Q&A: Her Brother Owns 3 Houses — Is That Why We Have a 'Housing Shortage'?

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28:49Welcome back. Before we get to Sarah's question, there was something I meant to say at the end of Karen's question that I forgot to say, which is I am a big believer that if you want to do something to improve the housing shortage, increase density. Just do what is in your power. If every single one of us increases density by one unit or even, heck, one bedroom, if all of us do our role in that, if that happens at a wide enough scale, that has a powerful effect on increasing the total housing supply. And so I am a big, big, big believer in if you want to both do well and do good, if you want to make more money and also increase housing supply, buy a home with a basement that can be converted, like a walkout basement that can be converted to an autonomous dwelling unit.

29:48So now you've got a single family home with a walkout basement, right? You turn that walkout basement into a separate unit. Now the single family home that you bought is two units instead of one. You have just played your part in increasing the number of units available. You've just doubled from one unit to two. You can do the same thing if you buy a single family home that has a detached garage and you convert the detached garage into becoming its own unit. You can do the same thing if you buy a home and build an ADU, an accessory dwelling unit in the back as an autonomous independent unit. You can even do the same thing if you can't necessarily create an entire separate unit.

30:28If you get a two-bedroom home and you have, let's say you've got a large living room, for the cost of some drywall and a few two-by-fours, like it's very, very cheap to build a partition wall. You can put up a partition wall and turn a two bedroom into a three bedroom. And now you've created more housing density. So a larger family and large families often struggle to find places to live. A larger family can live there. And what's beautiful about the solution is that you're doing something proactively to address the nation's housing shortage, which is a serious problem. and you yourself as a rental property investor are making more money because now you have just purchased a single family home and turned it into a two unit or you've purchased a two bedroom home and you've turned it into a three unit.

31:20So you yourself are making more money and you're also making a positive contribution to this housing supply shortage. So I'm a big believer in doing that. Number one, I just want to say that. Number two, if you live in a high cost of living area, like I live in Manhattan, right? You're obviously not going to do that in Manhattan, unfortunately, even though Manhattan needs it. You're going to do it in a place where you have cheaper costs. You don't have the regulatory burden. You don't have the permitting and red tape burden. And you're going to do it in a place where the numbers pencil out such that it makes sense to do it there.

31:59So all of that is to say, we've put together this free guide and it's seven expensive mistakes that first-time real estate investors make. It's totally free. You can download it at affordanything.com slash rent. That's affordanything.com slash rent. Particularly if you live in an expensive area and you're thinking about investing in a less expensive area, like you live in New York, you're thinking about investing in Indianapolis, or even if you don't, even if you live in Indianapolis and you're thinking about investing elsewhere in Indianapolis, but you want to maybe turn a two-bedroom into a three-bedroom, regardless of whether you're investing locally or out of state, these are just some of the mistakes that you should avoid.

32:43It's a free guide, affordanything.com slash rent. With that said, let's turn to our next question. comes from Sarah. Hi, Paula and Jo. I'm a second time caller here.

32:56Paula Pant:I called in a few years ago with the question about adjusting the 4 % rule for expected differences in spending over the years as a way to safety check what my financial planner was doing. Your answer and what I learned from listening to your podcast helped give me the confidence and knowledge to take an earlier mini retirement. Since that call, I took a couple of years break from work, spent time with my kids, relocated, bought a house, and returned to work about a year ago. I was working with a financial planner that charged a flat annual fee to help me through a lot of change and uncertainty and also investing some money from equity I had in my last employer.

33:31Paula Pant:I made the decision to self-manage my money now that I am back to work and expect the next 5 to 10 years to be really stable. I'm hoping to retire in about 15 years with a retirement income of about$100 ,000 per year. My question is about how to take over what my financial planner was doing and simplify in a way that is more manageable for me to do myself. I have about$1.5 million invested that was being managed by my financial planner and is split into just over a million in a rollover IRA,$150 ,000 in a Roth IRA, and$325 ,000 in a taxable account. I also have about$500 ,000 in home equity and$25 ,000 in a 401k.

34:12Paula Pant:Now that I'm looking at my portfolio myself, I'm invested in 13 mutual funds and ETFs that include things like a global REIT and 1-3 and 20-year bonds. My IRA, Roth IRA, and taxable account also all have the same allocation. This seems too complicated for me to maintain and know where to invest any new money, and I also think each of these accounts should be allocated differently. My question is about how I can make this manageable for myself. I know I don't have to worry about tax in the IRA and Roth IRA if I were to replace any funds, and I know that I'm limited in the taxable account without triggering taxes.

34:49Paula Pant:I'm mainly looking for how to reduce how many different funds I have, like can I go to three or four? I would also like to make my asset allocation more efficient. I would really appreciate any advice on how to simplify my portfolio, and thank you again for everything you've taught me and the profound impact it has had on my life. Thanks. that's so exciting. The fact that she was able to take the mini retirement and get all that done. It's just great. Yeah. It's incredible, Sarah, thank you for calling back and also congratulations on what you've done on spending that time with your kids and relocating and Joe and I can give you information, but you're the only person who can make changes in your life.

35:36And so it's incredibly gratifying for us to hear that you've actually taken this information, taken action on it, and used it to live a better life.

35:49Paula Pant:As always, Paula, when we have questions like this, I think it's important to take what seems initially complex, because you can hear a lot of complexity in this question, and to really boil it down to what are the truly important pieces of the question. And there's a couple of questions that I would have back to her. The first one is she says she thinks these accounts should be allocated differently. And what I would have loved to have heard was how, how does she think they should have been allocated differently besides more simply? I have thoughts on that. Well, me too, but I would have liked to have seen because it might've given us an idea toward what her end goal is and what would have made her happier.

36:35Paula Pant:Second is she says she wants to be more efficient. Efficient means so many different things. I hear that she wants it more simple, but does she mean more tax efficient? Does she mean more smooth ride toward her goals? Is that more efficient? I'm not sure. Efficient is a word that sounds phenomenal, but it can mean so many different things depending on how you apply it. So I'm not really sure how she wants it to be more efficient. But that said, I knew you'd have ideas. And of course, I have a bunch of ideas too. Well, when she said that she wants it to be allocated differently, she's got exactly the same allocation in a tax-deferred traditional IRA, as well as a Roth IRA, as well as taxable accounts.

37:22So you think about the three different tax treatments, right? Tax-deferred, tax-exempt, taxable. She's got the exact allocation in accounts with all three of those tax treatments. So when I hear her say that she thinks it should be allocated differently, which I completely agree with. And when I hear her say that she wants it to be more efficient, I interpret both of those statements to mean she wants good asset. Yeah. Asset location. She wants better asset location.

37:50Paula Pant:It is so funny because for people that aren't with us on YouTube, I'm holding up my notes, but check out what I drew. I drew a little text triangle. Immediately, Paula, we're on the same page. Yeah, yeah, exactly. And just for people who are new to this, who are wondering what the heck we're talking about, here's how asset location works. There are three different types of accounts that you can create that have three different tax treatments. One is tax exempt. So So a Roth account, Roth IRA, Roth 401k, those are tax-exempt accounts. That means that in the year you make that money, you pay taxes on that money.

38:33But everything that you put in to that account, to that Roth account or that tax-exempt account, all the capital gains, all the dividends, all the growth forever will be tax-free. And so whatever you expect to grow the most should go into the tax-exempt account. Because all of that growth is tax-free, right? So you don't want to have your bond allocation in that account because that's not going to grow as much as the small cap allocation or depending on your philosophy, maybe there's a lot of controversy over like mega caps, whatever you think is going to grow the most. Some of that is speculation, but whatever asset class you think is going to grow the most, maybe it's small caps, maybe it's large caps, whatever it is that you think is going to grow the most.

39:23I keep saying that. That's what goes into your tax exempt accounts, your Roth accounts. That's an example. That's what we call asset location of you're not disrupting the overall asset allocation of your total portfolio, but you are making a decision that a portion of your portfolio is going to go into the account that has the best tax treatment for that portion, right? You do the same thing with your tax deferred accounts. Those are the accounts in which you don't pay the taxes in the year that you make the money. So you get a tax benefit in the year that you make that money. But down the road, you know, 20 years down the road when you're taking out those dividends and capital gains, that's when you pay the piper.

40:09So you're going to be paying the piper on a much, much bigger sum of money, right? And then taxable is taxable.

40:16Paula Pant:And I think when you take those and you start looking at asset location, of course, then there is the investments that throw off the biggest tax price, you might want to put in either the tax-free bucket or into the pre-tax bucket, the most tax-efficient ones, you probably want to put in the taxable account side because of the fact that they're going to be much more efficient. But even more than that, to me, I think I look at these three and I think about them in terms of flexibility and utility. The biggest utility bucket, the one that's really going to be useful as a Swiss Army knife later is the tax-free one.

40:58Paula Pant:Because I can then maximize tax brackets down the road whenever I feel the need. The more money I have there, the better off I'm going to be when it comes to maximizing tax bracket concerns. So let's say I'm living in the bottom of one tax bracket. I can take just the money between the place that I'm living in that bracket all the way down to the bracket below it out of that tax-free bucket. The government thinks I'm living a much cheaper lifestyle than I am. So the cost of money becomes a lot easier with that money in the tax-free portion. So I want to use that almost like a spread across the entire landscape of the rest of my life.

41:45Paula Pant:The flexible money, I really want to know what my goals are. So I want to start with, when do I think I'm going to use this money? And then how do I efficiently get money out of that pre-tax bucket so that I don't really flag the government too much? So I'm going to take that out also much more like a spread, but also according to ease of use. So while I can take the money out pre 59 and a half or the money in the 401k, maybe age 55, I'm going to choose to minimize my use of loopholes by using it after that just for ease of management. And I think then I'm going to try to spread that money out over time.

42:28Paula Pant:So the way I look at these is dependent on your goal. If it's pre-55, I might go more heavily into that taxable bucket first, which means that's going to be your more conservative allocation because it's the first bucket of money I'm going to. And then the other two, because I'm using them more like spreads against each other, I'll be more aggressive in the tax-free bucket and in the pre-tax bucket. which then gets to her stated goal is I'm not going to need this money for 15 years. Now, she didn't say she's not going to need it for anything, but I assume that when she said that retirement's 15 years away, the premise of the question is this is my retirement money.

43:08Paula Pant:What do I do with it? Well, if it's 15 years away, those bonds immediately in my eyes go bye-bye. They're gone. Yeah, that makes sense. Here's the problem though with what I just said, which is if you take what I just suggested there and you do it, I just increase the volatility in your portfolio by quite a bit. And there's a reason why financial planners don't do that. They don't do that, not because they're not afraid of the market, Paula, but because they're afraid of you. They are afraid of their client not being able to hang on to the roller coaster ride that is a higher volatility portfolio.

43:48Paula Pant:And so you kind of got to ask yourself, well, it makes sense over long periods of time to beat inflation. And the best way to beat inflation is to buy the companies that create the inflation in the first place because the cost of a handbag or the cost of we were using pants earlier. Yeah. The cost of pants. Tiwou versus Nordstrom. Yeah. But for both of those companies. They're going to keep pace with inflation. Well, to create shareholder value, they got to beat the pace of inflation. Yeah. So they have to find a way to beat the cost of inflation. So owning those companies makes total sense. So right along with these companies, which have a capitalistic objective to beat inflation, they're in it for the sustainability of their company.

44:36Paula Pant:That's why I suggest owning companies makes sense over 15 years. Man, the problem is, though, is that that is a bucking Brock override, Paula. And so I think she has to ask herself if that's okay. Because when she says she wants it to be easier to manage and she wants it to be more efficient, I would actually suggest that those two are a little bit diametrically opposed. And when you tell me that you have$1.5 million of investments, my desire to go along with a simpler portfolio becomes less. I would suggest instead, if you're going to manage your own money at$1.5 million or more, I would become, and this is painful to say, it's going to be painful to hear, and it might rub some people the wrong way.

45:25Paula Pant:You need to become more comfortable with a rising number of asset classes. So there's a level of education that I think that you need much more than you need simplicity. You can make it more simple, but at what cost? Because the reason you got rid of the financial planner, I'm assuming, is because of the cost. If you make it more simple, you're going to pay that cost, but you're going to pay that cost in returns. You're just paying it out in a different way. In terms of getting more comfortable with the rising number of asset classes, if you have a good dashboard that looks at your holdings, that tracks your holdings and helps you see what you have and rebalance as needed, it's not all that much more complicated.

46:13I'm thinking about Paul Merriman. Paul Merriman has a four-fund portfolio, an eight-fund portfolio. He's got a 10-fund portfolio. So it's not that much more complicated to manage the 10 fund as opposed to the 4 fund. Yeah. Particularly as a buy and hold investor who is going to one time set everything to the proper allocation and then check in again a year later to rebalance. Like there might be like the initial day of reshuffling everything. that's going to be the greatest hill to climb. But very much like rental properties, you front load the workload. And then after that, it's just maintenance.

46:59Paula Pant:I think there's one cautionary tale, which is, I totally agree with you. I think it should be nearly as easy. If you set this up correctly, managing four funds versus managing 10 means you're going to spend maybe 10 minutes more per year rebalancing. I mean, 10 minutes. However, there's some people that see that as a lot more complexity. And again, this kind of goes back to know yourself. The gentleman who currently hosts the Bogleheads podcast, the Bogleheads on Investing podcast is a CFP named John Luskin. John, at a recent talk, had a great, great slide that I loved on LinkedIn. He said, intelligence is knowing that a 10-fund portfolio beats a four-fund portfolio over time, wisdom is knowing you'll never maintain it.

47:50Paula Pant:If you're not going to maintain it, even if it's only 10 minutes, you definitely shouldn't do it. And then you go back to cost, Paula. If it's cost, because I know people worry about cost, and this is when we get back into the financial planner, no financial planner game, how are you paying the cost? Because there's going to be a cost. Paul Merriman has shown in his extensive research that there is a cost for reducing the number of positions. Now, there is definitely a - Like declining utility? Yeah. Going from 10 to 20 does not have the utility going from 1 to 10, right? Right. Going from 1 to 10, huge utility, 10 to 20, not so much.

48:32Paula Pant:But I think the answer lies in, and how to make this easier. There is a great way that I think about this, Paula, and it goes back to when I sold my financial planning business, I decided to become a high school teacher and a track coach. So I went back to school to get my post-BA teaching certificate. And when I did that, I had to take a class on the way humans learn, on human development. And it's very interesting that when kids learn, you can spend all day. I see these parents that spend all day telling their kid why, why this happens, why that happens. The human brain is not generally ready for that until much later stages of human development.

49:12Paula Pant:So telling your five-year-old why we're doing something is not nearly as effective as saying, just do it. It's because I said so. And the efficacy of telling them why you're doing it makes almost zero change in the behavior. But for an adult, if you don't tell an adult why, it drives us crazy. Because in human development, adults are not going to change unless they know the why. So when she says global REIT, and I don't think, you know, she's listing off positions she doesn't think she could have, ostensibly, I think, global REIT. The question that wasn't stated, but that I heard there was, why do I own this?

49:56Paula Pant:I have these different bond funds. Why do I own them? What I love about timelining this out and then matching the brokerage money, the non-IRA money to a timeframe, and then marrying the pre-tax money and the tax-free money to a timeframe is you can begin to answer for yourself the why question. This global REIT exist in my portfolio because global real estate over a 20-year period is a fantastic diversifier, which by the way, it is. And that's why you would hold it. But when I know the why behind it, I don't sit here and look at this thing and I go, I own real estate in Singapore when I'm sitting in Terre Haute, Indiana.

50:45Paula Pant:What am I doing with a global REIT? Well, once I know the why behind it, it becomes much, much better. So that's also why I want to learn a little bit more about how these asset classes work. Because when I can get the why behind it, and I can place it to a timeframe, I can marry it to a timeframe, I then am not going to blow up, I'm much less likely to blow up my own strategy. I think also using the efficient frontier, and Joe, you've done trainings in the past around the efficient frontier. We'll link to a couple of the episodes that we've done. We won't go deep into it. But seeing where these various asset classes map out on the efficient frontier, for me, that was really eye-opening in terms of that why question.

51:32Because for me, I actually, it influenced me to not have a REIT position in my portfolio, frankly, because I saw where REITs were along the dimension of both risk and return. and it was just too far off the plan. Like relative to the construction of my portfolio, and again, your mileage may vary, right? Everyone's portfolio is different. But based on my portfolio, by mapping it out on the efficient frontier, I saw that I didn't need a reposition, but some other people are going to reach different conclusions.

52:12Paula Pant:I like that especially for another reason. I like it because we know things are going to change. And if we know why we hold it, we also then begin to parse out, speaking of back to this idea of parsing out data, we begin to parse out when that might not work for us anymore. Because in some conditions, these asset classes work very well and others, they don't. And number one, if I understand why an asset class isn't working well versus why it is working well. I also know why I would continue to hold it or why the conditions may have changed and I need to get rid of it. You and I, Paula, offline have been talking about this gentleman a lot.

52:54Paula Pant:I'm going to bring him up again. Joseph Moore. I brought him up on this show before. The historian. The past does not equal the future. And he goes into this idea that we think that the past equals the future and it doesn't. And what's great about the efficient frontier is it moves. It moves over time. And so the one thing that you have to know when you're building an efficient frontier portfolio is that it isn't going to stay on the efficient frontier because as new data comes in, it will change. So you are no longer looking for an optimal portfolio because then you're just chasing returns, right?

53:28Paula Pant:Which has always been a fool's errand anyway. Instead, you're getting behind the why I own this stuff in the first place and I'm using it as a construction vehicle in an environment that is much more like a sandy beach and you're building a sandcastle where it's all going to change and your sandcastle is going to get wiped away. You know the conditions under which you built that and you have the confidence and the fortitude to withstand the changing conditions versus getting married to a portfolio. This is why I don't suggest buying a Paul Merriman portfolio. I love the Paul Merriman portfolios.

54:09Paula Pant:Everybody who's listening to this knows how much I love Paul Merriman. If you just buy his portfolio, I believe you're chasing returns. I think it's far more important to understand why the hell I own this and where it fits in my timeline, because stuff's going to change. If I buy his portfolio, I think the past is going to equal the future. It's also why I'm not on board the risk parity train. I know risk parity is hot with some audiences. I think it's great. It's been great. The past does not equal the future. I'd much rather understand why the hell am I owning so many managed futures in my portfolio?

54:42I don't

54:42Paula Pant:get it. I don't think it's something that we should own in the future. So I'm not a fan of risk parity, which is interesting because you get risk parity, how? From the efficient frontier. The efficient frontier is kind of a first step toward that. But I think it's important to understand why I love the efficient frontier and I don't love some of the places people have taken it. I'm just going to press the easy button and buy this or buy that. Well, then you ruin the reason why you were doing it in the first place, which is getting why I own this. The biggest problem I saw in 16 years as a financial advisor was not that you had the wrong asset classes.

55:20Paula Pant:It was that you blew up your strategy. And my whole methodology of constructing a portfolio is a way to help you avoid blowing yourself up, which happened far, far, far more than people think. Right. I had a friend who asked me for some advice. He's 48 years old and essentially has almost zero, close to zero retirement savings. The little bit that he had was in individual stocks. He asked me for some help. I gave him a long, detailed explanation as to why he should move into index funds instead of individual stocks. Thought I had convinced him. I checked back with him a week later. He had gotten caught up in the SpaceX IPO.

56:08Oh, no. Yeah.

56:10Paula Pant:Well, and once again, not that it's performed badly as of the time that we are recording this. As of the time that we're recording this, it's actually below its initial IPO release price. Oh, is it? That's funny. It wasn't too late. It wasn't too late. I've been checked in too late. Well, there you go. Actually, that's illustrative of the volatility. And that is the reason why we don't like it. Not that it can't go to the moon. Get it? Not that you can't do that, but the volatility versus being your first position or a major position is not where you start. Right, right, right. Exactly. And there's this cognitive bias resulting, which is evaluating a decision based on the results that it yielded rather than on the decision-making process itself, right?

56:52So any given investment may or may not pay off. That doesn't make the underlying decision right or wrong. For example, you run a red light. There are no negative consequences. You don't get into an accident. You don't get a ticket. You reach your destination faster. Was running a red a good idea? No, it was a bad idea that happened to have a positive consequence.

57:19Paula Pant:Great analogy. I'm going to steal that one. Oh, thank you. Thank you. Thank you. That's why I do this professionally. All right. Can I match a story with a story? Oh, do so. Because while you were talking, I have this wonderful friend of mine who texted me just a couple of days ago. She's a wonderful local woman in her mid-70s living on a fixed income and really needs to stretch her dollars. So just for the price of buying me breakfast, we have gone out to breakfast before and I've helped her with portfolio stuff. So she writes me, I received this info in my inbox. I'm considering taking stock from some Texas railroad land, which by the way, I had already told her she should probably get rid of that.

58:02Paula Pant:But another story, it's from some Texas railroad land to invest in Energy X. I know lithium is a big deal and they're going to be working on some lithium projects here in Northeast Texas. What is your reaction? And I wrote, far too much risk. I'd be more diversified. And then I told her, I love this quote. And this might have been Paul Merriman who put this up on screen, this quote. And I snapped a photo of it. But listen to this. He's quoting Paul Samuelson, who is the Nobel laureate in 1974. for. Paul said, investing should be dull. It shouldn't be exciting. Investing should be more like watching paint dry or grass grow.

58:46Paula Pant:If you want excitement, take$800 and go to Las Vegas. It's not easy to get rich in Las Vegas at Churchill Downs or at the local Merrill Lynch office. Yeah. Yeah. And then she wrote me back and said, thank you. I hope you don't mind saving my ass again. Nice. But it could make a lot of money. Lithium projects, Energy X could be phenomenal, not for a 70-year-old with money that she really needs to have last for a long time. Right. Well, Sarah, I hope that provided some perspective, provided some next steps. We also, on free giveaways, we like to give things away. We like to give a lot of things away.

59:29We have an asset location cheat sheet. So affordanything.com slash asset location. What we talked about earlier in terms of what assets do you put in what type of tax treatments, what should go in tax exempt versus tax deferred versus taxable. We have those asset classes and where they go laid out in this and it's totally free. Affordanything.com slash asset location. That's affordanything.com slash asset location.

1:00:02Paula Pant:We should be like Oprah with that. You get a cheat sheet and you get a cheat sheet. Everybody gets an asset location cheat sheet. And the crowd here on YouTube goes wild. Oh my God, I got a cheat sheet. Cheat sheet, cheat sheet. All right. Well, with that, we're going to take one final break to hear from the sponsors who let us give this stuff to you for free. When we return, we are going to hear from Michael, who is 26, single, has a high income, and is about to buy a home. Oh, by the way, if you're looking for something to do during the commercial break, affordanything.com slash asset location.

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1:01:21welcome back our final question today comes from michael

1:01:28Paula Pant:hey paula and joe it's michael in new mexico and i've got what i think is a bit of a interesting situation i'm hoping can spark some good discussion for you all so to kind of lay out my situation. I'm 26 and single. I make about$120 ,000 a year, and I currently have saved about $460 ,000, roughly equally split between my taxable investment accounts and my retirement savings. I planned before the end of the year to buy a$350 ,000 house with 20 % down, and I expect that loan will have about 6 % to 7 % interest rate on it. When I run the numbers on whether I should save the money into my investments or put it into my mortgage to achieve FI faster, I get roughly the same amount of time.

1:02:15Paula Pant:And when I hit FI, I don't necessarily plan to just retire right away, but rather to continue working in some kind of part-time capacity to allow me to dedicate more time to the things I value. When I run the numbers on what my withdrawal rate would look with these two paths. So that's where it kind of gets interesting. So with the loan, I plan to spend about$3 ,000 a month at roughly two thirds of that being the actual loan itself. And if I were to pay that loan off, I'd have a withdrawal rate of somewhere between two and 3%, depending on what my exact rate of return is over that time. And if I were to save the money into my investments, I'd have a withdrawal rate of roughly 4%.

1:03:00Paula Pant:To me, paying off the loan makes more sense from the math standpoint, as I'd have a lower withdrawal rate. And even if I don't necessarily need that money, I would have more flexibility if I got married or something else changed my life situation. I'm not particularly emotionally attached to paying off loan versus investing the money. I'm just trying to find the best use for the money that I'm already going to be saving towards some form of FI. Am I going about this problem in the right way? Or is there something I've missed in my thinking on this? I'd love to hear your input. Thank you so much for listening.

1:03:40Michael, I love the question. We're going to give you two answers. We're going to answer the question that you directly asked, but we're also going to answer some of the questions that you haven't asked. But we'll start with what you have asked. I sure am.

1:03:51Paula Pant:It's a dare. I don't know what you're up to for the next 20 minutes, Joe, but. I'm listening to you answer all kinds of hypothetical questions, apparently. Well, okay. Because the thing with this level of focus on the mortgage interest rate, the thing that's going to come up for him, and he has not asked this question, is 15-year versus 30-year. Michael, when you go to apply for that mortgage, you're going to be presented with that question. And I think you're going to be very tempted to take out the 15-year because that's going to have a lower interest rate. And the reason for that is very simple.

1:04:25If somebody is giving you a loan for a longer period of time, there's necessarily more risk. So the interest rate has to be higher to adjust for the fact that there's inherently more risk with a longer loan. No matter what the prevailing interest rates are at the time that you take out this mortgage, I guarantee you the interest rate on that 15-year fixed will be cheaper than the interest rate on the 30-year fixed. Given that the nature of your question was so focused on do I pay off the mortgage or not? And so focused with the mortgage rate itself at the crux of that question, I suspect that when it comes time to make that decision, you're going to be very tempted to get the 15-year.

1:05:06My recommendation, even though you did not ask this, is do not get the 15-year. Get the 30-year. And Joe, I bet you can guess why I'm saying that.

1:05:15Paula Pant:Well, Ojo would have agreed with you. No.

1:05:22Paula Pant:I used to set this up for people where you take the 30 year at a marginally higher interest rate. It depends on where the yield curve is. But sometimes, and if they're close enough, take out the 30 year, take the rest of the money, put that money in a spot and invest it. Then if you lose your job, the cool news is, is that you have less of a commitment. You have a smaller monthly commitment. So you have more flexibility. The disability statistics are very disturbing. that people have that we don't want to look at. I don't want to buy disability coverage because I'm safe, but the statistics say otherwise that the chance of that happening to you are better than you think.

1:06:02Paula Pant:So your overhead is less with a 30. You can put the money into the market and you can, if the long-term averages continue to do what they've done for long periods of time, then you'll end up with more money that way as well. Wait, you said you used to agree with me. Sounds like you still do. No, that was my old argument. Oh. It was 100 % my old argument. Boo. All right, what's your new argument? Well, I think you choose one way or the other. I mean, here's the thing, Paula, is that if he's going to go into let's pay off debt, let's get the debt paid off as fast as possible. And I do like, to your point, thinking like a CFO, the bank will give you 15 and 30.

1:06:46Paula Pant:You don't have to follow any of those. Right. You could say, you know what, my payoff plan is 18.5. Right, right, right. So Michael, just let's take a step back because I realize we've gotten off track and we're starting off by answering the question that you haven't asked. We have, but we're halfway down that road, Paula. We are. Yeah, yeah, yeah. But I think it'll help answer the question that he did ask to first address the question that he didn't ask. Yes. which is actually where I'm kind of going is with the question that he asks that he did ask, because I do more strongly believe, you know what?

1:07:21Paula Pant:If you can dive bomb that interest rate, if you're committed to paying off that debt quickly, then pay it off quickly. And a very quick way to pay it off, if you're going to devote extra money, take a lower interest rate, because you're going to put more than the 15 number in anyway. So don't be halfway into this strategy, be all in on the strategy and do it. The biggest problem I have, again, with do-it-yourself mechanics is that without that third party in the way, the reason why, Paula, for me, that I would help people set up this 30 and invest the difference strategy worked was because of me.

1:08:02Paula Pant:Because I will also tell you that when I gave people this as a to-do, to-do at home, and I wasn't the one that did it and they were going to do it, it never got done. It didn't get done. So if it's not going to get done, take the 15, take the bank at whatever the best thing is that they'll give you and let them dictate the terms. You don't have to play by that. You can still pay it off. And with a 30 or a 15 year, a 40 year loan, a adjustable rate loan, whatever, you could pay it off an eight if you have the resources to do it. Don't take out an adjustable rate loan. But what the bank gives you is not the important thing.

1:08:38Paula Pant:It's what you do with that. I think that's the more important part of the equation. So if he's going to go to our paying off that loan early, and it depends on what the yield curve looks like, and it also depends on if he would actually invest the difference and leave it alone, I would probably take the 15 and pay extra on the 15. Okay. I disagree. I would take the 30, but then pay it off as rapidly as possible. So Michael, the good news is where Joe and I are converging, where we are in agreement, is on the question that you did ask, which is that both of us seem to be in agreement that your optimal strategy is to pay off the mortgage as fast as possible.

1:09:17Paula Pant:I don't know that that is the optimal strategy because I do want to get to that because that's the question that he asked. Yeah, that is the question that he asked. I am on team pay off the mortgage as fast as possible. Take out a 30 and pay it off as quickly as you can. The reason for taking out the 30 is that because you have a lower monthly payment, even though the interest rate is going to be a little bit higher, because the 30 gives you a lower monthly payment, if any type of emergency unfolds, Joe, you talked about how people frequently get short-term or long-term disability, right? You might get into an accident.

1:09:54Something might happen. or a loved one gets into an accident and you need to go take care of them or you want to go take care of them for a while. If anything happens, you've got flexibility. Whereas if you are burdened by that much, much higher monthly payment that comes with a 15-year mortgage, you have just curtailed your flexibility. And particularly in your 20s, I mean, at any stage of life, but especially when you're young, you don't want to curtail your flexibility. You want like one of the great benefits of youth is maximum optionality. And so preserve that optionality in your 20s and 30s by virtue of not saddling yourself with a higher monthly payment than necessary.

1:10:41So I would take out a 30-year mortgage, 30-year fixed rate mortgage, and then I would pay off that mortgage as quickly as possible. And the reason for, I've just described the reason why I would go 30 instead of 15, which is not the question you asked, but to the question that you did ask, which is, do you pay off the mortgage or do you invest this money? The reason that I would focus on paying off the mortgage as quickly as possible is because the delta between your expected return in paying off the mortgage versus your expected return in putting it into a broad market index fund, that delta is not wide enough to justify the risk.

1:11:19Paula Pant:I don't know if that's the case. Number one, it depends on his timeframe that he actually gets it paid off. if he gets it paid off in seven, eight, nine years, maybe. If he gets it paid off in 16, 17, 18 years, this is where the phrase, and by the way, Michael, this is not your fault. This is my issue. But the phrase doing the math triggers me. And the reason it triggers me is a mentor of mine told me early in my career, beware charts and graphs and math can be charts and graphs. There's a big difference in doing the math if your expected return of future market is 7.5 % and your return of future return is Dave Ramsey 12%.

1:12:09Paula Pant:Huge difference. And it's going to hugely affect your strategy. So when we let the math dictate our expected outcomes, we have to look at what the human did to affect the math. Before we got to the math, we decided on some benchmarks. And I would love to see when you ran the math. Because often, I worked with a lot of engineers when I was an advisor, Paula. And they would generally use this phrase, I did the math. And I'd never dispute the math. Of course, you're going to lose when you're fighting an engineer, you're going to dispute the math. But what I would dispute were the inputs that they used to come up with the math because the input is going to change the math substantially.

1:12:58I think that if we're running a 7.5 % expected return, Paula, I think you're right. I think

1:13:06Paula Pant:you're right on. I think the delta does not justify the return. If we're looking at though a 10.2 return over 17 years, 18 years to pay off the mortgage, then it way, way maps out much better for investing the money. I think running a between eight to 9 % return, like 10.2 is a little high to project with that degree of certainty. I think mapping out even somewhere between eight to 9 % long-term annualized return just doesn't make sense. That delta is too small? I don't know. Here's what I do know. I don't know what the future is going to do. I don't know what's going to happen. So here's what I would do.

1:13:53Paula Pant:I would ask the question, which one makes you less unhappy? If you decide to pay off the loan, you are capping your upside on your financial return, but you're also getting rid of some potential downside, right? You're decreasing the standard deviation. You're zeroing in on exactly what's going to happen. And for some people, that's what they're looking for. I'm looking to eliminate as much risk in this equation as possible. And by dealing with a fixed asset and a fixed rate of return, we've effectively done that. We're much more likely to know our outcome. We're a lot less likely to know our outcome if we have the money invested and we have the mortgage there for a longer period of time.

1:14:40Paula Pant:However, if we just look back 15 years and remember, I'm the guy that just got done saying the last 15 years doesn't equal the next 15 years. The last 15 years are pretty sweet, but you're limiting your upside. Yeah. And if you, but the last 15 years, I just got to say the last 15 years were so sweet, historically abnormally sweet. You can take the 1990s. You You can take 2010 to 2020. You could take the last 10 years. You can pretty much take anything besides that first decade, 2000 or 2010. Yeah, yeah, exactly. Could be that decade. And it's still mapped out the way better off if you had kept the mortgage.

1:15:22Paula Pant:So I would not go in expecting a return. I would not go in trying to guess what the return is going to be. I would go in going, if I decided to invest the money and the market went down, or did not do as well as I had hoped. Does that make me less unhappy? I love how I'm using a double negative, but I think you know where I'm going with this, which is if I do this strategy and it goes against me, which one, so I go ahead and I zero in on the interest rate. Which one will you regret less is what you're saying. And the stock market rocks. Because I think if we assume that we're going to choose the wrong thing, if we go in assuming we choose the wrong thing, I think we're going to make a better decision.

1:16:05Paula Pant:about which way is going to be the one that we pick. So basically as a thought exercise, assume that with the benefit of hindsight, once you know in the future how history ends up unfolding, if you assume that with the benefit of hindsight, you've chosen the mathematically wrong thing, which one would you still regret less? Right. I think it's a fantastic thought exercise. Yeah. Because clearly doing what you are suggesting that he does would have been horrible. the last 10 years. It would have been way worse. And I will say as somebody who paid off all of my rental properties, seven rentals, totally free and clear.

1:16:45And that means paying off 3 % mortgage interest rates, but between three to 5%, like three handle to five handle, paying all of them off and then seeing how the market performed, I will say I have zero regrets.

1:16:59Paula Pant:But what's funny about that is, so what you just said is it wasn't about the math at all, because I've known you for a long time, Paula. That wasn't a mathematical decision. Right, right. That was a know-yourself decision. Yeah, it was a know-yourself decision. It was also contextualized with the fact that I am not a tenured professor. I am an entrepreneur. And those are very different risk profiles. If you're a tenured professor and you plan on never quitting that job, or at least you don't plan on quitting that job in the next 20 years, you know that you have income certainty. right and that is a very different position to be in from somebody who like michael wants to reach fi and then switch to part-time work and he's going to be entering a phase in his life where he's going to have income uncertainty and when you're entering a phase of income uncertainty then and i know this i have by virtue of being an entrepreneur where you're also constantly in living in just perpetual income uncertainty.

1:18:01You want to create certainty in the other elements of your life so that you are better positioned for the uncertainty on the income side of the spectrum.

1:18:12Paula Pant:Well, and that certainly is a piece of knowing yourself. Certainly. Certainly. The lack of certainty is certainly. Yes. It is a big piece of knowing yourself. It's not just emotionally, like we were talking about earlier with whether I have global REITs in our portfolio, right? And if I'm going to blow up my portfolio, but it also is knowing your income streams, knowing your timeframe, knowing all of these things. Like, you know, we compare ourselves to the S &P 500. The S &P 500 doesn't have any timeframe. So it's the most ridiculous thing when people go, well, my portfolio didn't beat the S &P 500, so I didn't do very well.

1:18:48Paula Pant:Well, when's your goal? My goal is three years from now. Are you kidding? The last thing you wanted was anything to do with the S &P 500. So comparing your results to that is ridiculous. So knowing yourself is also, Paula, knowing what you're talking about. What are the other extenuating circumstances in your own life? Our mutual friend, Andy Hill. Andy Hill paid off his mortgage at a young age, and it was because he wanted to quit his job. I mean, he wanted to work for himself. He wanted to be an entrepreneur, and he knew, like you just said, that having less overhead was going to help and achieve that goal.

1:19:24Right. Andy Hill's been on this podcast. He's talked about that decision. And for him, it was because he's got two kids who are still young and he wanted to spend more time with them. So the cost of that is paying off the mortgage instead of investing in the market.

1:19:39Paula Pant:And look at the number of mathematicians over the years that have argued with him. Right. And said, oh man, that's dumb. And I look at Andy and I'm like, there's nothing about that that was dumb. Right. The math didn't math, but it was a great decision. Yeah. So I don't know that I have an opinion at which one is best. My opinion is you clearly like paying off the mortgage. For me, I think I gave him the parameters around how I think about it. There's far more potential upside to keeping the mortgage. And Michael, my position is, I don't think that the Delta, the likely Delta on that upside justifies it.

1:20:15I also think given your goals, given the fact that you want to make a career change, switch to part-time, go into a more exploratory phase of your life once you reach FI, given all of that, plus given the likelihood that your life might change significantly, maybe you'll get married, maybe you won't, nobody knows. given that so much is up in the air and you want to preserve flexibility, optionality, all of that points to keep your overhead low. And the way you keep your overhead low is get the 30-year mortgage and then pay it off as fast as possible. Those two things keep your overhead low. All right, it's fun to disagree with you, Joe.

1:20:58Paula Pant:Yeah, I think there is so much more fighting we could do because just the phrase that the delta doesn't make sense drives me crazy. But pulling out the calculator, and I think everybody can do this on their own, pulling out the calculator, I could so quickly go the opposite way on that notion alone. But we will let the mathematicians go at that one. I do agree that it is based on the goal. And I do agree that if you're looking for more flexibility earlier on, he's putting himself in a place where you've been where Andy has been. And, um, and it's not a bad place to be. What I wouldn't do though, Michael is blame it on the math.

1:21:43Paula Pant:I would not the math part still, obviously, Paul, even when you said it, it wrinkled me. The math part drives me crazy. The part that doesn't drive me crazy is basing it on your goals. That piece I have no problem with. You could always blame it on a sibling. Going back to the first question. You could. You probably should. Let's not even say could. That's what happens. My sibling said that this was the way to go. And then when it doesn't work out, you got somebody to blame, which is even better. And that's why Paula is frustrated. Yeah. You know. Yeah. The plight of the only child, nobody to blame it on.

1:22:21It is so frustrating. All right. Well, thank you, Michael for the question. Joe, I think we've done it again.

1:22:27Paula Pant:I think we have, but our good friend Rima is telling us that we need your questions so we can fight more. We need your questions. If you have a question that you want to submit to us, go to affordanything.com slash voicemail. That's affordanything.com slash voicemail. Especially questions that you think would agree with my way of thinking, not Paula's. Especially questions where you think Joe and I will disagree because those are the most fun ones to answer. Send us any questions that you think will provoke a Paula versus Joe showdown. That once again is affordanything.com slash voicemail. We're also going to give you affordanything.com slash asset location.

1:23:14If you want to discover where to locate your assets.

1:23:18Paula Pant:And if you know what I mean. And if you want to play your role in increasing the housing supply, in solving our nation's shortage problem, doing good while also doing well for yourself because you will make more money by virtue of doing that, affordanything.com slash rent. Thank you so much for being part of the Afford Anything community. Joe, where can people find you if they'd like to know more? Well, guess what? You can find me on YouTube. We're on YouTube right now. We just this last week made public our discussion with one guy that maybe a few people have heard of, a gentleman named Morgan Housel.

1:24:02Paula Pant:And coming up next week, another guy that I can't stop mentioning on this show. Made public our discussion. Sounds so like, what is he going to say next? Oh, you can't believe. What did he make public? We'll make it like BuzzFeed. The 14th thing he said made me LOL. And that's on the Stacky Benjamins YouTube channel where you can also find our discussions with Paula Pant where we're live on Mondays, by the way, creating our Friday episodes. And that's always fun. And Paula, who is traditionally pretty horrible at trivia, is like mounting a charge. Yeah. I have no idea what's happening. But Paula is on the move.

1:24:40Paula Pant:So if you want to see if Paula does not finish last place, you can also. Which would be so weird. Wouldn't that be weird? Unprecedented. These are unprecedented. We're living in unprecedented times. Yes. But my discussion with the one and only Morgan Housel and the history professor, I can't stop talking about Joseph Moore coming next week to YouTube. Just go to the Steck and Benjamin's YouTube page. Smack that like button. Subscribe. All the above. Ring the notification bell. Ring the bell. Ring our bell. Thank you again for being an afforder. If you enjoyed today's episode, you know where to go.

1:25:15Affordanything.com slash voicemail. Affordanything.com slash rent. and affordanything.com slash asset location. Those are your three destinations. This is the Afford Anything podcast. My name is Paula Pant. I'm Joe Salcihai. And we'll meet you in the next episode.

1:25:35When you're commingling entry-level affordable homes with luxury homes, that's the equivalent of asking about the price of pants on Timu as compared to the price of like Cartier. Does Cartier make pants? No, they don't.

1:25:58You can see how far away from the luxury market I am. They're a jewelry maker, not a clothing designer.

1:26:04Paula Pant:Pants at Tiffany's.