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Afford Anything Podcast Episode Summary: Q&A: Can You Really Beat the Market by Copying Members of Congress?
Episode Overview In this episode (#657) of the *Afford Anything* podcast, hosted by Paula Pant and Joe Salcihai, the hosts address a variety of listener questions revolving around financial decisions and strategies. The topics include Congressional-trade ETFs, home maintenance costs, and the feasibility of starting a small business primarily for tax benefits.
Key Themes
- Investment Strategies and Congressional ETFs
- ETFs Tracking Congressional Trades: A listener questions whether investing in ETFs that track stock trades of U.S. politicians is a viable strategy.
- Lag and Bias Issues: The hosts highlight that these ETFs often lag behind actual trades and that even seasoned investors (like Congress members) can have biases that impact their investment decisions.
- Fun Money vs. Serious Investments: While such ETFs could be seen as a fun investment (less than 10% of a portfolio), they are not recommended as a core investment strategy.
- Home Maintenance Costs
- Predictability of Home Repairs: Paula discusses how homeowners can anticipate and budget for home maintenance costs.
- Finding Reliable Contractors: The importance of building relationships with contractors who work with investors is emphasized, along with strategies to find trustworthy contractors through networking and word-of-mouth.
- Understanding DIY Limits: DIY projects can often end up costing more than hiring professionals due to time, tools, and opportunity cost considerations.
- Starting a Business for Tax Benefits
- Evaluating Business Motivation: An anonymous listener contemplates starting a business primarily for tax advantages.
- The IRS's “3-of-5 Rule”: The hosts explain IRS regulations surrounding hobby vs. business classifications, emphasizing that businesses must show profitability in three out of five years to avoid scrutiny.
- Joy vs. Burden of Business: Paula cautions that turning a hobby into a business can drain joy and energy, making it a risky endeavor if not pursued with genuine interest and capacity.
Key Takeaways
- Congressional-trade ETFs: Not a reliable wealth-building strategy; they are speculative and expensive. Suitable only as a minor part of one’s investment strategy if approached as "fun money."
- Home Maintenance: Create a repair timeline and find investor-friendly contractors to manage costs effectively. Prepare for predictable maintenance expenses.
- DIY Projects: Weigh the actual cost of time and tools against hiring professionals; DIY isn't always cheaper.
- Business for Tax Benefits: Avoid starting a business just for tax advantages; prioritize genuine interest and purpose over financial deductions.
Episode Chapters
- (00:00) Should You Follow Congress’s Trades?
- (06:00) The Lag Problem and Investor Bias
- (10:30) The “Fun Money” Rule
- (11:20) The Hidden Cost of Home Repairs
- (15:00) Finding Investor-Friendly Contractors
- (18:00) Planning Ahead for Repairs
- (22:00) DIY vs. Opportunity Cost
- (26:00) Starting a Small Business for Tax Breaks
- (29:00) The IRS “3-of-5 Rule”
- (32:00) Purpose Over Deductions
- (34:00) Final Thoughts
Final Thoughts This episode emphasizes the importance of making informed financial decisions that go beyond quick-fix strategies or trendy investment options. The hosts encourage listeners to prioritize long-term financial health through thoughtful budgeting, maintaining relationships with reliable professionals, and cultivating genuine interests in any business ventures they consider.
Additional Resources
- [Afford Anything Podcast Website](https://affordanything.com)
- Download the free book, *Escape*, at [Afford Anything Escape](http://affordanything.com/escape).
Share & Engage Share this episode with friends and family to spread the knowledge of effective financial decision-making. Leave a review to support the podcast and engage with the community through questions and discussions on social media platforms.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Transcript
Automatic transcript. May contain errors.0:00Joe, have you heard about the fund that tracks politicians' trades? I have. There's several of them now. Yeah. So we have a question today from someone who's wondering if that's where she should put her money. She's actually one of the two Nancys who we're going to be hearing from today. It's Nancy day on the show. Yeah, exactly. So we also have a deep financial planning question. We're really going to go into the expenses of the other Nancy. And we've got a question about whether or not to start a small business for the tax advantages from somebody who is high income, but most of their income comes from W-2.
0:37Okay. And we've got a question about the cost of home maintenance, which is, as any homeowner knows, more than you expect. Always. All of that is coming up right now. Welcome to the Afford Anything podcast, the show that knows you can afford anything, not everything. The show covers five pillars, financial psychology, increasing your income, investing, real estate, and entrepreneurship. It's double I fire. I'm your host, Paula Pant. I trained in economic reporting at Columbia. Every other episode-ish, we answer questions that come from you. And I do so with my buddy, the former financial planner, Joe Salcihai.
1:11What's up, Joe? I feel like today I need to change my name to Nancy Salcihai. Nancy Salcihai. Just to get along with everybody. Right? Yes. Today is Nancy Day, and we're going to start with this first question, which comes from one of today's two Nancys. Hi, Paula and Joe. I recently learned about investment vehicles that track insider traders and congresspeople who seem to typically outperform the market and also have a lot of reporting requirements that allow these vehicles to copy some of their trades and follow along. The app that I first heard about is called Autopilot by the account politician trade tracker.
1:48but when I went on Morningstar, I also found the unusual Wales subversive trading ETFs, of which there is a Democratic and a Republican one. I'm curious to hear your thoughts about these vehicles in general and whether this would be an interesting strategy, especially for somebody who is many decades away from retirement and just starting out building their portfolio, looking for a higher risk, higher reward strategy. Thank you so much for your time. Nancy, that is a fun question. It's a fun and fascinating topic in the world of finance. However, I think you can guess where I'm going with that.
2:27However, it is for a tiny, tiny, tiny portion of fund money, fine. If this is the equivalent of entertainment on a Friday night, sure. But for anything substantial, I would not recommend it as a core component of your portfolio. And here's why. You mentioned that there are these reporting requirements. That is true. But there is a lag time, a substantial lag time between when a trade is made and when that information becomes publicly available. And in the markets, timing is everything. That's one reason. Second reason is even people who have a certain degree of insider knowledge are still prone to biases.
3:14So there's going to be a level of home team bias where people overweight the significance of companies and industries that they're familiar with. And sometimes that works out, but sometimes it means that they're underestimating the risks. people who are familiar with a given company or a given industry might put too much faith in the management, for example, because they like those people personally, or they might underestimate the risks or overestimate the amount of opportunity that that company has. The familiarity with a given domain can sometimes result in horse blinders. So for all of those reasons, for lag time, for the fact that even insiders have biases, I do not see this as a viable strategy for any significant amount of money.
4:08The fund going to Morningstar like Nancy did has outperformed its index, which they are comparing it to the U.S. large blend index, which is generally going to be fairly close to the S &P 500. It's outperformed it. It hasn't been around very long. The costs are fairly high, as you would expect with an active strategy like this, three quarters of a percent, which if you look at for people that are new to the expense ratio game, generally, you know, 0.1, maybe 0 .2 for an international fund. So 0.74 is going to be fairly high for this, but it isn't unwarranted because Paula, they have to track all of the trades these people are making and they have to put money in the trades that these people are making.
5:00And by the way, this is specifically, I'm talking about the unusual whale subversive Democrat trading ticker symbol, by the way, Nancy is NANC. Nancy. Maybe Nancy runs this fund. I don't know. Maybe Nancy's like, Hey, I'm going to call in to talk to Paula and Joe about my fund. So if this is you, Nancy, running the Nancy fund, it's actually doing very well. Maybe she should buy it just for that. Yeah. Cause you share a name with your fund. The GOP version, ticker symbol, GOP tracking Republican trades also has high expense ratio 0.75. So, you know, for most purposes, the same performance wise, interestingly, Paula, this one is getting smoked by its index.
5:56So if you follow the Democrats, you'd be way ahead. If you followed the Republicans, you'd be way behind on following their trades when compared to this arbitrary index of large cap blend. So there's a guessing game going on here. And I think for me, Paula, this is the point. Do I like this with fun money? A hundred percent. I like it with fun money. I think it's fun. I think it's playful. I think it gets you interested in investing. Why wouldn't I do all of those things? But when I'm building an investment policy statement, I'm not going to build my investment policy statement, the line on my investment policy statement isn't going to be, I'm going to invest in whatever Democrat Congress people invested or Republican Congress people invested or both.
6:42I'm not going to, you know, that doesn't make sense to me. And not only is it what they invest in, but it also is going to be which investments of those pick based on a methodology that this fund has that is unclear to me what their true methodology is, is where I'm going to back my faith in my investment policy. I want to know a little more about why things happen. Because I think for me, the key to my success is that when bad things happen to my investments, which is going to happen, Paula, bad things are going to happen to your investments. When that happens, I have to have the fortitude to know that I can stick with it.
7:26And if I'm not sure exactly why I'm down, now I'm just doubting my strategy. Does it really make sense to follow what Democratic Congress people or Republican Congress people are doing? And then I'm going to sell at the wrong time. So I love how playful it is. I think it's really fun. There have been other funds like this that I've liked before. There's funds that back the sin companies, lots of Vegas stocks, tobacco stocks, alcohol stocks, gambling stocks, things like that. All of those. I think that's fun. I remember at one point there was a NASCAR fund that did really well. Ah, fun. Companies that advertise on NASCAR cars and the fund invested in that.
8:12And that fund did really well until it didn't. And again, you're like, Like, why isn't it doing well? And the answer is, I don't know. It just isn't. Right. Why all of a sudden are companies that invest in NASCAR not doing as well as they used to do? I don't know why that is. But have I done stuff like this, like the cool funds that invest in art? Yes, I have. Or invest in rare books. I've done that one too with my own money, but always with the playful part of my portfolio. Right. Right. I think when the subject is Congress people, part of the appeal of that one, as opposed to, let's say, the NASCAR one, is the notion of insider information.
8:54Sure. You know, the notion that these people are in closed door meetings where they learn things that the general public does not know. And so it feels like a way to get some access to insider information. And different than people who are the principles of a corporation. where there are strict laws against them being able to really profit from the information they're learning, Congress people don't have those rules. Right. So that makes it even more enticing. Exactly. And so I think there's a sense of being able to mimic the advantage that they have. I think that's part of why these funds are really appealing.
9:36But the reality is a lot of congresspeople don't know how to harness their own advantages. And again, that goes back to they are clouded by their own biases. Their judgment is clouded by their own biases. So it might outperform for a time, but I wouldn't bank on it consistently outperforming for the next 40 years. But that said, when we talk about fun money, we're talking about definitely less than 10 % of your portfolio, ideally less than 5 % of your portfolio. I think as long as your fun bucket is contained to that, then I do think it's perfectly fine for anyone to have a fun bucket. What I like doing is starting with my goal and work out how much money I need to reach my goal.
10:26And then money that's excess of that for me can be any of that money can be the fun bucket. Right. So for me, it's not as based on the percentage of the portfolio, even though I like that metric as I don't want to bet my financial independence goal on Republicans investing wisely and I'm tracking them or Democrats, either party or Democrats. Right. Yeah. On one party or another investing. Well, yeah, I think that's a very valid approach as well. One easy way to think about it is to have a particular brokerage account that is purely dedicated to fun that is separate from all of your other brokerage accounts.
11:10So maybe you've got like Vanguard and Schwab, and those are your serious accounts. And then you've got maybe a Fidelity or an E-Trade or a Robinhood, and that's just purely for fun. So thank you, Nancy, for the question. for that fun portion of your portfolio, have at it. Happy investing. Now on the opposite side of investing, there is spending, particularly home repair costs that creep up on you. And so we're going to address that in this next question, which comes from Leslie. Hi, Paula. One of our largest expenses in the last few years has been home repairs and maintenance. I was wondering if you as a rental investor could help answer or could bring on a guest to help answer how to keep this expense minimal and reasonable.
12:09So are there any tips you have on choosing good contractors, negotiating a fair price, maintaining your home to minimize the chance of needing expensive repairs, easy DIY items to learn or identifying a home that will need minimal repairs in the first place through shopping around for your home. Home repairs and maintenance as well as optional upgrades to our home have been one of the top three expenses for us in most recent years, definitely far more than any amount that we spend on auto and transport given we have one electric car and use public transit a lot. So for us, when we talk about the top three expenses, our mortgage, our home repairs, and food as well as travel are the items that we're spending the most on.
13:06So thinking about where we could make the biggest dent without impacting our lifestyle, I'd really like to hone in on how to reduce home repairs and maintenance. Thanks for all you do. Leslie, thank you for the question. I absolutely relate. Home repairs, particularly if you have an older home, occupy a massive chunk of the budget. What can you do to reduce those costs? First, you mentioned contractors. Broadly speaking, there are contractors that tend to work for owner-occupants and service owner-occupants and service retail homebuyers. and there are contractors that tend to work with investors.
13:49There are some people who do both, but the differences that you see are that contractors that tend to serve retail homebuyers, they are the companies that have a logo and stationery and everyone's got the matching shirts with the logo on it. When you see that, you know that that is a contracting company that serves retail and they price accordingly. There are also contractors who typically just work with investors and you'll find them through word of mouth. You find them by talking to other investors. So you go to local investor meetups or if you're investing out of state, you join local investor forums, email listservs, Facebook groups, all of the online spaces where people tend to meet.
14:42Or you have Zoom calls with other investors. And word of mouth, you, you know, ask them, hey, who's your electrician? Who do you use for HVAC? Who's your plumber? Or you talk to property managers and ask, you know, who's on your approved list? Because property managers typically have a very short list of pre-screened and pre-approved vendors. So you ask them, hey, who are some of your pre-screened, pre-approved vendors? And some of them will share that information with you. Some of them won't. sometimes you just have a house that's managed by a property manager and after a few years of having it you see who the vendors are get to know yeah yeah yeah exactly like you know who the vendors are because like you see the invoices and so then if you have other properties in the area and you know you can either you can either pass that information along to other investors or if you have other houses in the area that you are self-managing you can just reach out to those same vendors.
15:41Real estate is all about relationships. Real estate is about people, not properties. And so much of it really is when it comes to finding the contractors that tend to work with investors and tend to price accordingly. Much of it is really word of mouth. Part of Dr. Thomas Stanley's research, Stanley was the author of The Millionaire Next Door. And part of his research involved looking at, of course, the habits of wealthy people. And one thing that he found, Paula, was that people who are very wealthy tend to all work from word of mouth. So the best way to find the best people, if you know anyone who's affluent in your area, and ask who they are.
16:27Now, what a lot of people think, and this comes from two books that he had that went along with The Millionaire Next Door. He wrote a book called Marketing to the Affluent, and he wrote another book about selling to the affluent. People, when they first work with affluent people, think that, well, people that are wealthy have tons of money, so they pay a bunch of money. No, that's not how they got wealthy. They became wealthy because they know great value. And in fact, in his book about selling to affluent people, he said, if you're going to sell to someone who's affluent, do not try to charge them more.
17:02charge them a very fair price and work your butt off for them. And you know what they'll do? They will refer you to everybody they know. They'll refer to every, because rich people don't have time to go do a ton of due diligence on every little single things they need to do due diligence where it makes sense. And if it's HVAC repair, I'm just going to ask my buddy Paula who has this done on her properties and and try out her person. And the degree to which I'm successful is going to be much higher because I know that Paula has done a lot of research already. So I'm going to pick winners that I work with more often.
17:43So the numbers really back up what you're saying, which is it is a people game and find the people who know the people and you'll end up with much better relationships and people that are not going to take advantage of you and they're going to charge you the right amount for the work you're getting done. Right. First of all, Joe, and I know we've had this conversation before, every time you say affluent, I pronounce it affluent. So it's like, every time I hear you say affluent, I'm like, oh yeah, that's how Joe pronounces that word. Affluent. Affluent. This is tomato, tomato. I think it's the way you're using the word, actually.
18:24I think both are correct, but I think people are... Agree to disagree. Well, if you're happy being wrong, that's fine. But beyond that, the thing about word of mouth is that if somebody makes a recommendation, if someone refers out somebody who sucks, it reflects badly on the referrer, right? Like, I've had a couple of friends in the online space who have recommended vendors and that vendor has ended up sucking and that reflects badly on them and vice versa. I've had a couple of friends who recommended vendors and that vendor has been great. And now I think more highly of the original referrer.
19:10So because there is that transfer of reputation, what often happens is that if somebody gives you a recommendation, they give you a detailed and complete and nuanced one. So for example, there are people that I've recommended where I say, all right, here are the pros of working with this person. Here are the cons of working with this person. Like here are all of the details of what the experience is going to be like, the good, the bad, and the ugly, so that you can make an informed decision as to whether or not you're okay with that. Because I know that if I'm going to be issuing a recommendation, I need to issue that complete picture.
19:48Or sometimes I'll say, hey, here's a person I sort of know them, but not very well. So I can pass their information along, but I can't specifically vouch for them. I might say something like that as well. So just depending on your level of relationship with that person, you're going to get a very complete description because that transfer of reputation depends on it. This is why one of my favorite lessons from this coaching group that I've used for a while called Strategic Coach, a lesson from them that I've told a few times on the show for people that are new. This is a key lesson that I wish I'd learned earlier in life, Paula, which is ask who, not how.
20:29And asking who is exactly what you talked about. The person not only will make the recommendation, but they will tell you a little bit, many cases about how they will fit with me in particular. You will like them because of this. You won't like them because of this. Like I can get so much more information than I can just Googling something or ending up in YouTube hell. Yeah. Yeah. I love that when it comes to contractors. You know, there's a whole other piece of this that I think we need to talk about too, which is, I think an important part of a financial plan is to have a spreadsheet or a calendar where you think about the things that are inevitably going to happen to your house.
21:09because some of these surprises that people have truly are not surprises if we do some critical thinking around the fact that there will come a time when I will need a new roof on this house. And maybe that's not 2025, but that's 2032. And then every year, if it lasts past 2032, that's great. But if I plan my sinking fund based on the fact that I'm going to need this big sum of money for this big expense then, then it's not going to be the kick in the pants that it is when all of a sudden I need a new hot water heater and it's several thousand dollars that I wasn't expecting. But if I know the life expectancy of my hot water heater and I put it on my calendar ahead of time and it becomes then a piece of my budget today for a 2032 expense, it's going to be much, much easier.
22:01So things like the HVAC unit, the hot water heater, the roofing. The windows, the siding, the flooring, all of it. Yes. Yeah. Yeah. Those major expenses build a timeline out of those continuous maintenance projects. And that I think will lower Leslie the burden on you significant. There's still going to be crap that comes up, right? But still it's going to lower the burden a lot. Right. Exactly. Yeah. We have a spreadsheet, just a spreadsheet of life expectancy of every major component. Yeah. This rental house that I had, I thought the furnace was going to go out in year X. I don't even remember the years.
22:39This is like 2006 where that baby was still going, Paula, in 2009. I was high-fiving myself because I had the money to replace it. And I just, I felt like I'm living on borrowed time. It was so awesome. versus had I not planned at all in 2009 or 2010, when it finally gave out, I would have gone, oh, are you kidding me? I got to replace this. Right. But instead, when I replaced it, I was like, I got five extra years out of this thing. Yeah. It felt like a gift. Leslie, you also asked about the possibility of doing some work yourself. The issue is twofold. Number one, if you don't already have all of the proper tools, the upfront cost of buying those tools is going to be significant.
23:27And at least in the short term is not going to help you save any money at all. And don't use some of my friends that just love buying power tools. We've all seen the videos about quote girl math, you know, about I do the thing and it ends up being free. Right. And I think there's also power tool math with my power tool friends. I buy the power tool. I use it three times. It's like, it's free. haul up because I didn't have to pay somebody else to do it. Yeah. And then you upgrade to a bigger house so that you have a garage that can store it. Right. All the power tools. Yeah. Right. If you don't have a garage or maybe you have like a one car garage.
24:05Okay. Now we need a bigger garage. Yeah. I will say this though. I do like when there is repair, if it's something I think I might be able to handle myself, I have liked over the years trying to do it the first time by myself or at least following the person around and see how they do it. Because the thing I've also learned over time is that if I can more accurately diagnose the problem, number one, because I've seen it firsthand, or number two, I can talk to the repair people a little bit more in their language. I tend to also get the job handled better and I can supervise it better. So I do like the fact that I've repaired a toilet before.
24:50I like the fact that I've worked on not heavy-duty electrical stuff, but I've worked on some light electrical things. I think knowing just a little bit about those can also go a long way. I think if nothing else, having the vocabulary to be able to talk about it, you know, to be able to talk about the flashing when you're discussing a siding project, right? That type of vocabulary knowledge, that's actually a big component in our course, Your First Rental Property. in the section on renovation, the module on renovation, we dedicate a lot of time to learning the vocabulary so that you can have an informed conversation with a contractor.
25:35Because when you are using the right words, that conversation is going to be a lot easier. It's going to go a lot further. They're not going to be trying to interpret what you're saying as you're incorrectly describing it. You'll be able to describe the issue accurately, and then you can go straight to discussing the solution rather than them trying to figure out the problem. Can I make a note here and say for all the people who are like renting is throwing money away, like let's highlight everything that we have just talked about. Particularly in high cost of living areas where the price to rent ratio is over 25, there is a strong, strong case for being a renter.
26:16The exception is if you're house hacking. I had one more note as I was listening to Leslie's question that also has struck me. Speaking with home inspectors, when people hire home inspectors, they often see it as a checkbox and the home inspector goes out to the house and they do the home inspection. They give you this binder. you take the binder, you put it someplace and you never look at it. When you're purchasing a property, which Leslie asked about identifying a home that might need less maintenance, every home inspector I've talked about this has said the same thing. They are not even open to you following them around when they do the home inspection.
27:04Many of them like it, Paula. They like the fact that they get to show you how they're evaluating the house for potential maintenance issues. And a lot of the time when you follow them around, they will point out things that don't even make it to the report. So number one, reading their report is great. But number two, if you can show up during the inspection and actually talk to the person who's doing the inspection of the property you're considering buying, hugely rewarding in many cases. And I actually take it a step further. So in addition to hiring a home inspector, I also will pay on an hourly basis, I will pay a contractor to walk through the property and issue recommendations on what they think should be done.
27:59And it's not a formal inspection. It is something that's additive and supplementary to the formal inspection. But the reason that I do that is because an inspector has a certain degree of formality, right? The inspector's job is to compile a report that complies with the guidelines around what is supposed to be in that report. And that is sometimes different from the day-to-day lived experience of what do you actually want repaired. I still get the inspection done, of course. That's a non-negotiable. I would never waive inspection on a property. But in addition to that, I also get a general contractor paid on an hourly basis because you got to compensate them for their time, right?
28:46They know that this is not going to be some free evaluation. This is not going to be like them coming up with a quote for work, right? So pay them for their time, but have them walk through the property and just offhand, informally tell you what they think. Oh, Leslie, the other thing I was going to say on the topic of doing the work yourself is think about the opportunity cost. That's the other element of it. Because if doing some of that work yourself comes at the cost of not building a business, not writing a novel, not pursuing some other money-making activity, then it might not be a cost savings.
29:27It might actually cost you far more in missed opportunity. So if you're dedicating a weekend day, then the question is, what else would you do on that day? But then again, if you're dedicating like a weekend day to it, there's not a whole lot you can actually get done in a day when it comes to home repairs or even in a weekend. So necessarily, if this is a weekend warrior type of a thing, the scope is going to be limited. But I think for most people, economically speaking, that time would be much better spent doing something else. Because somebody who specializes in a task is going to be more efficient at it.
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30:04They're going to be able to do it faster and likely better. And then you can spend your time doing whatever it is that you specialize in or deepening your area of expertise. Thank you, Leslie, for the question. That was a fun one. That was a fun one.
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35:13On the topic of spending your weekends starting a small business, that is the next question that we're going to answer. And that question comes from Anonymous. Hey, Paula and Jo. I'm calling with a question about starting a small business primarily for tax purposes. Last year, our household earned around$440 ,000 in W-2 income, which is our only current income stream. I listened to your tax strategies episode from April, and it helped me understand why our tax burden seemed so much higher than other high earners I hear about, the lack of flexibility in W-2 income tax strategies. I've had thoughts in the past about turning my hobbies into side hustles, like selling my crafts or custom birthday cards on Etsy.
35:57I'm currently in a season of life where I would have minimal time to devote to something like that with toddlers and grad school and a career. But I did think about starting an LLM or other business structure for the tax flexibility. For example, my understanding is that we can pay our kids as W-2 employees and contribute to their post-tax retirement accounts if they participate in my craft selling business, even if the money we use to pay them comes from our W-2 income rather than proceeds from the actual business. I would love to hear your thoughts about the strategy. Is it silly to create a small business when my primary thoughts are about tax and investment strategy rather than the business itself?
36:35Is the juice worth the squeeze, as Joe would say? What professionals would I need on my team to do this properly? Are there any other pitfalls or considerations I should be focused on? Thank you both very much for your time and for all the great advice that you give to the community in a very accessible way. Anonymous, thank you for the question. There's something that I want you to be aware of, and it's called the three of five rule. The IRS basically wants to make sure that you are not trying to write off a hobby as some type of a money losing business for the purposes of getting a tax benefit.
37:12And so there's a safe harbor rule, an IRS safe harbor rule that states that if a business shows a profit in at least three out of five consecutive years, then the IRS generally is going to assume that that's a legitimate business. But if you are not showing a profit in three out of five years, in other words, if you're consistently showing losses year after year, that's going to trigger a big red flag and possibly an audit and then possibly back taxes and penalties. I don't even think about this monetarily though. I actually think about this a different way, which is I have a great coach who I've been working with for a long time.
37:55And she told me long, long ago to stay away from what she calls energy drainers. And this will take all of those hobbies that you love and turn them into energy drainers. Because if you are somebody who loves to bake cupcakes, as an example, and you turn it into a business, you will no longer be worried about making beautiful cakes as much as you're worried about profit margin, hiring the right people, getting the supplies for the cakes, delivery times, throwing away stock that wasn't good. It becomes this abstract business thing that has very little to do with cupcakes and a bunch to do with running a business.
38:40With operations. Yeah. Yeah. And so the joy of cupcakery goes out the window. Yeah. Unless you love running a business. And what I heard specifically from you was in this season of my life, no, no, no, no, no. And so I would definitely say the juice is not worth the squeeze. I wouldn't go near this. And opening a business is so hard to do it for a tax break is 100%, I think the wrong reason. Yeah. The moment you open a business, it's inventory, it's procurement, it's, you know, for the people you hire, it's processes, onboarding, SOPs, KPIs, it's project management software. Yeah, sure. Maybe you can, when your kids are old enough to be doing bona fide legitimate work, you might be able to hire them.
39:35But like any cost savings associated with that is going to be offset by all of the software that you need just to operate the most basic of businesses. For example, if you're selling physical products, inventory management, a subscription to Airtable. Yeah, I mean, like, and look at what they charge per user, right? And then you've got like seven or eight users on there and you're like, wait a minute, I'm paying them how much? What? Right. And it's thing after thing after thing. That's like that. Death by a thousand paper cuts. Yeah, exactly. The costs, even for a purely online business, the costs, the operational costs are enormous.
40:15Well, for me, it isn't even just the cost. It's the little thing, you know, you brought up air table, which is perfect by the way. Yeah. It's every month I get my recurring subscription cost. And as I'm looking through my cost, you're managing 85 different little connectors to make the end product that you would have never thought. Just on this podcast, let's say that Steve and Dan didn't exist and you had to edit this yourself. Paul's like, oh God, no. Yeah. But for those of you watching this on YouTube, you could just see my expression. But the editing software called Descript and there's other editing software tools, but your editing software tool, then there is Megaphone, the place that you upload it to.
41:10And there's different things there. The software that you and I use, Riverside, to get there. There's three solutions right there. And I'm sure I'm forgetting three more. And then anything to get the word out about your episode, right? The marketing of the episode is a whole Canva, which is another subscription. And this all assumes that you're doing it yourself. Yeah. And if you're not doing it yourself, then you have Steve and Steve is wonderful. He ain't cheap. And that's because Steve, you're worth every penny and more. And we love you. Yes. And Dan is amazing. And keep all of that in, please.
41:52Yes. But having the people to do the pieces in a beautiful way for you that you don't have time to get to. Well, and then the HR software, right? Gusto. Right. To pay people. To pay people. And then bill.com in order to track accounts receivable. Licensing that you may need in individual states. Keeping your LLC current in the state that you're in. Oh, well, there's a lot going on. Yeah. And I know there are people online though, Paula, that pedal this, and I'm just going to call it the way I see it, which is this nonsense of, Hey, all you got to do is just hire your kids. Or we go on a family vacation.
42:37Then this is the current one that cracks me up. We go on a family vacation. Let's say we go to Puerto Rico. And because my kids are on my board, this is a good one. We turned my vacation into a board meeting in Puerto Rico. I saw this one last week. I haven't heard of this. That's all you got to do. You just, you have your board of directors be your family and bam, you're having your board meeting at Disney world. Are you kidding me? as if the IRS isn't going to see right through that. Well, and again, you need to post a profit. Remember the three out of five rule. If you're posting losses, if you're posting losses for too many years, the IRS is going to hunt you down.
43:26And by the way, you don't have to make a profit three out of five. You have to show that you tried your ass off in three out of five years to make a profit. And it gets really rigorous. and yeah, no, no, don't do it. Please don't do it. Well, now that we've dissuaded everybody from starting a business. Well, I think for people in the right season of life, and I'll point to one, my spouse, Cheryl, is thinking about in the next 10 years, what her next thing is gonna be. So on the side, we've started Stacking Adventures, which is our travel blog, which we post to not all the time, but we're starting at Paula, this thing that is a business that we want to be a business as our next thing, but we're doing it on weekends.
44:19We're doing it a little bit at a time. It isn't a serious quote business yet. It is much more bootstraps and getting the foundation laid so that when Cheryl decides that she wants to do the next thing, that she can just step into it. We have all of the foundation in place, right? If you're at that point that I would say, go for it, but realize that A, it's not going to go very far and B, beware what you ask for because it does turn vacations into content creation. When you go visit someplace can also suck the joy out of going to see the place. Right. Yeah, I have friends who started a travel content creator business because they were traveling a lot and they wanted to write it off on their taxes.
45:08And now, every time I invite them to go out to dinner, they're like, oh, sorry, Saturday night, we have to stay in and work on our business. Yeah. It was meant originally to be a tax write-off. And now it is the reason that we never see them anymore. They're not hanging out with us on Friday, Saturday nights. They're staying in and working on the business. That's a whole nother episode because a basic question I would always ask business owners when they came into my office was, is the business working for you or are you working for your business. And almost every entrepreneur would tell me, no, I started off because I wanted the business to work for me.
45:53And now I work for the business. The business has consumed me, which is something then I would try to help them change around. Right. But it's hard when you start out, it is so hard. I'm reading a book right now by the founder of a Midwest coffee chain that some of our afforders will know called Bigby Coffee. the book is called grind and what i love about the book i love the double entendre yeah that's a that's a great title wow what a great title but he goes back paul and you remember this your first years of being in your business yeah the first years are you are your business and the only thing that matters and this guy hammers this home is sales the only thing that matters is sales you You need to tell your family that you don't exist.
46:41You need to be there on nights and on weekends and really, and you know what? Five years from now, you'll be so happy that you did it. But if you don't start the business that way, A, the business won't succeed. And B, you'll end up regretting that you kind of went halfway. Yeah, Grind is a really good book. Anonymous, thank you for the question. Before we sign off, we have to give you a name. Oh, we already know the name. Clearly you're going to be Nancy. Nancy. Yeah. Because, I mean, you're anonymous. We're anchoring the episode with Nancy as the first question and Nancy as the last question.
47:20So anonymous also has to be Nancy. Nancy number three. Duh. Yeah. Right. Well, actually you're Nancy number three, but technically you're in the Nancy number two spot. Yeah. Second Nancy. Nancy. Or would you be the third Nancy because the other two were previously named Nancy and you're the most recent to receive the name of Nancy? I think the second Nancy is good. Maybe two and a half. And Leslie, by the way, whose question we answered last, your middle name is now Nancy. Yes. So thank you, Nancy, for the question. So great to meet you, Nancy. We're going to take a final break to hear from the sponsors who make the show possible.
48:03And when we return, we're going to hear from Nancy number four. Four? No, three. Oh, man. If Leslie's middle name is Nancy, then Nancy number four. Oh, geez. I'm so confused. Anyway, we're going to hear from another Nancy.
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50:10Welcome back. Our final call today comes from Nancy. Hi, Paula and Joe. I've been a longtime listener to both of your podcasts, first introduced to Paula through Stacking Benjamin. Both of your podcasts have provided great insights and meaningful guidance on our financial journey and really help shape our retirement plans in a positive way. You both have my gratitude and appreciation. I've really enjoyed the Wednesday format, as you both always bring great, thoughtful perspective to callers' questions, so I'm reaching out with a good problem and would appreciate your input. I'm retiring in April and will receive an estimated$53 ,000 lead payout.
50:45I'm weighing a few options, which contribute to a$457 Roth with any remaining amount to my$403B Roth, take the payout in cash and use it to convert some of my pre-tax savings to Roth, or is there a smarter move that I haven't considered? Here's a quick snapshot of our financial picture. I'm 57 and will have 20 years vested in my state's retirement system pension plan at retirement. My retirement accounts include a 403B with$351 in pre-tax and$206 ,000 in Roth, of 457 with$178 ,000 pre-tax and$38 ,000 in Roth. And I also have a Roth IRA of$12 ,000, but I'm currently not contributing to that. My husband's almost 58 and a federal employee, and thanks to a special military buyback program, he was able to purchase retirement credit for his military academy and active duty military service time.
51:36Next summer, when he reaches his fifth work anniversary, his leave time will jump from five years to over 19 years. I should also note he is a service-connected disabled vet receiving VA health care and a monthly tax-free disability payment of$1 ,900. Our plan is for him to work until 60. Additional financial details, we have over$162 ,000 in a brokerage account. My husband has an IRA around a million and over$200 ,000 in his TSP. And we also have a combined total of$46 ,000 between CDs and cash. Our only debt is a 2.25 % fixed mortgage, and our monthly expenses are about$8 ,000. We'd love to hear your perspective on how to best optimize this lead payout and whether Roth conversions or some other strategy might make better sense in our situation.
52:24Thanks again for all that both of you do to educate and look out for us. Your work truly makes a difference. Nancy, thank you for the question, and congratulations on your upcoming retirement in April. So my preference, and Joe, I'm curious to see if you and I are going to agree on this because we have not discussed our answers beforehand. Okay, what I love about the$53 ,000 payout is that it's going to happen in 2026, which means 2025 is going to be a high income tax year because you're working for the full year. 2026, you're working partial year, so it's going to be a much lower tax year. So you get the payout in 2026 where you're in a lower tax year and you can start funding Roth conversions later in 2026 when you've got lower taxable income and your tax bracket is going to be lower then than it is today.
53:18So I say start making Roth conversions next year in 2026. I am so agnostic on this. I think that you're not going to be upset either way. I think you already have enough money in a Roth position for tax diversification in retirement. So I think you've done a good job of building that portion of your tax triangle. So I can make an argument for going ahead and taking the bird in the hand pre-tax money now because of the fact that I don't know if having that much more money in a Roth is going to significantly affect your situation in the future. I think I'd have to know a little more. I'm also thinking, we answered the question from Leslie about some of these big rocks.
54:15And if you think that your financial independence goals are covered without this money, the question that I would ask Paula is what other things, what other big expenses are coming up? Because this could also be a sinking fund that is just separate. it. So I'm not sure. I can see the basis of her timeline and her financial plan, but I think I want to know what these other things are. So yeah, I see where you're going with funding the Roth conversions and because income streams are going to be less next year, which means the tax bracket situation isn't going to be what it is in 2025. Okay. Yeah, I buy that, but I also buy pre-tax and I also buy, I don't think there's a wrong answer here.
55:05Well, she said she's considering contributing to a 457 Roth and then putting any remaining amount in a 403B. That's one option, but she's also considering taking the payout in cash and then using it to convert pre-tax savings into Roth. And I like the payout in cash followed by conversion, I like that option better. Why do you like that better than just going into the Roth 457? Greater control, greater ability to make a multi-year conversion. You know, she's 57. Her husband is 58 and plans to work until he's 60. So he's going to be working for another two years. I think with the payout in cash followed by conversions, they're going to have some tax Valley years where they can spread this out.
55:55So I'm thinking 2027 as well. So when you say control, you mean in control of the investments because you have a wider range of investment choices in the IRA? That too. Well, I guess I don't know what choices she has in the 457, but generally speaking, most people are going to have better investment choices outside of something that is employer-sponsored, although she might be able to roll out of any employer-sponsored plan at the time of retirement. Certainly that's a possibility. But more of what I'm thinking is if this$53 ,000 payout goes into a 457 Roth, it's going to hit a contribution limit.
56:39The rest of it then goes into a 403B Roth. I think that's a fine plan. It's a perfectly fine plan, but I like the idea of her having the flexibility that comes with taking the payment in cash and then having the remainder of 2026 to execute Roth conversions on a portion of it or all of it, you know, or perhaps waiting until 2027 and then executing Roth conversions. Optionality is greater with the money coming as a cash payout. You know, there's something to be said though, too, on the other side of that argument, Paula, about the simplicity of just contributing. You know, you got workplace tax tech taken right out of your paycheck.
57:30I don't have to freedom from worry. Don't have to show it on my tax return. Just the ease of the 457. So again, And I can see both sides of this and I don't think there's a bad answer. Yeah, I don't think there's a bad answer. Which by the way, these were always my favorite questions when I was a financial planner. When all the answers are good, you're not like, how are we going to make ends meet? How are we going to make it through this crisis? Those were always difficult and really sometimes frustrating. you know but in this case it just all seems like a win there is one more option paula that we didn't discuss she mentioned that she has the mortgage and the mortgage is at a very low interest rate so clearly she's thinking she would keep that mathematically it probably makes sense to keep that however when people get close to retirement age sometimes the cash flow freeing up the cash flow of not having to make that monthly payment, not having that loom over your head when you're creating your distribution strategy from your investments might also be something to take a look at.
58:45I don't know if she didn't mention how much money there is left in the mortgage, but that's something I would explore. Also, I've been doing a ton of research lately on what the happiest retirees know. And happiest retirees are people that understand math, but they still pay off the debt anyway. The freedom from worry of having that debt hang over their head is something that pretty smart people do, even though mathematically, it might not at first make a lot of sense. Right. She mentioned that their monthly expenses are$8 ,000. My question would be, if that mortgage were paid off, what would the monthly expenses be?
59:24Right. Because that will have an impact in how much they need to draw down. So I think I'd put that on the table as well, just to chat about. Yeah. If the 53 ,000 is a big enough lump sum that it could pay it off in one fell swoop, I'd be far more inclined to do that than if it moved the clock forward, but didn't completely eliminate it. A hundred percent. Yeah. If she told me there's$35 ,000 left on the mortgage. Right. Yeah. And it's$1 ,500 a month or$2 ,000 a month. Exactly. Yeah. Because that would have an immediate benefit when it comes to cash flow versus if there's $200 ,000 remaining on the mortgage.
1:00:05Forget about it. You know? Yeah. Then there's no cash flow benefit. Yeah. You know, you move the clock forward and that's great. It might still be worth running a spreadsheet to consider it. Well, and especially against Paula, the piece that I brought up earlier, which is on the timeline, there will be these big rocks, these big expenses. And if we look at maybe you might convince me at five years from now, they're buying$150 ,000 RV, let's say, and they want to use that to travel. Then I might go, okay,$200 ,000 left on the mortgage. Let's see if we can get that paid off first before we make this big expense.
1:00:44But generally I'm with you. No, no. But I love timelining first these big expenses that you see coming up. And then maybe I can make a case for pull it forward. But generally, I'm 100 % with you. Yeah,$200 ,000 left on it. No, no. Yeah. Well, thank you, Nancy, for the question. And thank you for being a longtime member of the community. And thank you for being a Nancy. Yes. Thank you, Nancy, for being Nancy.
1:01:15well joe we have done it again where can anyone named nancy find you oh you can find us at the greatest money show on earth the stacking benjamin show monday wednesday friday nancy mentioned that she learned a lot from us nancy don't tell anybody that because you'll ruin our reputation that you uh learn something that's horrible we want you to have a good time feel like you can do it. And that's every Monday, Wednesday, Friday. And the amazing Paula Pant is with us on many Fridays. And what you may hear is something very exciting, which is that Paula unfortunately had to miss a recording. And the lovely woman who filled in for Paula on our Friday round table, talking about five regrets that retirees have if they don't do the right planning.
1:02:04Jill Sirianni from Frugal Friends joined us and actually won the trivia on Paula's behalf. For those of you that aren't Stacking Benjamins fans, you have no idea what we're talking about, but that's a big deal when Paula wins trivia. Yeah. You know what's scarce is valuable. And Paula with the win at trivia time. So Paula, I think you owe Jill Sirianni from Frugal Friends,$10. Wow, that's incredible. Well, thank you so much, Joe, for being part of the show. And thanks to all of you for being afforders. If you enjoyed today's episode, please share this with Nancy. All the Nancys in your life. Share this with everyone you know named Nancy.
1:02:50That is the most important thing you can do to help all the Nancys of the world reach better financial health, make better financial decisions, grow their net worth. Nancy's of the world unite. Yes. Also, please leave us a review. Those reviews are absolutely incredible. We read every single one and it helps us so much in booking better guests. So open up your favorite podcast playing app, leave us a review. And while you're there, make sure that you've hit the follow button so you don't miss any of our fantastic upcoming episodes. Find us on YouTube, youtube.com slash afford anything. Hit the subscribe button, hit the like, leave a comment.
1:03:29share it with all of the Nancys of YouTube as well. Thank you so much for being part of this community. I'm Paula Pant. I'm Joe Solcihy. And we'll meet you in the next episode.
From the publisher
#657: This week, Paula and Joe dig into a listener’s question about ETFs that track the stock trades of U.S. politicians — including the Democratic “NANC” fund and its Republican counterpart “KRUZ.” They explore whether this strategy is smart investing or just expensive entertainment.
Then, they shift gears to home ownership headaches. Another listener asks how to control ballooning maintenance costs, and Paula shares her best advice for finding trustworthy contractors, budgeting for repairs, and knowing when DIY doesn’t actually save money.
Finally, an anonymous caller wonders if starting a small business just for tax breaks makes sense. Paula and Joe explain the IRS rules — and why energy and purpose matter more than deductions.
From “fun money” investing to financial planning that actually works, this episode is all about balancing curiosity, caution, and common sense.
Key Takeaways
Congressional-trade ETFs aren’t a shortcut to wealth. They’re speculative, lag behind real trades, and carry high costs
Home maintenance is predictable — plan for it. Create a repair timeline and build relationships with investor-friendly contractors
DIY isn’t always cheaper. Factor in time, tools, and opportunity cost
Never open a business just for taxes. If it doesn’t make a profit or bring joy, it’s an energy drain, not a strategy
Separate fun money from freedom money. Keep speculation playful, and build wealth with focus and purpose
Chapters
Note: Timestamps will vary on individual listening devices based on dynamic advertising segments. The provided timestamps are approximate and may be several minutes off due to changing ad lengths.
(00:00) Should You Follow Congress’s Trades?
(06:00) The Lag Problem and Investor Bias
(10:30) The “Fun Money” Rule
(11:20) The Hidden Cost of Home Repairs
(15:00) Finding Investor-Friendly Contractors
(18:00) Planning Ahead for Repairs
(22:00) DIY vs. Opportunity Cost
(26:00) Starting a Small Business for Tax Breaks
(29:00) The IRS “3-of-5 Rule”
(32:00) Purpose Over Deductions
(34:00) Final Thoughts
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