfriend does have a uh also a job with local government and that brings in about 30 000 a year awesome so so what's coming in after tax um after tax let's see um and after my 457 plan i bring home about four thousand four hundred and thirty dollars a month and then he brings in about 1880 a month so total about 63 10. awesome plus about um let's call it 40 grand in after-tax income from your second job yeah we can call it that and which varies considerably yeah we discussed awesome um and where does that money go what are you spending it on besides amazon right well uh budgeted things go to car insurance that's about 120 a month um we do have a windham timeshare i got roped into about 10 years ago and it's about 50 a month nice um mortgage currently is 1400 a month um i i suspect that will go down a little bit next year because as i mentioned before my homeowners insurance went up it doubled so not only did i have to pay for what's coming up but i had to make up for that shortage so i would guess it'll go down a couple hundred bucks next year but not significant um utilities which i would include water trash electric internet and then things like netflix hulu and amazon are about 475 dollars a month cell phones 125 dollars a month and then what i call luxury items which are we have a house cleaner that comes twice a week lawn care and a pool guy and that's about 325 dollars a month and then we have the big expense of groceries slash eating out slash gas and then what we like to call fun money and that's 1800 a month and those are i guess our lifestyle expenses and then i have my monthly investments that come out after tax which is 500 in an ira for both of us um so a thousand dollars a month and then a brokerage 500 a month and then i also budgeted a hundred dollars a month for crypto sometimes i do it sometimes i don't if i don't it goes into the brokerage so awesome so if i'm doing the math here we've got 6 300 in income between you and your boyfriend each month uh and 4 300 going out every month on average obviously with big fluctuations on in the variable expenses being a major part of that and that leaves you with 2 000 surplus which generally gets invested in a combination of brokerages ira et cetera not to mention that pre-tax you're also contributing to your 457 plan is that a good synopsis of the situation yes awesome and then on top of that we've got an unknown factor about you know the tens of thousands of dollars you're bringing in after tax from your second job correct so we have a really strong cash generation situation here if we just if we factor out all those investments we've got two thousand dollars a month coming in steady state after tax and 457 contribution um so that's twenty four thousand dollars a year and we've also got um about thirty to forty thousand and calling it forty thousand in additional cash coming in from your second job so that's a 64 000 65 000 per year that we've got to play with in order to build wealth yes that sounds great okay so i'm seeing that that she's got all this income i think that her expenses or her spending has some leaking in it if you're not seeing this giant surplus every month where's it going and there is 500 uh what is this 500 to the iras and 500 to the brokerage so that's 1500 and then in an additional 100 but i think that there's more money available that is just kind of yes not being accounted for so so um with that second job that i have i as i mentioned it does have a 401k um so up until about this point um about 50 of my money has been going into that as well and now i mean that you also made a great point now up until this point i've been having about 2 400 a month extra coming in but i haven't been saving it i really am not sure where it's going okay so there's the first research opportunity is to find out where that's going and i what's got well it's going to the the iras and the brokerage accounts no this is on top of that that's on top of that so what i find i remember that a word that i said in the beginning of the show in my little diatribe or my very lengthy diatribe um i really don't want to see how much i spend on amazon every month every year um but i think that you would be surprised at how much is still going there even when you're conscious of it and i started tracking my spending and you can follow along at biggerpockets.com mindy's budget and you can watch me really not be doing it right because everything is a guess i mean all of this even with all of my years of financial experience it's still just to guess where my money's going and what i have found over the month of may i actually wasn't writing down all of my expenses so now at the end of may i have to go back and enter them into the spreadsheet i have no idea how much i was spending but when i wasn't tracking it every single time i made a purchase i didn't even have a vague running total in my head i was swiping my card a whole lot more in the month of may than in previous months when i was far more conscious of having to type in the amount that i'm spending so on the one hand it's super tedious to sit there and track your expenses so granularly like i do but on the other hand it's so eye-opening when you do it halfway through the month you're like i'm already in the red in nine of my ten categories what is going on with me i know i want to spend less i have to make a conscious decision to spend less but it's a work in progress too some of them i just i'm budgeted too low and i need to realize that i'm spending more money if you do enjoy going out to eat then don't cut that you have the money to do that but every dollar you spend going out to eat is a dollar that you can't put into your house or save for a down payment on a new house or do you know spend in a different way you can only spend a dollar once and i don't want anybody to send me an email about how you can borrow and spend it multiple times and send that to scott he loves it it's got a bigger sucker you just have to be conscious of that and i think a lot of people when you're not tracking every penny it's very easy for lots of those pennies to just leave your your wallet well well let's keep let's keep rolling for a second here and go through net worth and then your goals and that will that will lead us to what we can do about this the situation it could be that your spending is where we need to focus it could be that there's other areas we need to focus um more on my guess is spending and getting control of your dollars and having a very clear understanding of what's coming in where is it going how's it how's it flowing through your system is gonna be the 80 20 um at least in the short term here but let's let's let's kind of press on and make sure that's the case before going there where is your um where's your net worth and where's that money go all right um so let's see if i've got a little list here we got about uh 20 i guess i'll just give you number figures we got about 24 500 and a joint brokerage account um 7 000 at a regular savings and that's just for i guess i'm not sure what that's for but then i have 10 000 in a high yield savings account as a designated emergency fund um my boyfriend has an inherited ira at 135 000 um and he's also got the frs investment plan which is a defined contribution plan and it's locked at three percent um there's about 5 500 in there my 401k has 56 000 about 3 000 in crypto um his ira has 13 000 and that's a roth my roth has sixteen thousand my traditional has fifteen hundred and then my four five seven plan has thirty four thousand five hundred so that's about three hundred six thousand dollars and then um so of mine at 306 000 i'm counting that about 40 000 of that is not in the in an ira is that right or similar type of vehicle um yes you're talking like savings and brokerage type yes yes yeah you're you're correct okay great so we have 300 000 in net worth in these investment accounts 40 of which is either cash or after tax brokerage and 260 of which is in various retirement accounts yes and you consider your finances to be joint with your boyfriend um and then i have home equity it's about 174 000. so i guess that brings us to 480. okay and what what are your goals what can we help you with today i would like to just a short quick short term goal would be to save 80 000 this year um i think we're right around 37 000 so far but my ultimate goal is to have some passive income of about seven thousand two hundred dollars a month so i guess my one of my questions is um can i do this without real estate do i need to start thinking about that um but mostly just i need a real fresh set of eyes on this you know why aren't you doing this it looks like you you'd do well to do a or b awesome so you want 7 200 per month in passive income as soon as possible and you want to save eighty thousand dollars this year yes that's that's what we got can i ask how old you are uh 39 and your boyfriend's on the same age uh he's a little younger 35. okay awesome um well great i think i think we can we can certainly work with with that and and begin going there let me um with the passive income what's the goal what would you do if you had the 7200 um would not work anymore that would be our that would be our phi income okay so we want you you want to retire essentially yeah as soon as possible from from work love it let's let's think through this the first i want to make an observation before you can get to spending um and you you may have heard me say this before but your wealth of your 480 thousand dollars in wealth 40 000 of that is accessible and relevant to your goal here of achieving financial freedom the other and forty thousand dollars is in retirement accounts and home equity which is not going to help you generate that passive income until you reach retirement age and from the way you've raised your your your goals i can infer that you're not looking to wait until retirement age to retire you want to retire much earlier than that correct yes so so i would i would noodle on that and say let's start with this what does a portfolio that generates 7 200 per month and passive income look like at the end of the day what what what does that mean to you i guess i'm not sure just something that i don't really have to work for it just um just kind of shows up that makes sense well that's the definition of passive income right um i want to look at your second job how much time does it take you to generate that 35 to 100 000 a year um it depends on the contract so right now i'm doing a contract i make a hundred dollars an hour but i am capped at 20 uh 20 hours a week and i don't i don't mind i love the work um a lot of people are like how can you work you know 60 70 hours a week and i'm like well i work my government job and then i come home and the second job is kind of what i do to unwind so that that works out well for me could you continue to do that to generate a portion of this income it's it's a lot easier to work when you like what you're doing um yes yeah i have talked about that i think i think i would actually prefer to do that i know i said i would want passive but this i mean i would realistically if i know myself i would keep doing it okay so if you are in a position where you can you're generating let's see 100 hours 100 an hour on this contract can you take multiple contracts at a time no because it is a w-2 position and they kind of control what i do now i could you know go out into like what they call the contractor pool and take on multiple projects but i'm not sure i would really have fun doing that but okay i could try i just wanna i wanna stay focused on the goal here because um i think i think you're you've created a number there and don't really have a good framework for how to achieve that and so uh because of that i think we have an opportunity with your permission to reframe that goal to something that is more tangible um and that can be achieved in a three to five year period that gives you more optionality i don't i don't know you know if you're going to go by the four percent rule and you want to achieve 86 000 in passive income per year then that says you need to build a net worth of 2.1 million dollars right that is a far way off even saving 80 000 per per year but we can get to something that achieves the the result of life flexibility and the ability for you to leave your job and have optionality far earlier than that if we back into a reframing of that goal right and we think about how to how to access more of your net worth in in the near term than what you've than what would currently be allowed with it all being trapped in retirement accounts and home equity here so i think first of all if we go back to spending um why do you why do you need 7 200 a month how did you come up with that number um you know i kind of just uh took what we spend now on um i guess a a normal month um including all of my my extras and it's between six and nine thousand and i was like okay i don't need to be buying you know all this ridiculous stuff so i came i just settled on 7200 as like a happy medium in there there's no real science behind that number okay you you're you don't you didn't listen to car payments you don't you have paid off cars uh yeah we have one vehicle um it's a 2015 mazda it's paid off um and then for with my job in local government i actually have they provide me with a vehicle and gas um so kind of lucky there okay so so and we we will i think spend a large amount of time tackling the variable expenses but let's go back to housing which for you is fourteen hundred dollars a month may vary when you get your payment reset from the insurance thing and we've got the utilities bill so that's 1800 a month you know what if we if we were to able if we were able to drastically eliminate those for example now you don't need 7 200 anymore and if you're able to cut out a bunch of that variable expenses on from spending from amazon and get that down i mean you could conceivably get your spending down to three thousand four thousand dollars a month if we were able to pull those pull those numbers down is that right yeah seem seems to be that way okay so now you don't need 7200 in income now you need 4 000 in income uh per month or 5 000. maybe maybe you need 2 000 and in passive income and you're like okay i cannot retire but i can leave the main job and just do the side hustle that and that will more than cover my expenses right so this is i think the power of reframing the goals around what i'm hearing is is flexibility you want the option to leave your job at an early time period um and you want passive income and flexibility to enable that to happen as rapidly as possible and give yourself lots of options downstream is that right yes that sounds great let's start with what i call financial runway right now you have 17 000 in cash is that right yes so what what happens if you leave your job right now how fast how long do you run out of before you run out of cash it depends if i lost both jobs then about three months yeah i i think that that is that's where i would start i think you you'd feel a lot better if you had closer to six to 12 months in an emergency reserve you earn more money per hour at your side hustle than your main job that's exciting something's there and i would and i would i think that a runway of building of putting that cash towards you know let's call it 30 40 000 in that emergency reserve is gonna be really powerful for you because you have the side hustle opportunity and because it sounds like you're doing a lot of home improvement projects as well with that so i don't think you have enough cash on hand given the opportunities that i'm beginning to smell in your circumstance what do you think about that um i i i agree with that 100 i i would feel definitely the 10 000 in the emergency fund it doesn't make me feel warm and fuzzy i would feel better just with the emergency fund closer to 15 or 20 and then maybe having you know an additional 15 20 and something else yeah i would think about how big does that emergency plan have to be for me to feel comfortable leaving my full-time job for six months to a year to pursue this side hustle you don't actually have to do it but i think i think if you build your position and concentrate the next forty thousand dollars in cash you're generating primarily going towards that goal then things will light up for you in a way that they wouldn't for somebody i would not be given the same the same question the same thought process guidance to somebody who did not have a big side hustle that was so lucrative um but i think in your situation it's gonna be really powerful okay so no that's a great great plan okay so second let's talk about um uh your home eq and by the way that will come at the expense of continuing to stuff dollars into these iras you're doing this like you're doing you're doing this approach where you put a little bit in this one a little bit in this one a little bit in this one a little bit in this one and then you have very little cash and everything else going is going into the mortgage payment and these these other expenses instead i think you need to prioritize what you think the best opportunity is and so far we have lots of discussion left but so far it sounds like we're thinking maybe stuff it into the the savings account or the emergency reserve and be willing to use that for some sort of opportunity downstream so that means you're gonna have to not contribute to all these other other areas and prioritize that one until you get to your your first goal um but i think that that will open up flexibility and options for you so i would consider that second thing let's talk about home equity where do you live and how much do you like your house uh i live in um south central florida i like the house it's small it's a little small for us i don't know i i'm open to moving that's for sure so you have 174 grand in home equity right now and that's costing you 1400 a month um to maintain i i would consider i would put put on um in there the house hack right is there a duplex is there a place that you could live with um we just interviewed um a couple from where where were andrew and haley from mindy uh the east coast well they're from florida as well um and they're and they're on i think they're on like the the west coast of florida if that makes sense so okay they're in a town where homes are 300 000 ish and they're able to buy properties with excess units and airbnb them and that is more than covering all of their housing costs while they live in a fairly nice unit and rent out the other the other units either and i think you could either consider that long term or short term that's been that's super powerful and if you want to get lots of flexibility very quickly you can take that 175 000 in home equity cash out a ton of that use that to beef up your emergency reserve for example buy one of these properties maybe even a second rental property within six months or a year following that and now you've got a potential way to live for much cheaper on average you're gonna have to do some work managing the airbnb um or the tenants on the side but that might be a way to jump start your rental property portfolio if you're interested in doing that you may also find that you're able to live a very comparable living arrangement um depending on on how you want to do it you obviously would you know spend generate less income or have less of an advantage if you buy a really nice place and live in the nice unit versus if you buy a place that has more income potential and live in the garage depending on your preference there but but that would be i would i would put that bug in your ear and think about hey that's a big lever in your situation because right now we don't have much to play with in the form of cash or other iras i can't do much with those but we can do something with the home equity that's a move a strategic move you could make in the next six to 12 months to redeploy what you do have um yeah it's definitely something to think about i am i've been in the um i've been in the landlord business before i'm not opposed to getting back into it um i i guess i hadn't hadn't really thought about it too much uh just because of where the housing market is right now and i don't but that's that's pretty much the only reason i just you're already exposed to the housing market in a big way with your current property right so the disadvantage to what i just said is you're going to trade your current interest rate for a higher one right so it's up to you to kind of determine is that trade-off worth it because of the income potential i can generate from these properties but you'll have the same amount of wealth in the housing market before and after the transaction if you buy a property that's around the same value as your current home for example okay yeah that makes sense so the risk profile is the same except for the higher interest rate um which you gotta which you'll have to grapple with that's the challenge for everyone and i have a i want to make a comment about passive income there is this idea that passive income means absolutely no work on your part whatsoever but if you had nothing to do all day you have two jobs if you had nothing to do all day you would be bored sitting here for 25 minutes talking to you i already know this i just got back from a weekend retreat called camp mustache and all of those people are on their path to financial independence or have gotten to financial independence and none of them sit around doing nothing all day long that's just not that isn't what they want to do if you enjoy this technical writing at a hundred dollars an hour that just seems kind of like a no-brainer no it's not passive income but it's also you're limited to 20 hours a week that's a couple of really long days and then you've got the whole rest of the week to just lay on the beach and do nothing yeah that would be exactly true or would you find other ways to fill your day you know having a an airbnb where you are the the turnover that is hands down the hardest part of an airbnb is finding somebody to consistently clean to your standards people who rent airbnbs really expect absolutely pristine and it can be difficult to leave that up to somebody else especially if you're a control freak like some of us on this call so but it also doesn't take a ton of time you're not doing it every single day even if you had a property that didn't have a minimum you would still have people who come and stay for three or four nights and then maybe you would turn it over once or twice a week that's something for you to do you're going to be working and generating like filling your days with things it's it's i think it's a little and i'm not saying this to you rebecca i'm saying this to anybody listening i think it's a little bit disingenuous to think that once you reach financial independence you are only going to have passive income you're never going to do anything else and you you don't get to this place and then just be like i'm just going to do nothing for the rest that's a good point your drive your body your mentality your makeup is not going to allow you to just sit around and do nothing so if you like doing this technical writing and it pays super well pick and choose the jobs that you want to do it sounds like a hundred dollars an hour is the going rate that you make and they're capped at twenty dollars for all contracts or just the one that you're currently working on the one i'm currently working on is uh is a hundred dollars an hour because it's california money um okay but it is capped at 20 hours a week um if i were to say leave this company and go out on my own i could probably charge in general 50 to 75 an hour outside of california okay so step number one is focus on california jobs yes step number two is uh double up on those california jobs go out on your own and get those california jobs i i like what scott did he took your your desired amount and your monthly and reframed it and cut it in half for you in like 45 seconds so that's good scott thanks that's pretty awesome yeah well yeah well i think i think i think that if you say great i can move to a location that i want to move to and buy the same amount of house and get income for it um that you might have a lifestyle a similar lifestyle or even an improvement depending on how you do it and now you've knocked that down by 1400 bucks if you could live for free for example with an airbnb right and that just dramatically accelerates um this position so i i think that's where that's where you can say what do i what do i really want here you know i don't think you want 7200 in income you want optionality to leave your job as soon as possible and then you want as much passive income as you can possibly generate over time uh with that but you but you need but there's a there's a minimum goal here that can be achieved in three to five years with creativity and a little bit of luck um versus what you just what you say at the beginning of this is if you save 80 000 a year and you want 7 200 and passive income and you want to do that through passively managed real estate long term rentals or stocks you're looking at building 2 million dollars in wealth which is going to take you 10 15 years that's that's really long to get to what you want what you really want i think and i think there's other ways to to hack around that that's that are faster so that's that's how i'd frame that and the less you spend the less passive income you generate so every dollar one way to think about it is if you go the passive stock bond route every dollar you spend per year you got to generate 25 in wealth in order to have the passive income to cover that's really hard so every dollar you cut reduces that every thousand dollars you cut per year in spending every thousand dollars per month you cut in spending is twelve thousand dollars per year times 25 is what's 12 times 25. 300 grand in wealth that you need less so if you can cut a thousand dollars a month out of your your budget you cut you you reduce your journey to financial independence by three hundred thousand dollars in total wealth so i'm going to tag on scott's rant before we change topics and challenge you to use my spending tracker emulate my spending tracker which i got from waffles on wednesday so if you google waffles on wednesday mobile spending tracker uh mr wow detailed how to do it um if you're a technical writer you probably can figure that out yourself uh but it's it's very easy you put it on your phone and it's really hard to get in the habit of tracking every time you spend but it will soon become a habit it's it's so beneficial and almost instantly you will discover you know oh i am spending on amazon every single day and i am going to the grocery store every single day and that was my big one and you know whatever it is you're doing and challenge yourself if you're going out to eat six nights a week see if you can do it at five nights a week don't go from six to zero because you're gonna be like wow my life sucks go from six to five and then if that's okay go from five to four and if that's okay then go from four to three oh you know what four is really where i wanna be you're making good money but know that every time you go out to dinner is more expensive than cooking at home and you know there's just there's all these trade-offs so it's not that you're spending too much money you're generating a lot of income you have this money to spend you're not going into debt with the spending that you're having but you could live far more frugally and rack up your savings faster by making different choices and having the information in front of you helps you make those choices a lot easier and you know you don't have to give up everything scott still goes out for beers and wings i i think that's right and i think i think that's where we've now talked about i think the biggest levers in getting you toward flexibility which is one emergency reserve and an emergency reserve i would even relabel it financial runway and and i think you need six months plus in your situation because i think that there's gonna be lots of opportunities that are gonna light up in front of you when you're sitting in a really strong flexible financial position that you're going to take advantage of the second is home equity and getting the the fixed expenses down as low as possible you've done a great job by having one car with a pay that's paid off you don't have that in your life you just have the car insurance payment and then gas for that and then the next is the mortgage payment your cell phones i assume you don't want to cut those plans although you could try the mint mobile um uh uh plan that i think is a lot of people are really powerful now we get to the luxury uh what you call the luxury spending which includes all of those those other items and so great now we can attack some of those and think through how we want to handle that and so let's go through them line by line before we get to amazon i want to talk about house cleaning lawn care and pool guy um which you said is 325 a month yes for all three awesome i like those and i'd keep them in your spending plan right now but i'd but when we i would get into a point where i can track my total expenses and i know how much is going to those areas the reason i'd keep those right now is because your time is worth a hundred dollars an hour 50 to 100 an hour so you can hire out i imagine those services at a lower rate than you currently work for and you work a full-time job and then some so your time is valuable and i don't think that it makes sense to uh take the take those into your into your your ballpark right now if you want flexibility and you want to leave your job for example then the value of your time is going to come cratering down to a large degree and that would be a time to cut those expenses at that point if you said you know what i can take care of those things in exchange for not having to work anymore but you can begin to kind of say okay that's a reasonable trade-off for now it won't be it may not be later if i wanted to leave my job in three years for example on a modest amount of passive income in a house hack or whatever um so that would be what one thing there so that leaves us with fifteen hundred dollars in other variable expenses and i think this is where um mindy's system can become really powerful for you um i have a couple of other things i want to talk about you said your homeowner's insurance just doubled i want to tell a quick little story about how i had really low coverage for my automotive and insurance and really low coverage for my homeowners insurance and i decided that now is the time for me to get an umbrella insurance policy so i a friend had just gotten one she really did a lot of research she she landed on liberty mutual i called them up and i talked to them and they said oh you know what we can do for you we can give you more automotive coverage and more homeowners insurance coverage and an umbrella policy and your annual premium is going to be less than what you were paying for your lower amount of auto and your lower amount of homeowners insurance and i was like what this has to be a catch she said nope and i did increase my deductible on my homeowner's insurance because i don't really need that i've never used homeowners insurance in my life but i'm always going to have it because if my house burns down i want somebody to come in and rebuild it for me for free i'm doing little air quotes for those listening um but i think that insurance is valuable and i was shocked at how much lower i'm paying now versus before i had the umbrella policy so i challenge you to get your insurance requoted and you're in a place where you have to have probably some certain kinds of insurance that other people don't have i don't have to have hurricane insurance over here in colorado where we have a historically low chance of hurricanes every year um but i do have oh i don't have flood insurance either but in another another house i had flood insurance because i lived on a lake and it was um much more rainy there and there was a real possibility that i would flood so the ocean has to rise like 5 280 feet for it to be an issue um yeah and then we've got way bigger problems than just you know having flood insurance i i think that's right i think with with the insurance um you know there's there may be an opportunity to combine those with the car insurance and the home insurance um and and we are not lawyers this is for entertainment purposes only of course um with with all this but you know what one thought thing to noodle on from an insurance perspective is the concept of do you have assets to protect and your assets are almost entirely in home equity homeowners insurance it can help with that and then retirement accounts you have no other assets outside of that besides the car and forty thousand dollars in in brokerage accounts and checking and savings so i'm not clear on the advantages for you of a of a big umbrella call policy for example and other forms of asset protection because um you may find that when you self-educate on this topic a little bit more that the the the retirement account contributions and such are going to be generally more protected um from lawsuits and those types of things than other forms of assets so when you have a huge real estate portfolio that's in your name or an llc that you own um or you have other things and you you know you get angry at somebody at the bar and punch them in the face that you can get those can go after you if you don't have the the policies in place right but uh if you uh this obviously this has not happened i'm making this up but but uh uh uh that would be that would be a good case for an umbrella policy at that point to help cover some of those those higher level things but maybe not um and maybe not if you punch him in the face i don't know if they could protect against you know crimes uh that you commit but but i think i think that you know like that's that's where you'd want to have the umbrella policy i think in place and that's the thing that can come later uh maybe when you approach 500 to a million in net worth outside of the those at those areas that you have um would be a good yeah and i wasn't suggesting that she'd get an insurance uh umbrella insurance policy i was just highlighting that because when i had my insurance requoted i went from two policies auto and home to three policies my auto and home coverage went up and yet my out-of-pocket premiums for all three policies is currently less than my out-of-pocket premiums for the two policies that i had before for lesser coverage so it was just shocking i mean and they didn't raise my insurance rates significantly over time it was you know every year it's like five dollars well why am i going to go re-quote my insurance for five dollars now it's been a few years and it's not five dollars it's i think my insurance was 600 for car and now it's like 500. so i'm not saving an enormous amount but i'm saving enough that it makes it worth my while to call up and you know 15 minutes can save you 15 or more on car insurance it's actually not even where i went that's where i was but with all of this other you know with all of this other coverage i'm still paying less now so definitely re-quote your insurance if you have not recorded your insurance in a year it's time to re-quote every year they have no loyalty to you so you have no loyalty to them uh investment comment you said that your boyfriend has an inherited ira yes there is are you familiar with the rules around inherited iras there's a timeline for liquidation yes i believe the last we check it was 10 years yeah um and he has he since 2020 so only two years now okay uh i guess i was just gonna say i think based on her income at time of death there is no uh required minimum distribution from my understanding at this point okay but i think that you have a cpa or a tax professional that helps you with your taxes or are you a diy tax partner um this year was the first year i actually paid someone to do it um so so but we're not married so that was just for me so on his end he's got a tax guy that i think his dad uses um that that he inherited as that as well so um yeah hopefully we haven't had haven't had um any withdrawals from that account this year but last year it was minimal and it didn't really make a make a dent so so i just would give him a research opportunity to look into the rules surrounding that because you don't want to get to year 10 and say oh now i have to withdraw all of these funds and i have this huge taxable event that i wasn't planning on that i now have to deal with so just yes you have eight years to look into this start looking into it now and making plans for it maybe keeping it in there is the best choice maybe rolling it over is a great idea i don't have an inherited ira so i don't have a lot of information about it i just know that there is a timeline for you so i'm going to send you down that rabbit hole i think our our unofficial plan is to withdraw the majority of it and and do something with it be it put it in the brokerage or anything while his income is still low and before we um before we get married let's talk about your incidentals if we we said they're 1800 a month if you pull out the 300 bucks for house cleaning lawn care and pool guy which i think are perfectly reasonable given your income situation um that's 1500 for incidentals per month that is super reasonable uh at the end of the day that i mean that like you say it's if you say it's 750 for groceries um and then you have 750 um between the two of you for life's fun stuff and guilt-free spending what is that that's 375 bucks per person per month that would be a very reasonable amount of money um to spend in perhaps even on the low end from uh hey i'm gonna i get to do that guilt-free and i would i would encourage you to make that to make that guilt free um so i think i think you have an opportunity to control that grocery budget so you see you have you're making sure that that's going where you want it to go but i would i would at the end of the day with with your with what i hear here have that those that 350 400 bucks per month be guilt-free spending just make sure that it doesn't go beyond 300 400 per month which is what i'm hearing uh might have been happening for the last year or two so i think that if you can that's the hard part so so great if you do you need maybe maybe it would be helpful to provide a toolkit that could help you know some options that could help make sure that that money does not advance beyond four hundred dollars a month per person for act for example so one simple option would be the money date and the budget the budgeting process and saying look here we're gonna we're gonna have all these other expenses and then here's your fund money account and here's my fund money account groceries and household goods are all included in this particular in in this budget here but then like we're going to track and all of your spending um boyfriend i don't think we've said his name yet um is going to be on on this credit card right and 400 bucks a month and i'm going to get the same on this credit card um this the separate one and that way every one of those expenses is tracked by that individual each month in preparation for the money date and you can see where those are going in crystal clear clarity right so you know you can even put a limit on those credit cards that is 500 or 750 or whatever and then use your debit card or whatever for any bigger purchases if you want to control that that would be one tool kit for this what do you think mindy i think that's awesome in fact i just made a note oh put a new card on the amazon account so that i can track my amazon spending easily because i do think that i am using it mainly for necessities that's what my wife and i do i have my credit card um that i put all of my purchases on and she has her credit card which she puts all of her purchases on and we only use the debit card for certain expenses where it's just really hard to use the credit card or doesn't make sense um like right now we're renting we wouldn't pay you know three percent of the rent and transaction fees on the credit card um but that way at the end of the month it's super easy for me to track all the expenses because it just says scott's credit card in our budgeting software and so i know that i've got to put in all those those transactions and she's got to put in all the ones that say virginia's credit card um and so that's really easy at the end of the month and we can tell where the money's going um by the way i'm always the culprit on the one that's spending more frivolously than my wife um every month without exception so um yeah wow what a surprise yeah yeah yeah my boyfriend's like let's just cook in and i'm like let's go out we haven't been out in like three days let's just go it's fine we have money so yeah and that's great put it on your credit card uh as like hey i wanted to go out it's to be my credit card for this one and that's coming out of my fun money budget um boom we're good to go there so okay and then and then you you you know at the end of the month okay those are all my calls that's my bad okay but that would be a tool kit that i i we found really powerful because at the end of the month you just look at it and there's no guilt you're not like shaming the other person you're you're just like facing the reality here's what was spent on scott's credit card and here's how much was spent on virginia's uh with that and we want to make any tweaks now we're good we're going to keep going with that or yeah we want to kind of we want to get this one this this expense a little bit more under control next month let's make a plan yeah i like that and we don't we don't really have any any guilt i wouldn't use that word but it is you know it needs to get under control because at the end of the day i made a goal for savings um we're on track to meet the goals so it it feels like anything outside of that is is okay um and that's it that's just it's it's just okay it's not it's not the right thing to do we should be saving more so i like that idea of splitting up the fun money so without reducing what you said for which is eighteen hundred dollars per month in these miscellaneous expenses um your total spending comes to 4 300 per month right and if if you were to come out of this in a year from now be house hacking with an airbnb or a rental property with that um your expenses now dropped from uh for 4 300 per month to 2 900 per month and you're you're good to go you can cover that with your second job right now within a year you won't be building a lot of wealth on top of that at that point so you may want to continue that process maybe you know buy several properties over three years and set up some systems maybe think about um stockpiling 80 or 100 000 a year 80 000 this year next year and then maybe 100 or 120 after a year or two if you make some of these moves grow the income in some of these categories and that would further cement your position but i think you can have your goal of flexibility way faster than trying to just go work towards this kind of amorphous seventy two hundred dollars per month in passive income goal okay all right i do have another um i guess small wrench it's not a huge it's not a big deal um i do have a pension with this local government job and it has the problem is it's an eight year vesting period um i'm about three and a half years in um and it's already one of the longest jobs i've ever held um but if i can stay until if i stay the full eight years and then even at that point wait until retirement age that will be an extra thousand dollars a month so if i leave before the eight year that's kind of like walking away from what like three hundred thousand dollars right is that right so so the the thousand dollars a month does that come into play eight year four and a half years from now or at retirement age that would be at retirement age interesting i i have to think about how to value that asset at retirement age it would be worth three hundred thousand dollars ish um if you want if you want to call it that depending on how how likely it is that the the company or sorry the government um is likely to pay out that pension which is probably fairly likely in florida yes i would say i would say fairly likely so you know but that's discounted by 20 years by a discount rate because you're not getting you're not going to access those funds until 20 years from now then you're going to access a 300 000 annuity um at that point from the pension so it's worth considerably less than 300 000 at this point let's call it let's value it at 75 000 for purpose of this discussion i'm probably off there you should go and value that by using a discount rate you think it's appropriate but that's 20 to 25 years from now is it 65 or 59 and a half gosh i think it's 65. okay so you're 25 years out it's probably worth less than 75 000 in present value right now okay so that would be a way to think about that from a valuation perspective when you're making decisions so yes okay i'm going to stay four and a half years in order to make 75 000 um an additional value right now or can i you know i could easily make more than that potentially in this avenue but that would be a way to think about it um over the next couple of years okay okay but yeah i missed how long you've been at this job uh three and a half years three and a half and it has to be a total of eight yes okay and do you like your current job i do i do like it um it's it's a higher level position i'm not a huge fan of the human resource aspects of being a director um just i've never been a never been the best or most i guess interested supervisor so that part of the job is not my favorite i would rather be an individual contributor like i am with the technical writing but right now it's just i mean i like it enough that everything makes it worth it right now okay then i wouldn't make a rash decision right now because it's still three hundred thousand dollars down the road um if you hated your job i would say four and a half years is a lot of time to spend at a job that you hate for three hundred thousand dollars in 20 years um by the way i did i pulled out a present value calculator um because this is fun and the present the present value of a 300 000 pile of cash in 25 years 2047 would be at a 5 discount rate is 88 000 so if you think you're pretty close if you think you can earn 10 return it's going to go down to 27 000 so if you're using the 10 discount rate it's like 25 grand with that and by the way you're not getting a pile of cash for 300 grand in 25 years you're getting a set of future cash flows so it's even less than that um from a valuation perspective so all those things i think will be helpful perspective um for you in making that decision i would i would not consider this is this is less than five percent this is less than ten percent of your net worth right now mostly it's 10 to 20 of your net worth depending on what discount rate you want to use but probably closer to 10 or less in that case the current life satisfaction and current job enjoyment is going to factor heavily into my own decision if i was in your shoes if i like my job why would i leave it's hard to find a job that you like and there's no guarantee that when you change jobs you're going to find one that you like better if i hated my job i would start looking this wouldn't be enough to keep me there based on what scott is saying it's yeah it's kind of he's not saying it's worthless yeah he's saying it's not worth much well i'm saying right there's a calculable value on this income stream and at the high end assuming a ver assuming you are a terrible investor and get five percent returns on your money for the rest of your life it's worth 90 grand but it's worth less than that because it's a set of incomes it's it's incomes income from the future based on that not a pile of cash so it's it's not worth a lot relative to your financial position but it is a factor i would not stay in the job for four and a half more years in order to get to realize that benefit at the opportunity cost of really realizing seeing some things that you want to do and you're doing things you want to do in your life pursuing investments or other job opportunities in other locations this is not a powerful benefit um relative to your overall savings rate okay yeah i appreciate that i was i was thinking i was stuck on that you know what it would take to generate a thousand dollars in income today and based on based on that calculation i think that that's pretty much a non-factor for a decision-making going forward no i was think that's really great to be able to realize that a lot of people don't factor that in scott can you share a link to that uh that present value calculator we'll include those in our show notes sure i googled present value calculator very rapidly and then put it in there and became this is one of the first results in google so i will uh i will go ahead and link that in the show notes at biggerpockets.commoneyshow314 yeah i think that is important to have that the ability to realize oh this is a really great thing that i'm about to give up if i just work there for another month or this is nothing even if i work there for 10 more years so you know it's it's when the the decision is much tighter that it it makes it a lot more difficult to make but this one i like that you have realized very quickly too very like you're so easy to uh to let go of this this uh uh weight this this golden handcuffs thing that's not the right phrase no that's exactly what it is it is i've referred to it as that before as well no it's it's i think it's easy to let go because uh kind of over the years i've i've learned that the money's out there you can get it um it just i've changed this job that i've had for three and a half years that's the first time i remember doing it i when i walked in the door three and a half years ago i had no idea i didn't even have a background in it so it's just like but up until this point i was just kind of throwing all this money away i didn't know what to do with it so now that i'm on this track now now that i'm thinking about it in a different way you know 10 years ago if you would have said that i'd have been like that's too far in the future i'm not going to think about it but if you had said it a year ago even i would have been like i will never let that go but now here i am thinking it may maybe not be worth it if you're 62 and you have another year left to vest the thing obviously you have a like like okay we're gonna do that but but i think that that we can we can make a different decision or value it differently because of your circumstances and by the way i would discount it at a 10 rate of return um okay that's because i am perhaps a little arrogant and think i can i can do much better than five percent um return over the course of the next 25 years with my invested dollars um with that so that value then is 27 dollars twenty eight thousand so so now that that's not the maximum i would get that is just that is basically the minimum if i stayed vested now if i continued working there for another twenty years which i don't see happening um it could you know be quite a quite a big sum of money maybe four thousand dollars a month it just depends on if they take the average of your top five earning years i believe um and that's that's how they base their calculations but it you know the less you work the less lucrative it is so okay we did an episode i just want to remind people on episode 259 we spoke with grumpus maximus and it was called pensions 101 so this is something to listen to if you're considering taking a job that has a pension or if you're considering leaving a job that has a pension or if you just want to know more about pensions because i've never had a pension i didn't know anything about them i thought it was a very interesting show so that's episode 259 at wherever you get your podcasts i think this has been great from my perspective but how do you feel about this information it's a lot um it's interesting it's interesting i i knew you guys wanted to i knew you guys would pull out some things that i hadn't really thought about and i did i yeah it it's been really helpful so i'm glad this is not meant to be just here's all those problems solved yes yes we're done you have homework yeah you have homework you have things to look at but it can be really difficult to get outside of your own head when you're focused on this it's hard to see what else is around so having these other options you currently have seventy two hundred dollars in expenses therefore you need to generate seventy two hundred dollars in expenses to be able to quit your job and i love scott's way of thinking let's reframe that and yeah in 45 seconds you cut your monthly needs in half yes yeah and then you've got 2 000 of that already from your current job so now you're down to 20 hours a week working and we've got to figure out another way to a way to generate two well two thousand more dollars and then you can quit yeah then i'm good to go yeah another thing yeah right which i probably wouldn't you were right about that there's no way you could just sit around but another thing he pointed out was my lack of like accessible funds right now which i really need to think about that and i think i think i may try to redirect some of this into maybe a a one real estate deal or something into a real estate deal into after tax brokerage accounts um your boyfriend's inherited ira i'm assuming that because you're not married you don't file jointly taxes correct yeah yeah yeah so look up the mad scientist how to access retirement funds early i don't know if you've ever read that article before he talks about the roth conversion ladder in that article and the inherited ira isn't a roth so you convert it to a roth by paying taxes currently on your at your current income level so you want to look up and this is where a good tax planner will be able to give you great direction um they will look at your situation and say oh you have this much space between your income and your capital gains tax cap where you can convert and not pay any capital gains on this and then once it's sat in the roth ira for five years you can withdraw the principle not what's grown but the principle and everything that you've converted over is now principle so it is an interesting idea and if you've got i mean he's got eight years to pull out 135 000 he could roth convert it a little bit by little bit and reduce his taxable income uh reduce his tax burden on that while changing it to a roth when the market's low it's going to i can't guarantee past performance is not indicative of future gains but i think that the market will continue to bounce back and will go will return i mean if you look at the historic market returns it goes up into the right eventually so you want to buy low when you can that's fine thanks thank you very much yeah if you roth ira or if you roth convert it then it's growing he takes out the principle if he wants the the gains are still there and they continue to grow or you know go up and down whatever um but yeah just i think having a conversation with a tax planner having all of your numbers out there for them to see they can give you some really great advice that's even better than what scott and i are giving you because we're not tax planners we just know enough to give homework so that's another homework homework assignment is to connect with the tax planner and ask them for suggestions to maximize what you have both pre and post tax but more along the the post tax lines and see what they say what else can we help you with rebecca um no i think that's actually it awesome that's awesome i got i got a lot to think about well let's let's recap at the strategic level uh most of your net worth is in retirement accounts and home equity and that is not going to get the job done and giving you life optionality and financial freedom so when you as you acquire more cash that needs to go into accounts that can provide that freedom options would include after tax brokerage accounts your emergency reserve which i think is a great starting place because that will help you build financial runway which may create options for you and you may and you might consider buying real estate you can access your home equity is a major part of the equation and you should think through that as part of your journey here to to to cut costs and potentially think about redeploying that into a house hack or other investments that can bring you this this flexibility um you make a great income so you're really not at all unreasonable with your month-to-month spending even though i think that's what you thought was your big problem coming in although that's assuming that you keep it at the levels that you stated and um and have been true in the recent past it sounds like so we have some tactics and tips to to do that maybe consider the credit cards um for each of your spouses uh or for each of the partners here you and your boyfriend to make sure that you um are accountable for your own spending and can and can talk about it in a positive way once a month and then lastly mindy had some great tips for how to think about um uh dealing with the boyfriends and inherited ira and rolling that over bit by bit in order to play a really strong tax advantage game ideally parts of that being done before um if you guys are considering this before you get married and have to file jointly so lots of good i think uh hopefully helpful tactics here and hopefully some some helpful perspective on reframing the strategy and the overall goals a lot of homework for you yes definitely awesome well rebecca thank you so much for your time today this was so much fun i really appreciate you sharing your unique situation i think it will help a lot of people who are in similar situations i don't think anybody's going to have the exact same scenarios but i think a lot of people are gonna have this portion or that portion or that portion so this is always really helpful and that's why we do these these shows i'm so glad for your time thank you so much okay we'll talk to you soon all right bye okay scott i just want to give you huge huge huge props for that reframing idea i really really really like how you gave her different things to think about and were able to basically top her monthly needs in half in such a short time frame nice job that was super helpful i know to her yeah i i think i think that the the goal usually is optionality and flexibility right now or very soon um for for most people right and so i think that's you know and so when you hear a number that is just like okay well we are not going to get you to 7 200 a month in passive income anytime soon with the current way things are structured let's reframe the goal and let's come up with a strategy that we can that we can use to really jump start the journey towards that by increasing the amount you're going to save every year moving more of that wealth into after-tax investments like real estate or after tax brokerage and having a bigger runway that gives you some flexibility now we can play a game that is winnable in the short term um and gives you real life options and improves your life absolutely i am so excited for her homework assignments and her for what she finds out about them because i think she is going to take this at the end of the show after we stopped recording we we checked in with her and were like hey is this you know did we get you what you needed and she said i have so many things to look into now and but it like excitedly like now i have all these options to you know that i thought i that i wasn't aware that i had before which is the whole point of this show is just here's things to introduce you to so you can make sure that you are doing all the things that you need to do that you want to do that you can do to reach your goal as comfortably as you want as you can i love it should we get out of here mindy we should from episode 314 of the bigger pockets money podcast he is scott trench and i am mindy jensen saying i have no clever line today email me mindy bakerpockets.com with your suggestions [Music] [Applause] [Music] [Music] you

Channel: BiggerPockets Money

Views: 32,507

Keywords: financial freedom, how to achieve financial freedom, achieve financial freedom, how to retire early, retire early, early retirement, fire movement, financial independence, fire retirement, financial independence retire early, how to quit your job, when to quit your job, how to invest in real estate, investing, invest, personal finance, expense tracking, how to budget, how to spend less money, retirement goals, how to retire in 10 years, money, bigggerpockets, biggerpockets money

Id: q6A1vuomDeQ

Length: 74min 53sec (4493 seconds)

Published: Fri Jul 01 2022