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Afford Anything Podcast Episode #484 Summary: The Hidden Cost of Student Loan Forgiveness
Episode Overview In this episode of the "Afford Anything" podcast, host Paula Pant and former financial advisor Joe Salcihai tackle listener questions regarding financial planning, student loan debt, investment strategies, and insurance policies. The discussions revolve around critical thinking, decision-making, and evaluations of financial professionals, especially concerning fiduciary responsibilities.
Key Topics and Discussions
- Kristen's Fiduciary Question
- Background: Kristen is 34, earns $180,000 annually, and is a parent. She has recently engaged a fiduciary financial advisor and is concerned about the insurance products recommended, including term life and whole life insurance.
- Discussion Points:
- The complexity of fiduciary responsibilities in financial advising. Joe describes being dually registered, switching roles between fiduciary and non-fiduciary depending on the insurance context.
- The importance of understanding what a fiduciary truly means, especially in light of the insurance commissions involved.
- Criticism of whole life insurance products due to their high commissions and potential inadequacies in coverage compared to term life insurance.
- Discussion on the rising costs of long-term care insurance, referencing a class action lawsuit against Genworth and the unpredictable nature of these policies.
- Casey's Student Loan Queries
- Background: Casey, a physician, has $290,000 in student loans and is halfway through a 10-year period for public service loan forgiveness.
- Discussion Points:
- Evaluating the decision to remain in a public service job for loan forgiveness versus potential opportunities elsewhere.
- The importance of job satisfaction and career fulfillment over financial considerations alone.
- The idea that time is a limited resource, and making informed choices about career paths is crucial.
- Sara's Asset Allocation Dilemma
- Background: Sara is 35 years old with $500,000 in retirement savings and is considering increasing her bond allocation due to rising treasury yields.
- Discussion Points:
- Fundamental understanding of bonds: defined as loans to entities (e.g., government or corporations) with interest payments.
- Differences between purchasing bonds directly from Treasury Direct vs. through a brokerage firm like Vanguard.
- Evaluating risk in long-term investments versus short-term goals, with a focus on inflation and the importance of maintaining purchasing power over time.
- The suggestion that for long-term investments, a mix of stocks and bonds is beneficial, while for short-term goals, such as home improvements, cash or short-term bonds may be more suitable.
Key Takeaways
- Fiduciary Responsibilities: Always verify if your financial advisor is truly acting as a fiduciary. Understand the implications of insurance product recommendations and seek clarity on costs associated with them.
- Career Fulfillment: Personal satisfaction in a job can outweigh financial incentives. Emphasizing the importance of enjoying your work and considering long-term career goals is essential.
- Investment Strategy:
- Young investors (like Sara) should focus on growth-oriented investments aligned with their long-term goals rather than overly conservative allocations.
- For short-term financial goals, consider options that offer liquidity and comparable returns to bonds, such as high-yield savings accounts.
Conclusion The episode emphasizes the importance of thoughtful decision-making in financial planning, career choices, and investment strategies. It encourages listeners to question traditional norms and seek advice that genuinely serves their best interests.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Transcript
Automatic transcript. May contain errors.0:00Hey, Joe, when you were a financial advisor, were you a fiduciary? I was. However, I was in one of those firms where you're a split fiduciary. Oh, you were dual, what's it called? Dually? Yes. Dual registered. Dually registered. That's the term. Yes. And so I wore two hats, Paula. There were sometimes I was a fiduciary. There were sometimes I wasn't. Oh, yeah. And you could switch between those two hats in the same meeting with the same people. How great is that? Am I your buddy or am I not, Paula? Jeez. You could Jekyll and Hyde in the middle of a meeting. Totally could. Man. If I didn't have a...
0:45A conscience? Yeah, a conscience. I could have used that to my advantage a lot. And some people do. Wowza. All right. Well, we're going to be digging into that. We're going to be digging into a bunch of questions. Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. It applies to your time, your focus, your energy, your attention, to any limited resource that you need to manage. And that opens up two questions. First, what matters most?
1:14And second, how do you make decisions accordingly? Answering those two questions is a lifetime practice, and that's what this podcast is here to explore. My name is Paula Pant. I am the host of the show. Every other episode, we answer questions that come from you in the community. And my buddy, the former financial advisor who was a dually registered fiduciary, Joe Salcihai, joins me. You make it sound like I had all the registrations. No, you only had two. Two, dual. I was dually registered. Yeah, you weren't like Quattro registered, Trio or Quattro or Hexa registered. Yeah, but I could walk down the street and tell my friends.
1:57You went Senta registered? No, I got both of them. I got both of them. I'm good. Oh, you don't like fiduciaries? Well, that's me. Oh, you love fiduciaries? Oh, that's me. Here's what we're going to tackle today. Kristen's the one with the fiduciary question. You're going to hear that in a second. Meanwhile, Casey has$290 ,000 in student loan debt. He committed 10 years to one employer for a chance at public service loan forgiveness. But five years in, Casey questions what he's missing out on. Meanwhile, Sarah feels like it's time to move to a more conservative asset allocation. But she's torn.
2:38Should she buy bonds from Vanguard or from Treasury Direct? What's the difference? Where do you get bonds? Why does it matter? And an anonymous caller and her husband want to retire at the age of 55. But they also want to upgrade their home. They want to buy a nicer car and they want to start growing their family. So are they making the right financial moves? We're going to tackle all of these in today's episode, starting with Kristen. Hi, Paula and Joe. Thank you for all your helpful advice and helping out the community. Last year, I listened to your advice and converted my traditional IRA to a Roth, and I'm excited to watch my money compound tax free.
3:15A little background about me. I'm 34 years old with a three and a five-year-old, and I make$180 ,000 a year, and I plan on retiring when I'm 50. I max out my Roth 401k from work, and I do a backdoor Roth IRA as well. Recently at work, our company offered us some financial advice, and I linked up with a fiduciary financial advisor from Northwestern Mutual. He discussed several insurance plans for our future, and I contribute to them monthly. They include term insurance, whole life with accelerated care benefit, and long-term disability. The term is 20 years and costs my husband and I$37.56 a month.
3:59The whole life is paid up at age 65 for$150 ,000 with an accelerated care benefit, including nursing home long-term care. This will provide$125 ,000 a year for long-term care services. It costs us$281 and my husband,$286. My long-term disability covers up to$9 ,000 a month, but up until age 70 and costs$262. This totals$922 a month coming from our accounts. A lot of financial blogs advise against whole life policy, but since the accelerated care benefit was added on to the whole life, my financial advisor recommended it. I know we can't predict the future and our needs, but am I making the right decision by contributing to these plans or is the money better elsewhere?
4:49As well, our advisor charges a rate of 1.3 % from my Roth IRA and brokerage accounts. Please let me know your thoughts. Thank you again for all you do. Kristen, thank you so much for the question. And also thanks for the kind words. You know, when people make great moves, Paula, it just warms my heart to see people making moves because of these awesome sessions that you and I get to do together. You know, this fiduciary thing, let's tackle that first, shall we, Paula? Absolutely. Because it is very difficult for an insurance salesperson to also be a fiduciary. I do not know if your person is really a fiduciary or not, But my sense is they got the same duly registered thing going on that I used to have.
5:42Because insurance commissions are very difficult to get if you are a fiduciary. And by the way, I went and looked this up specifically, Kristen, because I got a little bit behind on the fiduciary debate. The Department of Labor has been having all kinds of fits. There have been all kinds of congressional committees, people trying to expand the word fiduciary now that we have life insurance policies inside of retirement plans. Right. We have annuities inside retirement plans. Now you can be a fiduciary and recommend an annuity where in the past you weren't able to. So these laws have been changing.
6:20Let's cut to the chase here, though. It doesn't matter. And the reason fiduciary doesn't matter anymore, Paula, is because you see the number of people who are outright lying about being fiduciaries, not even a little fibbing, like making videos where they say, I'm a fiduciary. And they're not. There's no teeth behind the fiduciary rule anymore. So when somebody tells you they're a fiduciary, are you really a fiduciary? So that should give you – yeah. Number one, is there a way to verify if somebody is a fiduciary or not? And number two, are there ramifications for lying? Can you report them to a particular board?
7:04Well, that's the point. Even if you do report them, there are no teeth. Wow. I don't know anybody who has lied about being a fiduciary who had any sort of repercussion in the past five years. I run across it without even looking for it four or five times a year. There is a popular podcaster who says that he has all kinds of designations. I won't tell you the name. I know who you're talking about. Yeah. He doesn't hold any of them. He holds zero of them. I have anonymously reported him three times. Nothing has happened at all. I've told people in the press. I told a friend of mine at the New York times because he was writing about this very topic.
7:54I'm like, I know this guy and here's, here's the dude, nothing, no reporting on it. Talk to a friend of mine at the wall street journal. You know what he said happens all the time, not news. So Kristen, when, when you said you had a Northwest mutual financial advisor and then launched into how your advisor had a phenomenal insurance strategy, that is because that's what Northwest Mutual is great at is insurance. I generally think term life insurance is a great way to go. I did groan when you said you had permanent insurance because of course you did, because that pays the agent a much, much bigger commission than a term life insurance policy will.
8:41However, Paula, there is something else going on. Speaking of the New York Times, There was a piece in the New York Times late last year in November. I have it open in front of me. It's written by a wonderful writer named Ann Carnes. And it says difficult choices for some long-term care policyholders. The biggest insurer of long-term care, Genworth, had a class action lawsuit against them because they weren't obvious enough about the fact that they were going to have to raise their prices again. Long-term care insurance is a very difficult area. On one hand, Paula, you don't want to get into retirement and worry about what happens if I have a catastrophic illness.
9:21You can see all around us the problems in healthcare. That gets extended where you have health care and custodial care. The inflation on these things is even worse because we have we've got a nursing shortage. We've got a custodial care shortage. So these places have to raise the amounts that they pay people to get people to work in these facilities, which means they pass it on to you. Genworth advised policyholders that they may raise their rates from where they are now, which are already sky high, 600 percent, according to The New York Times, 600 percent over what they are now. So I look at a policy that has a long-term care benefit, and I think this is a good way of the few ugly ways to solve it.
10:10And this is an ugly way because what you're hoping for is that you never need to use it. You're going to waste a bunch of money using this policy. And you know what, Kristen? I hope you do because I don't want you to need long-term care. But if you end up needing long-term care, that$125 ,000 a year is a sweet benefit. Maybe. Let me tell you why there's a maybe on this, Paula. This is pretty wild. Insurance agents will often say$125 ,000 a year. They'll show you the cost and they'll go, oh, yeah, that checks, right? These are expensive places. They're only becoming more expensive,$125 ,000. maybe it has an inflation rider on it so that'll go up over time so even though she's probably not using it for another 20 or 30 years that it it'll be worth a lot of money then okay that's great here's what you want to look out for kristin and this is the gotcha in long-term care policies paula it's 125 000 with and i guarantee there is this phrase that kristin did not either doesn't know about, didn't see, wasn't told about, whatever, with a daily maximum of X.
11:22Oh. Yeah. And long-term care policies pay by the day, not by the year. So get this. This is not what Kristen has, but let me just put this in ridiculous numbers. Paula, this will pay$500 ,000 a year with a maximum of$3 a day. Yeah. Right. Right. Yeah. Yeah. Which, by the way, that's ridiculous. That doesn't happen. Northwest Mutual is a fine company. They have fine products. Not going to talk any smack about their long-term care policy, but I do want to know what that daily maximum is because that's really what you're buying, not$125 ,000. What is the daily maximum and how do I go get it? I want to know that.
12:06But assuming that realize Kristen, that you are putting money into something that is the insurance industry's best duct tape for the biggest problem in financial planning. I like it. I don't love it. And I don't think the person was a fiduciary when they sold it to you. I think they were a insurance salesperson when they sold it to you, but all that said, it's okay. Not wonderful. It's a difficult, solution to a difficult problem. I don't like the 1.3 % on your Roth IRA. Yeah, I was waiting to jump in on that one. Jeez. I don't like that. That one was hurting my heart. Yeah. It's not an egregiously high fee for what a lot of asset-based advisors charge, but it's on the high end.
13:03It is on the high end. The industry average, Kristen, so you know, is around 1%. And a lot of people in our community will scream that they hate the 1 % fee. Paul and I will fight about that often here. I don't mind the 1 % fee depending on what you get for it. A lot of people paying a 1 % fee and not getting crap for it. I think 1.3 is on the high of fees. A bulk of the people in the fire community would have a stomach ache if you expressed a 1 % fee. And now I'm not going to go there. I'm not going to open up that wound again. Because there are a lot of people gladly messing up their money and avoiding a 1 % fee.
13:49Good on you. Good on you. Oh, I did it anyway. Sorry. it's all about what you get for it not the fee but that is high yeah yeah paula that's a so i don't know the fact that uh the the one thing kristin that really bothers me is that you you feel very good about you chose a fiduciary person and um which leads me to believe that you got a pitch about how they're a fiduciary and my thought process is probably not yeah well Well, she said, I mean, it's a fiduciary financial advisor offered by her work. Yeah, fiduciary-ish, I'll say. Yeah. I love that. To just elaborate on how a person can be duly registered for the listeners who might not have picked up on the Jekyll and Hyde analogy that we were making, you and Joe, you were duly registered when you were a financial advisor.
14:42As we talked about, you can be in a meeting with a person and that person can state one sentence as a fiduciary and then literally state the next sentence as a non-fiduciary. That is legal. There is no restriction against that. That is according to the way that the rules are written, that is perfectly legal and perfectly acceptable and perfectly within the rules. So that's what it means to be dually registered. I can be talking to Joe and Joe can tell me one sentence as a fiduciary and then he can tell me the very next sentence as a non-fiduciary. Joe, if you were my financial advisor. For the organization that I was with in our ADV Part 2, which we were legally required to hand to clients.
15:36What's ADV? It is funny, Paula, because maybe it's the best kept secret in the world, but I have no idea. I do know that it's the SEC, Securities and Exchange Form, that's the Uniform Application for Investment Advisor Registration, showing that I'm registered as an investment advisor and then talking about how that works. And part one is all the legal mumbo-jumbo. ADV part two is required to be written in plain English so your client knows exactly what they're getting into. Okay. So the ADV form is a form that is required by the Securities and Exchange Commission, the SEC. And it is a form that explains to the client exactly what kind of financial advisor they have.
16:25The relationship you're going to have. Yes. Okay, cool. How you collect fees, how you collect, and this is where the dual registration comes in, by the way, Paula, is that my ADV part two said in very plain English, when I talk to you about anything but your insurance policies, I am a fiduciary advisor. When we ever talk about insurances, specifically life insurance, annuities, long-term care coverage, auto insurance, because I could offer auto insurance as well, I now can receive commissions for those products. And I am not a financial advisor when we talk about those products. And so I would open up the ADV.
17:12I would highlight that section. And I would tell them, realize when we talk about these that I can, then I would talk about my methodology. And I would tell them, Paul, if you were my client, I'd say, what this means is that our organization sells these products. You know what we're going to do? We're going to figure out, A, if you need them. And B, we're going to agree on our methodology of deciding if we need them. And then if we do, I'm going to run quotes here. you will then I'm going to tell you where to run quotes outside of our organization. You go get those quotes. I'll get my quotes. We'll compare them and we'll see.
17:48And if it makes sense to pay me the commission, then we do it. If not, then we don't. And that's how I would work through that insurance piece. But that's what our ADV said. I'm not sure what every ADV says. That's That's how ours worked. So, Kristen, your ADV will tell you how fiduciary-ish your advisor might be. Man, what a system. And you know what? It's getting worse. Kristen, for your question, the number of organizations in committees in Congress trying to expand the word fiduciary so that it covers more stuff. Make it more of an umbrella term and thereby weakening it. Well, yeah. And what's funny is, is, you know, then I rolled my eyes and I went, well, it's already weak enough because I don't see anybody wearing orange for violating that rule.
18:43When industry lobbyists talk about this, Paula, here's what they continually say. Advisors cannot make enough money to justify serving people that need the advice the most. lower middle income families with very little assets they can't afford to. So they have to charge commissions because if they charge commissions, then they can be compensated enough so that people get advice. So what the lobbying organizations are saying is that this move toward percent of assets advice, like Kristen's doing both. She paid a commission on this insurance policy she has, and she's given this advisor 1.3. The move toward the 1.3s of the world, if somebody's got$2 ,000 in a Roth IRA, an advisor making 1.3 % on that money for a year, they're not going to pay any attention to you.
19:39So the lobbying organizations go, you are hurting people that need the advice the most, and you're making advice elitist. That's their stance. Right. Right. Because it would also be those same people who wouldn't be able to pay a flat fee, an hourly rate, because the hourly rate that the advisor charges would be so high. Yeah. So. Assets under management wouldn't work. Flat fee wouldn't work. Right. So while commissions can be high and can be ugly, it's the way to get the attention to somebody that might know what the hell they're doing. Right. And then you throw the word fiduciary in there and you can't be fiduciary and get commissions.
20:19Right. Yeah. Yeah, the challenge just comes from the lack of disclosure. The challenge comes from the fact that you think you're working with one type of person when in fact you are working with a different type of person, right? It isn't the earning of commissions itself that is, in my view, the problem. It's the lack of transparency. I think this is why the interview process is so important. An interview more than one person. Paula, you and I have discussed this, but not for a long time, so it's good to bring this up again. often when people would hire me, I was the only person they talked to.
20:54And while for me, Hey, that's great. That's fantastic. Everybody has a sales pitch and I had a sales pitch. Everybody needs clients. And so they're, they perfected emphasizing what they're good at and de-emphasizing the stuff that they're not good at. And it's impossible, I think, to get a true view of the industry and what's out there. When you only talk to one person, I think you have to talk to three. I think, you know, I've presented before, talked to five or six and, you know, people roll their eyes and go, oh my God, that would take forever. And it'd be so boring and so horrible. And you can do research online about advisors and who would really fit for you.
21:33Luckily, in times like today with YouTube and social media, you can even look at advisors and see what they say on social media and who they get a feel for them over some time before you do that. But I think you need to talk to a few people and I think you need a robust list of questions. Not just the fiduciary-ish questions that the CFP board recommends on their website or a lot of responsible sites will give you these list of questions, but just more specifically about you and me. Like, let's talk the two of us. Because I think during that one-to-one person talk, you will get a feeling, are they bullying me?
22:15are they talking down to me? Are they not really seeing me? Are they talking through me instead of to me? Like even those more, you know, we call them soft skill questions. I think those are really important, Paul. And given you're not always going to find your way around shysters that way, but I think it's, I don't think people ask enough of those questions. Right. Right. Exactly. You know, for general contractors, it's the same. Oftentimes when when you're planning a major home renovation, there are some general contractors who kind of condescend. They'll be a little patronizing, particularly if it's a rental property and you're making renovation decisions that are unusual or that don't fit the cookie cutter mold and that aren't necessarily the same types of decisions that owner occupants would make.
23:10oftentimes you'll get pushback from contractors. And it's that same set of soft skills, right? You want to talk to a number of contractors. And if you have a design plan for the renovations that you make, you want to be firm in your stance because some of them will try to talk you out of your design decisions because it's not what an owner-occupant would do. But to your point on the other side of that, there are times when I like the pushback because that's what a fiduciary, I mean, in the truant of fiduciary, right? Somebody who really wants my best interest. And I'll give you an example. We're adding on to our house this year.
23:55We're converting an open area into a four seasons room. And I'm never freaking moving again, Paula. So I'm going with this really expensive decision on these restaurant style folding doors that will open up this room to the outdoors. but I'm doing it in the most expensive way possible. And my contractor who I love really pushed back. He's like, do you know how much more expensive you're going? He goes, this is going to be beautiful. It's going to be fantastic, but you're not going to get anything back for that if you resell the house, right? You're not going to get, he goes, it's going to be beautiful while you're here, but it's not going to be resale.
24:32And I'm like, you know what, Jason, that's awesome advice, but I'm not moving again and I'm doing it for me. So this is great. He goes, well, let's do it because it's going to be badass. I thought that was great pushback from him. That's great. That's great. See, that's good advice. And that's just two people kind of making it. I'm talking about contractors who are condescending, just condescending, patronizing. Like when you make any type of decision that is an aberration from the norm, they interpret that as evidence that you don't know what you're talking about. Right. And so they see that as a sign of weakness and then they try to bully over that weakness.
25:13Those are the ones that you, you know, don't want to work with. Right. And I think that happened a lot more in my 20s. You know, when I was younger, when I was doing my first few projects, it happens. The older I get, the less it happens. anyway not not to get off on a renovation tangent but i think that's a an example of of interviewing a number of people whether it's your financial advisor whether it's your general contractor you know don't just go with one person talk to a between three to six at least and tell them your plans and see how good their soft skills are well kristen i hope that was helpful in shedding some light on the type of advisor that you might be working with and how you should be framing that relationship that you have and the advice that you're receiving, particularly about all of those various insurance plans in that light.
26:12So thank you, Kristen, for the question. You know, when you're a kid, you dream about being an astronaut or working with wildlife life or all these cool things. And then when you grow up, you think about not just what you want to do, but also you think about this other layer to it, which is how do I want to impact the world? What legacy do I want to leave behind? And how do I want to do that through my work? For a lot of people, that's when you start dreaming about owning your own business. But to do that, you're going to need a website, a payment system, a logo, a way to find new customers. And that can be really overwhelming and it's a big workload.
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29:25Our next question comes from Casey. I am a recent graduate from my medical training last June, and I started a career as a physician full-time, making about$240 ,000 per year. I have approximately$290 ,000 in student loans, and I'm about halfway through the 120-month period where I can apply for public service loan forgiveness. I'm fairly certain that I want to continue working with the company that I am, who is a 501c3 company that I can use to apply for public service loan forgiveness. But I just wanted to check in with you all and make sure that was something that you do agree with. I do have access to a 401k and a 457, which I'm maxing out both of those per year and putting anywhere from$1 ,500 into a brokerage account into index funds every month.
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30:24I think it's the right decision to continue doing the public service loan forgiveness track where I can have the majority of my loans forgiven after five more years of service. But I just wanted to touch base with you all and make sure that there wasn't something I was missing or that I shouldn't be putting other opportunities not to the best of their use. So if you all wouldn't mind to help me answer this question, I would appreciate it. Thank you so much. Bye. Casey, thank you for your question. So first of all, congratulations on being five years into this plan. Congratulations on doing great work and setting yourself up for financial success.
31:03But let's talk about your question because from the inflection in your voice, it sounds as though you like your work. I only heard a very short voicemail, so I have very limited knowledge and you can answer this question far better than I can. So I guess let me maybe pose this as a question. Do you like your work? Do you like that job? If public service loan forgiveness had never been invented, right, if that was not on the table in a hypothetical universe, would you still be at this job? That's what I want to know. Because if the answer to that is yes, you like the work, you feel as though your contributions are meaningful and are appreciated, you like the people that you work with, you see opportunity for growth.
31:52You know, if you feel as though you have autonomy and mastery and purpose in the work that you're doing with this organization, then great. Stay with it. Stay with it. Even if and when public service loan forgiveness is no longer on the table, after all of your loans have been forgiven, would you still stay with the same organization? If so, great. And if not, then that's something that you should consider. And that isn't purely a can I make more money elsewhere question. And it's, you know, you spend a minimum of 40 hours a week with your work. You need to enjoy it. What I like about your answer there is that often I feel like our community emphasizes and rightfully so, because, you know, by and large, we talk money on this show.
32:51But the other asset that we have to think about, which is non-renewable, is your time. and the deal you're making here is your time for money. I mean, in some ways, it's the age-old Vicki Robin question, right? Right, yeah, your money or your life. Yeah, maybe in reverse in some ways because you're trying to eliminate some debt by using your time, but you never get that time back. And I think that the universe throws things at you that you will never predict. You'll have an opportunity come at you. What if an opportunity happens in year number eight and you got to stick it out for two years and miss out on this opportunity?
33:35Paula, I think in every case I would take the opportunity and I would let the loan forgiveness go. But I think if I stay there 10 years and I like it and I've filled out all of the, because you have yet to make sure that you met some deadlines along this path. you've met those deadlines as long as there's no um penalty to get out of a program then then why wouldn't i continue to hit the marks and apply for it if i love my job and then have it washed away uh at year number 10 i do that in a heartbeat right but emphasizing time is the biggest factor and it's funny because you realize that you know now okay i'm gonna sound like the old guy paula but you realize that more every year.
34:25You realize that more when you start to realize that your enemy, my enemy, when I was in my twenties was money. My enemy in my fifties is time. Don't have enough time for all the things that I truly want to do, which makes me distill down. Where do I truly want to spend my time? Um, don't get me wrong. That's a great place to be. And I'm so grateful that I can be in that spot. But I think your answer of really focus on best use of your time is truly a North Star we need to pay a lot of attention to. People think that this is a money show, but really it's a show about, among other things, allocating every limited resource.
35:04That's your money, your time, your energy, your attention, right? All of these are limited resources. And, you know, when you make a decision about where to work, compensation is only one of many factors that play into it, right? The relationship that you have with your colleagues or with your manager or managers, right? That's one of the biggest predictors of whether or not you're going to enjoy your work. The level of autonomy that you have, the sense of purpose Do you feel as though you're a cog in a machine making widgets at a widget factory, proverbially? Or do you feel as though you are truly making a meaningful difference?
35:51These are all of the predictors of work satisfaction. A decision about how you are going to spend your time or your energy, I really think cannot be reduced to a spreadsheet or should not be reduced to a spreadsheet. For some people, temporarily, if you are in a very low income situation, right? Some people temporarily, you know, you've got to work a couple shifts in some pure cash grab job that you're doing just for the paycheck. I get it, right? That's a stepping stone that a lot of us have had to do, but that's a job. That's not a career. When it comes to your career, be doing the work that is likely to put you on the path to where you want to be 40 years from now, 50 years from now.
36:47When it comes to your career, be in the work and at the organization that puts you on the path to developing the type of career that you would like to look back on with satisfaction at the end of it. I know this is like the cliche job interview question, but where do you want to be in 10 years? Where do you want to be in 20 years? If there was a Wikipedia article written about you, what would you want it to say? Start with that and work backwards. And don't worry about whether or not you get loan forgiveness. If you think of it as part of the compensation package, all right, cool. You can assess different compensation packages by factoring that loan forgiveness as part of the compensation package that one job offers that another job doesn't.
37:44But people constantly turn down higher compensated work for the sake of more enjoyable work. Satisfaction. Yeah, exactly. Absolutely. Yeah. Yeah. Look at the number of interviews that you and I both done to people that left Wall Street. Yeah. Right. Yeah. Like if money were number one, you'd stay on Wall Street. And these people will tell you, they're like, I was making half a million dollars a year and hated my life. Hated everything about it. Yeah. To go found a company helping, you know, people that barely had access to money, solutions, learn what they were doing, you know, an uncertain future, uncertain paycheck, to go do something that was way more fulfilling.
38:30You know, just the other day, I interviewed Vivian Tu, the Your Rich BFF. And she had a Wall Street career. And she was telling me about it. She got to work at 5.30 in the morning, and she was at her desk from 5.30 a.m. until 6.30 p.m. And I was thinking about that. And I asked her, I was like, wait a second, because she'd mentioned it in her book. and I was trying to think through the logistics of it. Right. I was like, wait a second. When do you wash your dishes? And she was like, honestly, we didn't. She had a roommate. She's like, I don't think either my roommate or I ever ran the dishwasher even once.
39:10We every meal was just ordered out disposable for us. Right. Yeah. Disposable forks, disposable spoons, paper plates, takeout delivery. she was like i don't think we ever ran the dishwasher even once like being able to run the dishwasher is a luxury yeah yeah i got to the point in my financial planning career where um it was funny because it was before the days of instacart and i i got to the point every meal i was eating i was eating just trash food yeah um eating on the fly eating at my desk quickly between meetings or I took clients out. I got to the point that I would just take clients out so I could get a decent meal.
39:55I would take them to dinner so I could do two things at once. But I was trying to find somebody to buy my groceries for me without hiring. I was about to hire a maid at home, not because I need a maid. I just wanted somebody to do all my... So this was before TaskRabbit and before Instacart or any of these DoorDash deliveries. I wanted that then. What's sad today, by the way, is that it's made for those type of professionals. And when you look at all the statistics about who actually uses DoorDash, it isn't those professionals that are the vast majority of their business. It's people just being lazy.
40:31Well, I would disagree that it's people being lazy. I would say that a lot of people are very busy. I'm not saying there aren't very busy people using the service and I'm not knocking those people. When you look at the study of who's using it, the number of people that use those services that could go out and get it themselves, there's a number. I'm not pointing a finger at somebody who's really busy, has extenuating circumstances. I'm pointing the finger at the statistic that shows that I have a family member, Paula. I have a family member whose daughter decided that she did not want to eat the Thanksgiving dinner that we all had.
41:18And so there was, and by the way, this family member talks about how they struggle with money all the time. They are always in money trouble. There was a ring on the doorbell and it was a DoorDash person bringing Burger King to our house, which was at the end of the block. And then their child did not eat the Burger King. An hour and a half later, the door ring ring again. And it was in an Uber delivery driver bringing Tylenol for my family member who had gotten a headache. Walgreens right down to the end of the block. We could have had a nice walk there to get Burger King and headache medicine.
42:01And I'm not saying that because of my family member, I'm saying that I went and I looked at the statistics of who's using this. Many opportunities, probably not our audience, but a frustrating number of use cases where money's not being spent on what you value. But I like even more getting back to the time thing. Valuing money is great. Valuing your time, even then, I mean, that was service for me, service for Vivian to even more, um, to, uh, because of the quote relationship with the client or with the service or feeding the beast that we were working for that we were so busy that we didn't have time to prioritize nutrition.
42:50Right. I didn't. The year that I was, uh, doing a fellowship at Columbia, I was 115, one, one, five pounds. When I started that program, I was 143 pounds when I ended it. So I gained 28 pounds in 10 months. I gained a quarter of my body weight in 10 months. And I didn't have, of course, I didn't have time to go to a doctor during those 10 months either. And so when I did, my doctor was like, let me run some tests because that could be indicative of some type of a problem. Maybe stress. Yeah, she ran a ton of blood work, Right. And everything came back normal. And she was like, well, typically we don't see such rapid weight gain unless there is there's some sort of a problem.
43:40Right. And I was like, yeah, my problem was that I was. getting up at 6 a.m. every morning, starting my day at 6.30 and working straight until 11.30 at night and eating all of my food from vending machines. I mean, just from vending machines. That was my diet. How is that not healthy? Yeah. I lived off of vending machines for 10 months and gained 28 pounds in the process. Well, and there's also, you know, all these studies and I wasn't joking when I said stress, Paula, all these studies that show during the stressful period, your body will hold on to. Right. We'll hold on to weight worried that, you know, the body's worried about sustaining yourself for another 24 hours.
44:29Right. Yeah. Yeah, exactly. Spiked cortisol. all. At any rate, we're discussing all of this in the context of if you either dislike your job or you're overworked by your job, that has huge ramifications beyond just your wallet, right? It has ramifications on your health, on your nutrition, on your sleep, on your happiness. So that's why career-related decisions can't be reduced to a spreadsheet. And that's why people often quit highly compensated work because it's damaging to their health. So if you think of student loan forgiveness as simply an aspect of compensation, then you can bake that in there to figure out what your current compensation is.
45:20And then you can use that number when you're comparing compensation from different companies. But again, people don't choose jobs entirely based on compensation. People choose jobs based on whether or not it fits into their idea of a well-lived life. And I love the fluidity of this works for me now. It might not always work for me. And I'm okay if it doesn't in the future. I feel like too many people think about sunk cost. I spent all these years and I'm only, no, let it go. So, Casey, thank you for the question. And my question back to you is, how much do you enjoy your work? Is it meaningful?
46:04That's where you'll find your answer. You know, when I was a kid, I remember on Christmas morning, I got lots of toys, lots of books, lots of clothes, gifts. The books were always my favorite. I'd spend all of Christmas Day just reading and reading and reading. But, you know, none of those are things that I have anymore. They were wonderful in the moment. But decades later, I have no idea where any of those things went. But by contrast, when you give a gift that brings somebody financial security, that's something that lasts a lifetime. Now, when it comes to financial security, nearly half of American adults say that if they lost their primary income earner, they would suffer financial hardship within six months.
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49:19Our next question comes from Sarah. Hi, Paula. Could you help me understand what the one-year treasury yield being so high should mean for my asset mix? I have about half a million in retirement savings and I'm 35. Currently, I have less than 10 % of this in bonds. So I was thinking that this might be a good time to move towards a more conservative, at least 10 % in bonds for my retirement savings. but not sure the difference between the types of bonds that I would buy in my Vanguard account versus buying bonds directly from Treasury Direct. I also have some goals for home improvement and wondering if putting some of my savings in Treasury Direct one-year bonds would make sense to hold for short-term home improvement goals, given that it appears to be a liquid investment.
50:36Overall, a bit confused about all the different types of bonds and what the difference between bond prices and yields means. If you're able to help elucidate, it would be super helpful. Thank you. Sarah, thank you for your question. A couple of key things to know, And I'll state this not just for you, but for everyone listening, if you want a bit of a crash course on bonds. So fundamentally, when you buy a bond, a bond is a loan that you are giving to an entity such as a government or a company. When you buy a bond, if you hold that bond to maturity, like every bond has a particular time duration.
51:16And if you hold it for that duration of time, that's called holding it to maturity. And if you hold it to maturity, you also get not just the value of the bond back, you also get all of the interest payments that you deserve because you've loaned out this money. So think of a bond simply as a loan, right? If you go to treasurydirect.gov, then you are making that deal directly, right? You are buying U.S. treasuries, meaning you are loaning money to the U.S. federal government, which is widely considered the safest entity to loan to. And you are simply buying that bond for a particular duration of time.
52:03And they've got a whole bunch of different options on the website. They've got these I-bonds where you can only invest a limited amount of money in an I-bond. But right now it's as of the time that we're recording, paying at 5.27%. You can buy one-year bonds. You can buy 30-year bonds. You can buy bonds of any assortment of durations. If, by contrast, you're buying a bond fund from a place like Vanguard, that fund is being traded and therefore the value of that fund is going to fluctuate on a daily basis because it is currently being traded or actively being traded. if you're a long-term investor you can by and large ignore those daily fluctuations but that's the difference between buying a bond at vanguard versus buying something at through treasury direct buying a bond at vanguard you're also buying a collection of bonds on the open market we talk about stocks we often talk about diversification and about how you buy the S &P 500, you're buying 500 of the biggest companies in America.
53:18So you get some instant diversification. You get that with bonds too, Paula, but there's a downside with bonds that you don't have with stocks, which is that they're buying these bonds on the open market, meaning that sometimes they're going to be overvalued. Sometimes they're going to be undervalued. The manager is going to generally sell them before that maturity. So you get this secondary fluctuation that's very difficult to track and also difficult to understand for the average person. Give you an example. The average person thinks that bonds and stocks are on this teeter-totter, right? When stocks go up, bonds aren't great.
53:51And when bonds go up, that's because the stock market's bad. Not at all. Not at all the case. Bonds and interest rates are actually on a direct teeter-totter. And let me explain. On the open market, if you don't hold it to maturity, what that means. Let's say I go and I buy a bond and I pay a hundred dollars for it. And it has a 3 % interest rate. It's going to give me 3%. Well, then interest rates go to five. I decide I want to take myself to Disney world and I need to sell this bond before the maturity date. So I go to the open market and I go, Hey, how would you like a bond paying 3 %? And everybody's like, I could go to treasury direct and get five right now.
54:33Why the hell would I buy your bond for 3 % interest when I could spend the same$100 and get$5? So the only way I can make it worth somebody's money is to go, instead of$100, I'll sell it to you for$95. When I sell it to you for$95, then you start doing some math. You're like, oh, wait a minute. That extra$5 I make when this comes due, does that make up for the interest that I'm losing? Well, yes or no, whatever. You do that math. So bond prices, when interest rates go up, any current bonds you hold that are at a lower interest rate go down in value. Interest rates go down. If I've got these bonds at a high rate, cha-ching, people want those, the value of my bonds go up.
55:17That's the direct correlation. When she talks about retirement, Paula, let's just cut to it. None of this matters. like being conservative let's talk about the definition of conservative when it comes to if you're in your 30s and you're looking at needing this money in your 60s you know what's the most conservative thing to do buy assets that will be inflation because the definition of you know risk to me is what scares me what scares me over the next year is that my money will bottom out that i need in the next 12 months and i won't have the cash for that add-on to my house that i need. Right.
55:58So if I'm talking about bonds for that, heck yeah, maybe not even bonds. Cause there could be some fluctuation there. I mean, when you look at T bills, I could buy a four month T bill and get just over 5 % in the last, uh, in the last, uh, auction they had. So, okay. I could buy one for four months, get over 5%. That's, that's pretty good. I could do that knowing that I'm not starting construction until this fall. So yeah, uh, I would do that, but, but, but any bond that's going to fluctuate. I don't want what fills me full of dread is that I'm going to get to age 60 something though, and I'm not going to have enough money to pay my bills.
56:36So I got to keep up with inflation. And if inflation over long periods of time is three or four and, and the, the T-bills only paying five, the hell am I doing that for? Because, because now I almost have to go dollar for dollar, all the money I want to spend, if I want to live on, you know, what's$60 ,000 today, 30 years from now, well, let's, let's do this. Like, no, it's going to be more than double. So if it's, if I want to live on$50 ,000 today, 18 years from now, it's going to be a hundred thousand dollars I'm going to need. So if I extrapolate that, I need all this money. I almost got to go dollar for dollar saving that money.
57:13I can't do bonds and do retirement. I can't, But it frustrates me when people look long-term, and this isn't Sarah, this is everybody, look long-term and go, I'm worried about safety. Yeah, you are, but let's define what safety really means. The safest place to be are companies that need to continue to sell products in the future. The only way they can do that is to keep up with inflation. The reason why stocks and real estate keep up with inflation, there's actually two different dynamics going on. So let's deal more with stocks in this case is because they need to pay their workers a wage that keeps up with inflation to keep workers and they need to sell stuff to people.
57:56So they need to come up with inflation. That's why stock prices keep up with inflation and beat inflation is because if they're going to succeed in the marketplace, that's what it's going to take. So you're safe as place. If you've got 15 years, if you want to be conservative, invest in stocks. Contrarian words from Joe. Are those contrarian? Yeah, they are contrarian words. They are contrarian words. Because, you know, the classic personal finance advice is, if you want to be very conservative, it's your age in bonds as an asset allocation with the remainder in stocks. So for Sarah, who's 35, that would be a 35 % allocation to bonds with the other 65 % going to stocks.
58:40Right. That's, of course, a very conservative allocation, but some people modify it by 10%, right? So they'll say, hey, for a 35-year-old, we'll go 25 % bonds, 75 % stocks. Do you want a quote from me? Let's hear it. About bonds and your long-term stuff. If you want to invest your long-term money in bonds, you will very safely never reach your goals. Wow. very safely, never get anything done. But I'm going to push back on that. It's true that stocks and bonds are not inversely correlated. However, historically, they often have had inverse performance. Now, it is true that they don't necessarily always move in tandem.
59:31And what we've seen recently, in recent history, we have seen stocks and bonds move in lockstep with one another. But historically, over the long term, they have had inverse movements. And what that means is that during times when stocks are depressed, you can reallocate from your bond position to buy more stocks, right? So rebalancing functions because in the moments when stocks are depressed, you have a heavier bond allocation, which means you have assets that you can use to buy more stocks at the moment that they're down. Rebalancing is fundamentally a contrarian act. Let me push back on that.
1:00:18Are you going to suggest the barbell allocation? No, no. What I am going to suggest is that you can do the same thing, but you can do it with different types of stocks. What's interesting is, and if you look at some great research that Paul Merriman has Dunn, who's a brilliant investor on the West Coast. Paul Merriman took asset classes and continually, Paula, kept adding asset classes that by themselves are riskier than large company stocks. And he tamed a portfolio to make it because of the non-correlation of small stocks with big stocks, with natural resource stocks versus tech stocks versus healthcare.
1:01:05He took these different types of things and by spreading out the types of stocks he bought, actually went into riskier areas than the S &P 500 and tamed his overall volatility when you look at the bottom line number and created higher results. You could go that way or you could go into bonds to do the same thing, but you lock in much lower results. You do 100 % lock in lower results with bonds, or you can go the opposite direction. I like doing the rebalancing into different types of assets that are like a little, you know, just a little shot of chili powder in your mix goes a long way. You put a little of this, you put a little of that.
1:02:00And obviously we want to be a little more scientific than this, but I think you get what I'm getting at. You can do something else and not bury your returns. I would never wish less goal achievement on anybody. It drives me crazy. And I'm not saying there's not a place for bonds. She lost me when she was talking about being more conservative. I'm like, oh, please, if you're going to be conservative, then let's asset allocate based on your timeframe, based on your growing season. Then she started to talk about home improvements and I went, oh yeah, bond. Oh yeah, there we go. There's your bonds.
1:02:33Give me some of that. Forget about stocks. Those are horrible for those home improvement goals. Right. For the very short term, for home improvement, that's probably a one-year goal. I do love, though, to your point, Paula, rebalancing is a great tool that people talk a great game about and they don't do enough. They just don't do it. They tend to let their winners run too long, turning their positions into what some professionals call popcorn, which is, you know, how popcorn pops, it bounces up and then comes right back down. So instead of rebalancing and keeping your allocation the same, which is the key to your winning, you let the asset class go up and come down and experience a full cycle versus doing the right thing.
1:03:22And once a year, sticking to these percentages you set for yourself. Well, and so I would argue that Sarah can and probably should do that. She said she's 35 years old. She's less than 10 % in bonds, right? I think it's reasonable for a 35-year-old to have, let's say, a 20 % bond allocation, and then she can use that bond allocation to rebalance on an annual basis. If she's going to do it, do it. But realize that the key to your success now is going to be making sure you stick to that asset allocation, number one. And number two is to once a year rebalance and don't play games. I don't like phrases, not from Sarah, but from anybody where they're going, I think the time is right to do this.
1:04:12Correct. Yeah, that's timing the market. Sarah said that. I think the time might be right. No, no, no, no, no. We don't want to play that game because six months from now, you're going to eat a tuna sandwich that gives you something. And you're going to go, oh, I think the time is right to. And you're going to go over to your account. You're going to make a dumb move. And by the way, I'm not making fun of anybody here. I've done this crap. I've done it too, for sure. I got a great idea. Why did I never think of this? Yep. Yeah. I did it a lot during lockdown, during the pandemic. That was when some of my biggest money mistakes, my market mistakes, I should say, my biggest investing mistakes were made during lockdown because I was bored and alone, you know, and I had nothing better to do with my time.
1:04:57I was like, let me just light money on fire in the markets because I'm just bored as heck. So anyway, Sarah, for long-term investing, for the purposes of rebalancing, using a bond fund through a brokerage like Vanguard or wherever it is that you keep your retirement accounts, that's going to be your best bet in terms of buying the types of bonds that you can easily rebalance. Right. Because for retirement investing, for that long term investing, you want to be able to rebalance between stocks and bonds. So if hypothetically, let's say that you have your 401k or your Roth IRA at Vanguard, then buying bond funds through that same brokerage will allow you to rebalance annually.
1:05:46So that's the play that I would make for retirement savings. Now, if you want to set aside some money for a home improvement project, that short-term money that you're going to tap in, let's say, a year, sure, go to Treasury Direct, get some type of short-duration bond there that reflects the time of that short-term goal. or what you could also do, and this is something that we haven't talked about, put it in a high-yield savings account because, frankly, the payouts that you're getting for one-year bond trations is pretty on par with what high-yield savings accounts are paying right now. So, I mean, I would at a minimum compare between the two and see where you can get a better yield.
1:06:33Yeah, when I looked at the last auctions they had on Treasury Direct, and you could just go to treasurydirect.gov and look at what the latest auctions are, because if you're going to buy them, you're going to buy them at auction. So you don't know what you're going to get. So you can only look at the past to see how the future will probably go. But the past ones are not that much higher than a high-yield savings account. And again, going back to Casey's question, the universe tends to throw you opportunities when your money's locked up, right? Right. So if I've got to go from 5.5 to 4.95, which is the top 1 % of money markets as we are recording this, that's what the average of the top 1 % of money markets are paying or high yield savings accounts are paying.
1:07:25If we got to sacrifice that little bit to know that those home improvement things I can do earlier, I'll do that deal all day long to stay flexible. Exactly. There's value in liquidity. Right. It's a good quote. The universe tends to throw you opportunities when your money is locked up. But yes, as we were answering Sarah's question, I thought, wow, I can't believe we're this deep into the question and we haven't talked about high yield savings accounts yet. I totally forgotten. I had that on my list and I just let it go. Maybe it was all the bond rant, Paula. Well, they're paying just so well right now, right?
1:08:05And they're paying on par with short duration bonds. So in a competitive market, if you've got high yield savings accounts versus short duration bonds, the payment is about equal, but one of them gives you liquidity and the other doesn't. Go with the one that gives you the liquidity. Yeah. Duh. All right. Well, thank you, Sarah, for the question. And best of luck with the home improvement projects in the short term and, of course, with retirement savings in the long term. Well, Joe, we have done it again. Fabulous, as always. Such great questions from the community. Yes, absolutely. Absolutely.
1:08:40Speaking of community, where can people find you if they would like to hear more of you? Oh. Where can this community find you? If you'd like more of this goodness.
1:08:52You can find me three days a week at the Stacking Benjamin Show, the greatest money show on earth. Some recent shows, Lisa Curry, who is our show writer. She is a professional comedian who's open for Jim Jeffries and has written for The Daily Show. She helps us write our shows and punches them up, makes them fun. She actually rides along with us, Paula, through the entire episode. Talks about the headlines, answers the listener question. If you've never heard a professional comedian answer money questions when they don't know much about money alongside OG and I, it's a pretty, pretty fun ride.
1:09:31So that is our episode featuring Amy Minkley, by the way, who hosts the Five Freedom Retreat that I was lucky to be a keynote speaker at last year in Bali. In Bali. In Bali. Yeah, it was good stuff. So we talk about the importance of community with Amy. We talk about her money journey from not trusting people to becoming much more trusting to the point that she really felt like she needed to go from this isolated person to needing community to becoming a community leader because there were no financial independence retreats in her hemisphere or very few in her hemisphere. So she wanted to get Southeast Asia really moving.
1:10:11So great discussion with Amy Minkley and a ride along with Lisa Curry, professional comedian, all in one episode. Ah, fantastic. Fantastic. Tune into that on the Stacking Benjamins podcast, which you can find wherever great podcasts are found. The greatest. The greatest. Well, thank you so much for tuning in. If you enjoyed today's episode, please share it with a friend or a family member. That's the single most important thing that you can do to spread the message of maintaining great financial health. Also, subscribe to our show notes. I'm going to throw a couple of links in the show notes about the ADV form, which we talked about earlier.
1:10:48We're going to talk about long-term care insurance, a couple of links to articles that talk about long-term care insurance. All of that's going to be in the show notes. You can subscribe to the show notes by going to affordanything.com slash show notes. Thank you again for tuning in. My name is Paula Pant. I'm Joe Salcihai. And we will catch you in the next episode.
1:11:12Thank you.
From the publisher
#484: Kristen’s financial advisor charges a 1.3 percent fee on her investments. They also sold her term life, whole life, and long-term disability insurance. Do they have her best interests at heart?
Casey has $290,000 in student loan debt. He committed 10 years to one employer for a chance at public service loan forgiveness. But five years in, Casey questions what he’s missing out on.
Sara feels like it’s time to move to a more conservative asset allocation but she’s torn between buying bonds from Vanguard or Treasury Direct. What’s the difference anyway?
Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode.
Enjoy!
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