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

Mindy:
Welcome to the BiggerPockets Money Podcast Finance Friday edition, where we interview Patrick and talk about the best way to position his finances after his wife became a stay-at-home mom.
Hello. Hello, hello, my name is Mindy Jensen and with me as always is my sports enthusiast co-host, Scott Trench.

Scott:
And with me as always is my spike the football, slam dunk, home run podcast host, Mindy Jensen.

Mindy:
Thank you, Scott. Scott and I are here to make financial independence less scary, less just for somebody else to introduce you to every money story because we truly believe financial freedom is attainable for everyone no matter when or where you are starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, create a flexible financial position or have one spouse stay at home and raise the kids, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams.

Mindy:
Scott, today we have a new segment on the show, it’s called The Money Moment, where we share a money hack tip or trick to help you on your financial journey. Today’s Money Moment is if you have trouble allocating your funds correctly, try the 50/30/20 rule. 50% goes to your essential needs like transportation and housing. 30% goes to your wants, like new clothes, eating out, or a gym membership, and 20% goes to savings. If you have a money hack tip or trick for us, please email us at [email protected]. All right, before we bring in Patrick, let’s take a quick break.
And we’re back. Patrick is a full-time physical therapist for a major sports team. He has a four-month-old baby and his wife recently left her full-time job to be a stay-at-home mom. When he is not on the road or at home with the family, he has a side hustle where he helps private clients with personal training and physical therapy. Patrick, welcome to the BiggerPockets Money Podcast. I’m so excited to talk to you today.

Patrick:
Thank you so much. I’m so excited to talk to both of you guys. This is kind of surreal being on the show, but yeah, really, really excited about this.

Mindy:
Okay, well we have a lot to cover so we’re going to jump right into it. Let’s look at your money snapshot. You have a salary of 6,450, which is post-tax, so that’s good to know, with a raise coming in July to bring you up to 7,540. You have a side hustle that brings in about $750 a month and you get a per diem while traveling for work, which varies during the on season, off season, but averages about $800 a month after taxes. So the income seems pretty solid. We have monthly expenses that total 5,190, so right now there’s a delta of 1,260. For investments, we have approximately $170,000 in various retirement accounts. However, there is $7,000 in crypto, 8,300 in series EE bonds, and 12,400 in a K-1 partnership. Yay for the $28,000 in emergency fund. Yay!
Okay. Debts is where we really want to take a peak. 207 on a mortgage at 3.125% interest. I don’t care about that. HELOC, 8.5%, $24,000. We’re going to talk about that. Private home loan, 7,600 at 1% interest. I don’t care about that. Rental property mortgages at $55,000, 5.6%. Eh, I don’t really care so much about that. $35,000 at 0% interest for a private student loan for Patrick. And your wife’s student loans is a little bit… The balance is a little bit more there. We’re looking at $213,000 currently at 0%, but the aggregate interest is 6.335%. So guess what we’re going to talk about, Patrick? And your wife has a car loan of $24,000 and an HVAC loan of $2,000, which should be paid off by May. So we don’t care about that either.

Scott:
And just to summarize that because that’s a lot of numbers, just for my own purposes, we’ve got 260,000 give or take in mortgages against your primary and rental property. We’ve got 250,000 in student loans plus another 50,000 in other personal debts between the HELOC and the car payment and a couple of minor debts. Is that a good summary, Patrick?

Patrick:
Yeah, no, I think that’s a good snapshot of putting things together, yep.

Scott:
Could you give us a quick overview of how we got here? Just maybe three to five minute overview of your money story and how we arrived at the current state?

Patrick:
Sure. So I guess growing up, I was kind of like in a medium income household. Definitely didn’t like struggle, but I also don’t think we talked a lot about money. And so I think I did an okay job through the help of my parents of earning some money during high school and whatnot. And so I had some saved up going into college, but then was off to college and did what college kids do and had fun and spent some money. So not to say that I got into a lot of debt, which is great, but I sort of completed whatever savings I had had going into college. And then leaving school, started working full-time, then also went back for additional school, which I was able to sort of cash flow from my job at that time so it didn’t accumulate further debt.
And then finishing up my total eight years of school, sort of stumbled onto your guys podcast and that sort of kickstarted my enthusiasm, my passion, and my knowledge and learning with personal finance and sort of coming up with a plan of what I was going to do with what money I was making. So few years later, here I am with a wife and a son and have a primary residence and I think a pretty decent job and then just a handful of other debts, whether it’s educational or other minor consumer debts. But the overarching theme is not having to work till I’m 60, 65, that sort of thing. Trying to be a little bit more independent and have some of those freedoms from some of the decisions that myself and my wife make now that can help us a couple years down the road.

Mindy:
Okay. Your wife recently left her job to stay home with your son. Has this put a strain on your finances?

Patrick:
A little bit. I think like you guys talk about, personal finances is personal. And so it was sort of a cautious decision that we made because if we were looking at daycare, we’re looking at putting half to three quarters of what she’d be making right into the daycare. And so it was sort of one of those, do we want to be spending a majority of what she’s making just so she can not help raise our son versus taking a little bit of a haircut on the income front and have her be at home and be able to spend pretty much every waking hour with him, which is the hardest job in the world, way, way harder than what I do, but it’s also extremely rewarding. So the short answer is a little bit, but we are trying to make decisions in terms of what we have going on now that help to offset some of those differences.

Mindy:
What did she do and how much was she making?

Patrick:
So she’s an occupational therapist. She was working at a brain injury clinic and she was taking home about 75,000 in a year.

Mindy:
Is there any opportunity for her to work part time or do freelance or anything like that?

Patrick:
We’ve definitely considered that. I think at this point it’s still a little bit early. Our son’s four months and so he still requires quite a bit of attention. As Scott, I know you know have a small one at home so you can kind of attest to that. So essentially we’ve thought about it, but I don’t think the timing is right right now. That might be something we’re looking at in another year or something like that. But also considering in the future maybe another little one coming and so that sort of maybe resets the clock on her being able to do some of those things. So I think for the purposes of today, the answer is no, but potentially in the future once our home situation changes a little bit.

Mindy:
Okay, that’s fair. I, when I was pregnant with my oldest, was like, “What am I going to do with my days? Oh I’m going to be bored.” And then I have my baby, I’m like, “When was the last time I showered?”

Patrick:
Luckily, she gets to shower most days.

Mindy:
I cannot say the same about me.

Scott:
Walk us through the student loan debt for both you and your wife. How did that come about? Especially in your wife’s case, why are we looking at such a huge number?

Patrick:
Yeah. So for myself, I was lucky my parents were able to help out with school. So essentially, whatever I had not earned in terms of scholarships or whatnot, we sort of split expenses and whatever scholarships sort of went towards mine. So everything was split half-and-half and then I just owe the rest back to my parents. I’m lucky enough that they gave me sort of a 0% interest loan. So I’ve got another probably five years paying those off. So that’s about 550 a month going towards that. With my wife, she was essentially responsible for all of her student payments. So that included five years of undergrad as well as three years of grad school. That sort of adds up to the larger number we see there.

Scott:
Okay, awesome. You’re going to receive a large raise in July. Oh, should we consider that a kind of moot point for now from the total accumulation perspective because most of that will just kind of offset the side hustle income that you’re bringing in now? Or how do you think about it?

Patrick:
Yeah, I think that’s sort of a fair way to look at it. Based on that increase, I think I’m able to decrease what I’m doing with the side hustle stuff quite a bit and I think it’s actually still going to come out ahead. So we’ll be bringing in just a little bit more than what I’m doing now with my W2 job plus the side hustle. So yes, I think short answer is we can offset most of that and it ends up kind of washing out by the end of that, but then additionally hoping to continue to have some of these raises each year. But short answer is yes.

Scott:
Can you tell us a little about this rental property? How’s that going? What’s the kind of projection going forward for it?

Patrick:
Absolutely. So after doing a ton of research and a ton of listening, reading all that stuff on all sorts of BiggerPockets forums and everything, we bought our first rental in May of last year. And as you guys know, that’s sort of the time where rates were going up, inventory was flying off the shelves. And to be completely honest, I got a little impatient, which everyone says not to do. And so sort of bought something that was not exactly what we were looking for, had an inherited tenant that we struggled with getting rent from at times. And then that person ended up moving out without telling us at the beginning of February. So it’s actually been vacant for about two months now. And so we’re actually finishing up some work, some contractors going through and get sort of fixing it up.
Our plan as of right now is to try to sell that, try to recoup losses, essentially just breakeven and then move whatever proceeds from that into our next sort of real estate venture. I’m definitely really interested in the midterm rental, medium term rental strategy. We have a decent hospital network system where we live and so I think there’s some opportunity for that. But short answer is it hasn’t gone great, but it’s been a good learning experience and I think we haven’t gotten hurt too badly financially, but certainly looking to kind of hit the reset button on that.

Scott:
Got it, okay. Let’s go to your house next. Do you have any plans for your primary residence? Are you going to live there for a long time? Or should we consider the equity there kind of locked in and you’re happy with it and you’re there to stay?

Patrick:
Yeah, I think the plan for now and for the foreseeable future is to stay here. I think knowing a little bit more now about sort of house hacking and all that, my wife and I both read Set for Life, which sort of helped to kickstart us a little bit more. I think we’re maybe a few years past to where that might be applicable to us just because of the newborn and a couple other factors. So I think we’re here for the medium to long term depending on just my job and everything. But the interest rate is nowhere close to what we’d be getting right now. And so I unfortunately think the equity in that is probably best accessed through a HELOC like we’ve done versus a cash-out refi because I think whatever money we might take out of that is just going to go into a higher monthly payment and I don’t really think we come out ahead on that.
So that’s sort of how we view the house. I think we’re in a pretty affordable area of the country, so the payment’s not crazy, but it’s obviously a pretty big expense in terms of where we’re at. But again, one of those where just because of our family situation and again personal decisions that we’ve chosen to make, it’s not necessarily something that we are looking to monetize or help us out if that’s fair.

Mindy:
Okay. You have a whole life insurance policy. Is this a new policy or is this an older policy?

Patrick:
So it’s a policy that was taken out for me by my parents when I was about five. So it’s got about 25 years of growth in there. And so I hadn’t really known what to do with that. I actually remember listening to an episode with Eric Brotman years ago with you guys that talked about the infinite baking concept and withdraw from that or taking loans out. And so from then I started to think about it and I just haven’t done anything with it. And then after reading Set for Life, the situation described in that in, “Hey, here’s where you’re at. Here’s where you want to be in 5, 10, 15 years. And taking out a term policy that sort of lines up with that versus a whole life, the death benefit of that is not going to be life changing.” It’ll help with end of life circumstances, but it’s not something that can help if something terrible happens and I’d end up gone next year.
What we’ve set in place with our term policy is something that could, in theory, replace whatever we would make and what we would need to live off of. So long way to say that the whole life policy is not something I foresee being in place for a lot longer. Our plan has been to surrender that, liquidate that and most likely pay off the HELOC and then using whatever proceeds we might get from selling the rental property to then move into our next one.

Scott:
Agree completely with that approach.

Patrick:
All right. Yeah, and I appreciate you saying that.

Scott:
That’s very wise. Yes, I like that. The goal is flexibility in five to eight years, that policy is going to be with you for life. That’s the whole life policy, you’re going to be paying into it. I think that coming out with a small gain is not the worst thing in the world and you can deploy that too. You have 8%, 8.5% HELOC right now. Guaranteed better return than putting more money into the whole life policy.

Patrick:
For sure. Yeah. Initially, that HELOC was a variable rate, intro rate was like 1.9. So for the first six months we’re hardly paying anything on it, but then that jumped up in January, so it’s been a bit of a stressor. So any cash flow we might have had while the tenant was paying has been wiped out by paying on that HELOC. So for sure, trying to get that taken care of as quickly as possible. So I’m glad to hear you agree with our plan. We will go ahead and execute that tomorrow.

Mindy:
I would double check the numbers, run everything, but yeah, I see a whole life insurance policy. Cash value, $24,000. Primary residence HELOC, $24,000. It seems like that those two could wipe out each other.

Patrick:
Yes, exactly. That’s how we thought about it. Ideally, selling the rental would net about the same if we’re getting what we think we can for it. But again, I’m not worrying about how long that might sit on the market or how long it would take to close. I think doing the whole life and just wiping that out is the move. So I appreciate the discussion on that.

Mindy:
Yeah, so I’m going to start crossing off these debts once we figure out a way to get rid of them. So the HELOC, we just figured that out. Primary home mortgage, I’m not concerned about. Scott, are you?

Scott:
No, it’s 207,000 at 3.125, 3 and 8. I think that’s great. That’s a good one to not touch.

Mindy:
Okay. Rental property mortgage, he’s going to sell that so we don’t need to discuss that.

Scott:
And how much equity are we going to harvest when you sell that property?

Patrick:
It depends on what source you’re looking at. We are hopeful it’s worth between 100,000 and 110,000. We bought it for 75,000 last May.

Scott:
Okay, so we’ll clear about $50,000 in cash give or take.

Patrick:
After all expenses.

Scott:
$40,000 in cash after expenses.

Patrick:
Sure. Hopefully.

Mindy:
Fingers crossed, okay. You have a private home loan of 7,600 at 1% interest. I don’t care about that. I mean, I care about it, but that’ll get paid off. 1% interest is a gift. Is that 1% fixed for as long as you have it or is that going to vary?

Patrick:
It is. So that was actually a gift/loan from my parents to get us to 20% to wipe out PMI. And then I just agreed for… Again, that 1% interest is ridiculously low, but that was sort of generous of them to help us out with that. So they give us the lump sum to get us the 20% to wipe out the PMI and now I’m just paying that. So just over four years left on that. Just over three years. Sorry.

Mindy:
And your student loan is at 0% through your parents until it’s paid off?

Patrick:
Correct.

Mindy:
So I don’t care about that one. The HVAC loan, I don’t care about that because that’s almost done at 0% interest, which leaves us with your wife’s auto loan and your wife’s student loans.

Scott:
Let’s zoom out for a second here before we get into this and acknowledge though that we’ve got a boogeyman, I think, to deal with here. So wife has $213,000 in student loans and a $25,000 auto loan and does not work in this situation. I know this is a personal choice, but have we had this discussion and kind of talked through that that this is a real barrier? To that, I mean, your cash flow for your whole family on an annual basis if we’re not including CapEx allowances is about $25,000 a year. And so that’s a decade. That sets you back a decade, these two components for that. And so I’d just love to hear the… I want to confront that issue really quickly and we’ll deal with it after we have that discussion.

Patrick:
For sure. And it’s definitely we’ve had discussions on it, a lot of discussions on it. I guess we can start by talking about the car loan. So that was a decision that we made when we knew we were expecting our first child. So we ended up selling the car that my wife was in and upgrading to a new car with a little bit bigger and more safety features and all that. So again, sort of a conscious decision that we made. And yes, this is maybe not the ideal way to go about getting a new car or getting a car, especially if you’re running around the [inaudible 00:20:03] community, but it made sense to us at the time especially with my car paid off. And so the payment’s not wiping us out every month. That’s something that we’ll have for another five-ish years and then that’s done. We obviously could pay more towards that, but I think with the rate at just over 4%, it’s one of those kind of in between as it’s not 1%, but it’s also not 8.5%.
So I think at 4 we can be using whatever excess money to make us more money rather than paying off that loan. Does that make sense? Is that fair? Can I know where I’m coming from on that or do you have more?

Scott:
Oh, I completely understand it. And frankly, I did something very similar in my personal life. I guess I’m asking the tough question of, this combination of decisions is really, in my opinion, locking you into one path here. We can reposition a few of these assets, but it’s really I’m looking at it and the math is pretty straightforward here. You’re going to save at most 20,000, 25,000 a year. I think I agree with Mindy that after you clean up the HELOC situation with either the whole life policy or the sale of the rental property, there’s no reason to pay off the other debts in an early fashion. With a 4% interest auto loan, there’s no reason to pay that off early either. That leaves your student loans, which I think are 6% interest, but they’re paused because of the forbearance.
And so that’s kind of I feel the crux 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 the $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. I 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 this with the choices that’ll come out and they’re being a path to really getting ahead. And that’s where I wanted to be frank and just ask.

Patrick:
Sure. 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. And 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 our monthly payment will be whatever that is.
And so based on that, I 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, 150,000, $200,000, whatever it is, and paying taxes on that.” And so 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 are 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 that continues to be zero if she’s not going to work for the next handful of years. It changes it a little bit, but 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.

Scott:
So when does this come due? Or when’s the 20-year period end?

Patrick:
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.

Scott:
Okay. If she returned to work full-time and you had childcare, what is the net spread against how much money she’d… How much more cash flow would come into your household?

Patrick:
That number I’m not sure of it. It’s a little bit hard to say.

Scott:
Well, so if we had $75,000 in household income and we allocate $2,000 in… That was where her salary before she left, right?

Patrick:
That’s pre-tax, so yeah.

Scott:
Pre-tax $75,000 is… Say we’ll assume a 25% household income tax bracket, so that pulls out 18,750, leaving us with 56 grand. And then 56 grand after tax, that assumes no contributions to retirement accounts or anything like that. And what’s childcare in your area full-time?

Patrick:
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.

Mindy:
A month.

Patrick:
A month. Yeah, sorry. Yeah, Yeah.

Mindy:
I’m like, “2,000 a year? Take it!”

Patrick:
Yeah, do it. Do it.

Mindy:
Now, 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.

Scott:
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 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 benefits are not… I don’t like it as a life or financial decision because again, 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 a 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. 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, 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 in 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. That’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 of 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? What are you thinking in response to this?

Patrick:
I certainly appreciate the bluntness. I think it’s something that is important for me to hear, for us to hear. 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’ve been bringing home. So it’s definitely something that we will have to discuss based on some of your feedback. But yeah, no, it’s a good reminder of the reality of our situation in terms of what this boogeyman that you reference looks like with the form of these laws.

Scott:
Yeah, and I get it. You just don’t want to attack it because what I’m saying here is no, 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. And 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. 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? Or 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 payments gone, your student loans could be gone. Your… What is that? What was 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 inequity 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.
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 with a situation that’s capable of sustainably continuing to build 50,000, $60,000 a year in investible liquidity if just one of you works.

Patrick:
And I think that’s a really interesting way to hear it and think about it because for sure that is a sacrifice in immediate term, in the short term and in 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 whether or not that’s a sacrifice in the immediate term for sure. For sure. And I guess my question about how you’re envisioning going about this is, 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?

Scott:
Great question. So I think that that’s going to be the crux of the asset allocation question. Your 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 you’ll get 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… What’s the term that they were using? Forbearance? Is that what they’re calling it for student loans?

Patrick:
I’m not sure if that’s what’s it’s… I think they’re calling it a pause. But essentially, yes, you’re not having to pay. They’re counting and the payments are zero.

Scott:
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. So 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 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 suck 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. But I think it’s really in that coin flip space. Mindy, what do you think?

Mindy:
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?

Patrick:
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 contention and whatnot. So essentially those are expected to resume between June and October of this year. 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 in a couple few months.

Mindy:
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. I 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?

Patrick:
Correct, yeah. Essentially how I understand it, at the end of 20 years, whatever is left is forgiven. I think there are certain stipulations about making qualified payments and whatnot, which currently we are, even if we’re making the $0, that’s a “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 because there’s some certain language in her account or whatnot that has some of that. So we’ll have to look at that, but I think it should, like you said, whatever is not paid off will be forgiven at that time.

Mindy:
Yeah, I like the idea of pushing through and paying it off. I mean, it’s a lot of money, but it’s… It’s a lot of money. You’ll work towards paying it off.

Scott:
It’s 10 years of your earnings. It’s five years of your combined earnings.

Patrick:
Okay.

Mindy:
Versus 13 years of having it weighing on your psyche while you’re not filing jointly and you’re not investing in whatever. Now let’s talk about real estate. This 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 401(k), if there’s any sort of match, is the right investment. But I’m not sure that real estate with your demanding job and 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 you could… 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,” but reality says that that’s not always what happens. How long has your property been vacant?

Patrick:
About two months now.

Mindy:
Yeah. Does that feel awesome?

Patrick:
Not so much.

Mindy:
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, continue 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 that just because you get impatient, and I don’t mean to throw that back at you, but…

Patrick:
No, I think that’s totally fair. That was for sure what happened. My wife and I have had multiple discussions about that. That was definitely what happened.

Scott:
Did you use the HELOC to buy the rental property?

Patrick:
I did, yes.

Scott:
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, 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 cash flow. 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 and 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, right? 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 300,000 to 500,000. You already have like 160,000. So let’s call it even 400,000 to 500,000 after investment returns in five years inside your retirement accounts. But that wasn’t your stated goal, right?
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 inequity producing a 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 a creative finance. I think that’s a reasonable possibility for you in five years. Your car payment will be paid off, your HELOC will be paid off. You’ll slowly kind of 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 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. Again, bringing that flexible position, let’s call it in that case, to 50,000 in savings, 3,000 to $4,000 in passive cash flow, and 250,000 to $300,000 in retirement accounts. So those would be the two kind of outcomes I think you could back into over the next five years. Do those sound realistic to you buried back of the napkin map?

Patrick:
I think so. And 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 beefing, it has all these great benefits. It’s four or five different ways to make money in it.” And I would like to think I’ve done a decent job in 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. And I guess clarifying something, Scott, you had said real estate can be a part you think in five years, or you think at some point in the nearer future?

Scott:
Again, this is where I thank you for coming on the show because you’re giving us such a hard financial… 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. One 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. That’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. In 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 to 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. Even 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% potential to double the family’s cash flow.

Patrick:
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 X, Y, Z loans, some of which don’t make sense to pay off like the super low interest ones and some of which are in that gray zone like you said, what that does on the backend in terms of what we’re bringing in on a monthly basis and how we can then scale what we’re accumulating in different type of accounts, in different type of assets such as real estate to then have a strong financial position in a handful of years, five-ish plus years. So yeah, this is not where I thought the conversation was going, but this has been super helpful. Definitely gives us some tough stuff to talk about, but yeah, it’ll be fun.

Scott:
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 in the trade-offs in your life that discussion has.

Mindy:
Yeah, these are just our opinions. Talk to your wife, listen to the episode with her and see 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. I 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.

Patrick:
This has been really helpful. I’m really appreciative of your time.

Scott:
Awesome. Well, thank you so much, Patrick, for listening and coming on the show and sharing your situation.

Patrick:
Awesome. Thank you guys again.

Mindy:
All right, Scott, that was Patrick. That was interesting.

Scott:
Yeah. Look, it’s a tough situation. 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. Patrick 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 and become debt-free 20 times faster than you thought with a very similar problem, 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.
And 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. 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 betcha that the government does end up forgiving a lot of that tax burden for folks that do get student loan debt forgiven. But I still bias people, I think, heavily towards attack the problem, do the hard work, cash flow, pay it off, invest and build in and move toward financial freedom.

Mindy:
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.

Scott:
That’s right. This is a team effort. 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, right? And it’s not just 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 be written on why you should do any one of a variety of approaches. So we appreciate Patrick coming on and sharing a situation that has no particular right answer.

Mindy:
And if you want to debate, email [email protected], not [email protected].

Scott:
And I would love that. I’m not sure on this one and I would love a strong feedback if there’s a different approaches that folks had. I’m sure we’ll get a couple on the whole life insurance policy advice as well.

Mindy:
Yeah. And you can call Scott at… Just kidding. All right, Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
That wraps up this episode of the BiggerPockets Money Podcast. He is Scott Trench and I am Mindy Jensen saying, don’t be a stranger.

Scott:
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/biggerpocketsmoney.

Mindy:
BiggerPockets Money was created by Mindy Jensen and Scott Trench, produced by Kailyn Bennett, editing by Exodus Media, copywriting by Nate Weintraub. Lastly, a big thank you to the BiggerPockets team for making this show possible.