403: Finance Friday: Stay at Home with Kids or Work to Hit FI Faster?

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29:19Just go to Indeed.com slash BiggerPockets right now and support our show by saying you heard about Indeed on this podcast. Indeed.com slash BiggerPockets. Terms and conditions apply. Hiring Indeed is all you need. Of this Finance Friday is kind of understanding that decision because if we continue with the status quo, you don't really have much more in the way of options other than to slowly let this debt amortize, save up to$25 ,000 a year and build, again,$250 ,000 to$300 ,000 in wealth over the next 10 years in various passive investment vehicles. And so that's where I wanted to go right there for what I see as the big leverage point and see if there's any flexibility in a couple of those choices.

30:06I could see wife returning to work and bringing in some income there. I could see a house hack, which would be a sacrifice. I could see selling the car and going back down in order to free up some cash flow. But I can't see all of these things going with the choices that have come out and there being a path to really getting ahead. And that's where I wanted to be frank and just ask. Sure. And I guess it might be helpful if I explain a little bit more about those. So those are all income-driven repayment loans, which is a specific type of loan that you're basically paying from what you're making, what your income is.

30:44And obviously they've been paused for three plus years now, and those payments have all counted, which is great. But now that my wife is not working, her payments are effectively zero once those do resume and they still count. That is as long as we file our taxes separately. If we are filing jointly, then obviously my income is counted and we'll end up, our monthly payment will be whatever that is. And so based on that, I sort of ran the numbers, did the math and knowing whatever we don't pay off at the end of 20 years is going to be essentially given to us as loan forgiveness, which is essentially seen as like, here's this check for however much, 150,$200 ,000, whatever it is, and paying taxes on that.

31:30And so what we are currently doing in the after-tax brokerage that I had mentioned, we're putting$300 a month into that with the hope that that is growing over time. So at the end of, at this point, 13 years, that number in that brokerage will be however much we are anticipating we're going to owe in taxes. And we'll just have that. We can liquidate that account, pay the taxes. It won't be this big, huge burden. And so running the numbers, doing what we're doing now, paying whatever that amount is. And this scenario was based on what she was making at her job. And so if that continues to be zero, if she's not going to work for the next handful of years, it changes it a little bit.

32:10But at the end of the day, that math has us paying less over the course of all of our loans than if we were to say, accelerate these payments and try to actually pay off that entire balance. So when does this come due? Or when does the 20-year period end? Yeah. So it was 20 years from when she started paying, which I believe was June of 2015 or 16. So we have about 13 years, 14 years left. Okay. If she returned to work full-time and you had childcare, what is the net spread against how much more cashflow would come into your household? That number, I'm not sure of. It's a little bit hard to say.

32:54So if we had$75 ,000 in household income and we allocate$2 ,000, that was her salary before she left, right? And that's pre-tax. So pre-tax,$75 ,000 is – we'll take out – we'll assume a 25 % household income tax bracket. So that pulls out$18 ,750, leaving us with$56 ,000. And then$56 ,000 after tax, that assumes no contributions to retirement accounts or anything like that. And what's childcare in your area full-time? We don't have an exact number on that, but we are anticipating it would be at least a few grand a year, probably between two and three. A month. A month. Yeah, sorry. I'm like,$2 ,000 a year?

33:47Take it. Yeah, do it. No, it's going to be like$24 ,000 to$36 ,000 a year. So now we're at$25 ,000 to$30 ,000 that she's bringing home. Yeah. So that is significant. That doubles your household cash flow accumulation. So yeah, it may not feel that significant at the end of the day, but that it doubles your net cash flow. And so again, it may be a personal finances personal situation, but we got to run the math and understand that that is a major... It's not a gimme. It's not a, oh, it's not really much that we're going to bring in here, the net spread. It's a big spread. So aside from the fact that the benefits are not, I don't like it as a life or financial decision.

34:32Because again, And choosing not to pay it off for the next 13 years, yeah, your spreadsheet may work out one way or the other, but you're not going to be free that entire time. It's going to mean that, hey, there's an incentive here not to work for 13 years for your wife to earn any income. Otherwise, the income will push up the balance. So that'll make that decision very hard. You're going to file separately, which is going to impact your ability to borrow or use opportunities or have your wife, again, pursue options in the future. It's going to reduce your ability to offset some of your income on your tax returns.

35:12And I think it's just not very freeing. And so as much as I understand the situation and I can empathize with the choices that you've made, it seems to me like with$200 ,000 in debt, eight years in education, and really high income opportunities here that you guys should strongly consider having your wife go back to work and produce that$25 ,000 to$30 ,000. And it probably will be a little more if you're tax efficient with that. And just pay this thing off sooner than that. I think you'll get a much more flexible financial position. If you do that, you're going to increase your income, your take-home pay from$250 ,000 over the next 10 years to$500 ,000 plus, not factoring any raises, promotions, or anything like that.

35:58That's going to provide a much, much more flexible position. And this thing will be gone in five years. It will be a grind. It will not be fun, but it'll be more fun backing into that position in five to 10 years with much more options for your life, I think, than ignoring it the way that you're not ignoring it, but just essentially setting up a situation that has you doing nothing with it for the next decade plus and having you be the sole breadwinner to put cash in there. How is this sounding? Is this too blunt or harsh of an assessment of the situation? or what do you think in response to this?

36:36I certainly appreciate the blunt mix. I think it's something that is important for me to hear, for us to hear. And it's maybe a little bit difficult to hear, but I think it makes sense. And to your point about her working in some capacity, we have talked about her sort of being like the property manager for additional rentals we might bring into our portfolio And whether that in itself is enough to offset a little bit of this. And if that necessitates us having to put him into childcare or whatnot, but that also having certain tax implications for what I am bringing home. Um, so it's, it's definitely something that we will have to discuss, um, based on some of your, some of your feedback.

37:31Um, but it's, uh, yeah, no, it's, it's, it's a good reminder of, of sort of the, the reality, uh, of our situation in terms of what this sort of this boogeyman that you, that you reference, uh, looks like with, with the form of these laws. Yeah. I, and I get it. Like, you just don't want to, you don't want to attack it because what I'm saying here is know your financial position and your goals are not compatible with staying home with your son. And so I think it's a reframing of what's realistic. I think what's realistic in the next 10 years for you without that is, again, a financial position that increases by about 250 to 300 grand on your income.

38:15And that's fine. That's not a bad outcome. You're ahead of most people with that. But it's not a path to financial independence. If you guys are looking to be financially independent, there's a path there that puts you perhaps pretty close within 10 years. Because again, that's assuming no raises from either of you guys. That's assuming, I'm not factoring in investment returns. That's just straight cash accumulation going on with that. But I think that that's the crux. That's the big decision is right now, are we going to play this game? And I'm calling it a game where we're going to delay. We're going to have no income, we're going to file separately on this and allow the income-driven repayment of forgiveness here and plan for the tax benefit in 13 years?

38:55Or are we going to go after our financial situation intentionally, bust our butts, work hard for the next five to 10 years, and pay off these debts, clean up, and simplify this financial position, and in five years have essentially no consumer debt. Your HELOC's gone. Your car payment's gone. Your student loans could be gone. Your what is the other one? The HVAC loan and the auto loan all paid off and gone. You just have rental property mortgages or primary mortgages, and you've got 500 ,000 in equity investments. That's the position that I would encourage you guys to have the hard conversation around starting in a few months, frankly, from what I'm seeing on this.

39:44And I think that that's a good situation. Five, 10 years from now, that's passive cash flow. That's$2 ,000,$3 ,000,$4 ,000 a month. Now we're in a really responsible position to stay home and have lots of cushion here in a situation that's capable of sustainably continuing to build$50 ,000,$60 ,000 a year in investable liquidity if just one of you works. And I think, you know, that's a really interesting way to hear it and think about it. Because for sure it is, you know, that is a sacrifice immediate term and the short term and the midterm. But then having some of that flexibility, like you mentioned, in five years, eight years, 10 years, is definitely something that is sort of what we're looking to do with the longer term projection.

40:34whether or not that's a sacrifice in the immediate term. For sure. And I guess my question about how you're envisioning going about this is this, we are throwing absolutely everything we have on top of what our expenses are at these. And in that case, deferring some of what our goals are in terms of our real estate investments. Or is there sort of a balance between, hey, you're throwing X amount at the loans, you're throwing X amount into a savings account to build up your rental portfolio? What are your thoughts on some of that? Great question. So look, I think that that's really... That's going to be the crux of the asset allocation question.

41:11Your variable interest rate HELOC at 8.5%. I mean, I consider 8.5 % guaranteed return after tax to be one of the highest and best use investments you can make. So we already have a plan to clean that up. I think your whole life insurance policy is a great reallocation decision to go with that. I think that's a much higher return than what you'll get there. I think that when you get into your car loan, no sense in paying that off early. The student loans, that's a really interesting one, right? So we got 6.3%, but it's at 0 % right now, not accruing interest. If you agree with my diagnosis that this boogeyman needs to be confronted in the next couple of years, at some point that...

41:58what's the term that they were using? Forbearance? Is that what they're calling it for student loans? I'm not sure if that's what it's... I think they're just calling it a pause. But essentially, yes, you're not having to pay. They're counting and the payments are zero. Yeah. So while that's at zero, you just stick it in your emergency account and get 4 % or some other type of debt. I think that in your situation, I would stockpile assets outside of that. Maybe real estate, maybe even lending to get some sort of arbitrage there, maybe the stock market. And then after a few years, potentially consider borrowing against that to knock out these student loans, for example.

42:43So that might be one approach to knocking these things out because it's in this gray zone. Can you earn more than 6 %? Yes. Is 6 % a reasonably high return guaranteed, and especially after tax. Yes. So I think it's a really hard call and an art. So I don't know if I would necessarily invest. I think that's going to be up to you guys. I don't think there's a wrong way to go about it. I think one school of thought is just sock all the extra cash and pay it off. Again, after tax, we're looking at probably a 7.5%, 8 % return because that would be what you have to earn in order to earn a 6.3 % return after tax on debt like that.

43:28But I think it's really in that coin flip space. Mindy, what do you think? My thoughts are multiple. First, are her payments paused for the length of the government payment pause, whatever forbearance, moratorium, I can't remember what it's called either, Or do they continue to be paused for as long as she does not work? So the current pause is strictly from the government pause. And so those are expected to restart. It has to do a little bit with what the government decides to do with the laws that were passed and now contentional or not. But so essentially, those are expected to resume between June and October of this year.

44:11And that will be now the payments are still zero and they count, but now the interest is continuing to accrue, which it hasn't been for the last three years. That's really the only difference as we're doing it currently, if that's helpful. So yeah, the interest will kick back in a couple of few months. Okay. So for right now, I would not make any payments, but I would start collecting that. I agree with what Scott said. this is going to be a burden in your mind, on your shoulders until you pay it off in 13 years when you get the repayment or if you start paying it off beforehand. But if you can pay it off and not take the forgiveness, it's freeing so much faster.

45:02I truly believe you can pay off these student loans before the end of the 13-year payment. And if you can't, then you still get whatever's left over forgiven, right? Correct. Yeah. Essentially how I understand it, at the end of 20 years, whatever is left is forgiven. And I think there are certain stipulations about making qualified payments and whatnot, which currently we are, even if we're making the zero, you know, zero dollars, that's quote unquote qualified payment. So I believe anything we contribute in excess to what we need to contribute would be considered a qualified payment. We'll have to check on that.

45:42Um, cause there's some certain language in her, um, account or whatnot that, uh, has some of that. So we'll have to look at that, but I, I think it should, like you said, whatever is not, uh, paid off will be forgiven at that time. Yeah. I like the idea of pushing through and paying it off. And it's a lot of money, but it's a lot of money. You'll work towards paying it off. It's 10 years of your earnings. It's five years of your combined earnings. Okay. Versus 13 years of weighing on your psyche while you're not filing jointly and you're not investing in whatever. Now, let's talk about real estate.

46:25This is the BiggerPockets money podcast, and we're all gung-ho about real estate. But is real estate the right investment for you at this time? I think that your HSA, if that's an option, is the right investment. I think your Roth IRA is the right investment. I think 401k, if there's any sort of match, is the right investment. But I'm not sure that real estate with your demanding job and a baby and travel and your side hustle and, and, and, I'm not sure that throwing another log on that fire is the right choice at this time. Because I mean, I can talk you into a great real estate investment. Oh my goodness, it's going to be amazing and your tenants are going to pay on time and blah, blah, blah.

47:12But reality says that that's not always what happens. How long has your property been vacant? About two months now. Yeah. Does that feel awesome? Not so much. Yeah. It kind of sucks. And it gets worse the longer it's vacant. And you start thinking, oh, I'll just put anybody in there. And let me tell you, the BiggerPockets forums are filled with people who just put anybody in there to get a warm body in there. And all of the money you're putting in there now, when they start playing hammer darts in the kitchen, you're going to feel even worse about putting anybody in there. So if you love real estate, continue thinking about it.

47:51Continue investing in your education about it and continue looking at the properties that are coming up. Really learn your market. Know what properties are coming up, how much they're selling for, what are they renting for. Go to open houses for rental properties. Go to open houses for actual properties and just really, really learn your market. There might be such a smoking hot deal that pops up that you have to snap on it. But I wouldn't buy a house just because you get impatient. And I don't mean to throw that back at you. No, I think that's totally fair. That was for sure what happened. And my wife and I have had multiple discussions about that.

48:34That was definitely what happened. Did you use the HELOC to buy the rental property? I did. Yes. Yeah. So that's a real killer here too, because even let's forget the 8 % interest. If you just had 30 grand in that HELOC, it's 24, but I'm using 30 grand for easy math. And you want to pay that back over two and a half years, or that's$1 ,000 a month or five years, it's$500 a month before the interest payment. And so even if it was a good deal, that would kill your cashflow. It wasn't going to produce more than$500 at this purchase price unless you're real estate investing God. So that's a big issue here.

49:11And that's where I think selling this and restarting with a stronger financial position will be helpful. But I disagree with Mindy that real estate's not for you. Again, I want to zoom out and say, the goal that you came in was, I want a flexible position five to eight years from now so that I can do the things that I want to do in life. And so if we just stack$25 ,000 into the Roth IRA, that doesn't get us there, unless you're willing to tap the Roth IRA to live your life. That's a great way to have three to 500 ,000. You already have like 160. So let's call it even four to 500 ,000 after investment returns in five years inside your retirement accounts.

49:51But that wasn't your stated goal. So I think a better financial position would be something that looks something like this. I want$50 ,000. If we keep the status quo and I am the only breadwinner, I'm going to have$50 ,000 in cash. I'm going to have one to two rental properties with let's call it$100 ,000 to$200 ,000 in equity producing$1 ,000 to$1 ,500 a month in cash flow. That's a realistic outcome for you. If you save diligently and put some aside in real estate over the next couple of years and make some smart decisions, maybe do a little bit of creative finance. I think that's a reasonable possibility for you in five years.

50:36And your car payment will be paid off. Your HELOC will be paid off. You'll slowly get this consumer debt, your student loans, maybe your student loans, maybe paid off to your parents. That's a good outcome. And again, if we layer on top the much bigger decision, which I think is the real crux of your financial, the decision you and your wife need to make. If she works and is able to bring in something close to what I just described there, that adds another three to four, maybe more $100 ,000 on top of that position, all of which could be invested in real estate or some could be spread across those retirement accounts.

51:12Again, bringing that flexible position, let's call it in that case, to$50 ,000 in savings,$3 ,000 to$4 ,000 in passive cashflow, and$250 ,000 to$300 ,000 in retirement accounts. Those would be the two outcomes I think you could back into over the next five years. Do those sound realistic to you very back of the napkin math? I think so. I think, like you said, it's going to come down to us discussing, having conversations about what do we want our life, our financial position to look like in currently this year, next year, five years, 10 years, 20 years, and what gets us there. Because I think I've sort of had a little bit of tunnel vision in that like, hey, real estate is like the thing.

51:58It has all these great benefits. There's four or five different ways to make money in it. And I would like to think I've done a decent job in kind of keeping the pulse on the market that I'm in. I've tried to do everything kind of local. I'm not looking to do long distance or anything like that. So I think, and I guess clarifying something, Scott, you said real estate can be a part, you think, in five years or you think at some point in the nearer future. Again, this is where I thank you for coming on the show because you're giving us such a hard financial, and I can completely empathize with the struggle you're probably having across all this because your position is so complicated on the debt side in particular that what I'd love to do, there are multiple schools of thoughts.

52:45One good option is I'm just going to pay off these debts. They're all reasonably high interest rates, except for the ones that are at zero. And if you just pay them off and start with a fresh slate, that's going to be tremendously freeing and really turbocharge your ability to accumulate wealth. It's not a bad option. Dave Ramsey is a great potential choice for you. Another reasonable choice is you just bought the wrong rental property here and you bought it with a HELOC, which compounded the pressure that this property has brought on your life instead of generating cash flow for you. If you were to use your whole life policy to pay off the HELOC, you have 28 grand.

53:22In a year from now, you could probably buy a property similar to this with a responsible financial position, with a true cash down payment that does put money in your pocket. And that would be a reasonable choice. So I think it's an art and there's no right answer here. And that's why you're going to really struggle with it. I think you should either pick one or the other. And again, the major component here that's going to put you determine the level of flexibility you have in five years is how much cash flow your family is generating. And that's the function of your job and whether or not your wife chooses to go back to work.

53:55Even though I know that was kind of settled coming in, I do think it's such a big deal because of the amount of the student loan debt and the size of the 100%, the potential to double the family's cash flow. Yeah. No, I think you've definitely given us a lot to think about and to talk about. So it is a good way to think about it in that, hey, if we are paying off XYZ loans, some of which don't make sense to pay off, like the super low interest ones, and some of which are kind of in that gray zone, like you said, what that does on the back end in terms of what we're bringing in on a monthly basis and how we can then scale what we're accumulating in different types of accounts, in different types of assets, such as real estate to then have a strong financial position in a handful of years, five-ish plus years.

54:51So yeah, this is not where I thought the conversation was going, but this has been, I mean, super helpful. Definitely gives us some tough stuff to talk about. But yeah, it'll be fun. No, I appreciate it. And I'm sorry, we didn't have a more painless approach for you to solve some of these problems. That's not a fun conversation to think about. And the trade-offs in your life that that discussion has. Yeah. These are just our opinions. Talk to your wife, listen to the episode with her and see, you know, maybe 60 % of this makes sense to both of you together. I think the most important of all of this is that you're both on the same page.

55:36I do appreciate your time today, Patrick. I appreciate you sharing all of this information with us. I think that you have a lot of great opportunities ahead of you. This has been really helpful. I'm really appreciative of your time. Awesome. Well, thank you. Thank you so much, Patrick, for listening and coming on the show and sharing your situation. Awesome. Thank you guys again. All right, Scott, that was Patrick. That was interesting. Yeah. Look, it's a tough situation. And I think if we're being blunt about it and really attacking the problem head on, we can't take out hundreds of thousands of dollars in student loan debt, not work, have a new car, not house hack, and expect to move to financial freedom.

56:18Patrick and his wife are in a great financial position. They're cash flowing their lives. They have some cleanup work to do on a couple of debts and those types of things, but they're in a middle-class position and they can cash for their lives and live comfortably with the choices they're making. They're just not going to progress toward financial freedom rapidly without, I think, confronting head-on the student loan boogeyman. And we talked about a very parallel problem to this in episode 338, become debt-free 20 times faster than you thought with a very similar problem, a very similar couple that was looking to basically delay the payment of student loans until the forgiveness program came out in about 15 to 20 years.

57:05And look, I get that there's a spreadsheet where that works, but I really hate that way of attacking financial freedom. I really prefer attacking the big problems in a financial position head on and defaulting to hard work, sweat, grind, and fundamentally increasing the cash flow after tax of a household. I think that produces a better financial outcome, a more sustainable approach, one that's within your control. And I'm sure people will strongly disagree with me. I'm sure there's a spreadsheet that can strongly disagree with me that would prove me wrong. And I bet you that the government does end up forgiving a lot of that tax burden for folks that do get student loan debt forgiven.

57:48But I still bias people, I think, heavily towards attack the problem, do the hard work, cash flow, pay it off, invest, and move toward financial freedom. I agree with you, Scott. There's a lot of tough decisions to make. What is most important, I'll say this again, is that Patrick and his wife talk about it and are on the same page. That's right. This is a team effort. And I think that their situation was one of those really hard ones to diagnose. I have my opinion and my bias towards that approach. But from a financial lens, there are three or four different approaches that are all reasonable in his position.

58:29And it's not just in paying the choice to pay down that student loan debt or file taxes separately for the next decade and look for the payoff at the end of that. It's also the resource allocation decisions. Does he pay off debts that are in that bubble zone or does he invest those assets? Does he put it into the retirement accounts or into after-tax investments? Those are all hard choices with no right answer. and the textbooks can be written on why you should do any one of a variety of approaches. We appreciate Patrick coming on and sharing a situation that has no particular right answer. And if you want to debate, email scott at biggerpockets.com, not mindy at biggerpockets.com.

59:17And I would love that. I'm not sure on this one. And I would love strong feedback if there's different approaches that folks had. I'm sure we'll get a couple on the whole life insurance policy advice as well. Yeah. And you can call Scott at, just kidding. All right, Scott, should we get out of here? Let's do it. That wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench and I am Mindy Jensen saying, don't be a stranger. If you enjoyed today's episode, please give us a five-star review on Spotify or Apple. And if you're looking for even more money content, feel free to visit our YouTube channel at youtube.com slash BiggerPocketsMoney.

59:53Bigger Pockets Money was created by Mindy Jensen and Scott Trench. Produced by Kaylin Bennett. Editing by Exodus Media. Copywriting by Nate Weintraub. Lastly, a big thank you to the BiggerPockets team for making this show possible.