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March 18, 2021
Episode 54 of the NewRetirement podcast is an interview with Paula Pant, the Founder of Afford Anything, a personal finance site, and host of the Afford Anything Podcast with 15 million downloads. (congrats!) Paula’s core belief is that you can “Afford Anything but not Everything”, and every decision has a tradeoff. We’re going to discuss the timing and transition to Financial Independence and Retirement.
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Steve: Welcome to The NewRetirement Podcast. Today, we’re going to be talking with Paula Pant, the founder of Afford Anything, a personal finance website, and host of the Afford Anything Podcast, which has 15 million downloads. Congratulations on that.
Paula: Thank you. Thank you.
Steve: That’s pretty amazing. Paula’s core belief is that you can afford anything but not everything, and every decision has a trade off. So, we’re going to discuss the timing and transition to financial independence and retirement. So, with that, Paula, welcome to our show. It’s great to have you join us.
Paula: Oh, thank you so much. Thank you for inviting me on.
Steve: Yeah. I really appreciate your time. Our audience, I put it in Facebook, and they had a lot of questions for you. So, we’ll be asking you some questions later on that are specific to them, but just to get started, I also, in our community, I put out a question, what you made you think as an individual that it was time to retire or make the jump to financial independence, and a couple of big themes emerged. So, one was time. So, folks had a much bigger, I think, recognition that, A, their time is valuable. It’s a very scarce resource. They can’t get any more of it. They also may have seen a health scare either in their own lives or in the family or friends or something. They looked up and they’re like, “Hey, I’m 50 or something, and I’ve seen more yesterdays than tomorrows.” That was one big thing was time.
Steve: Another big thing was environment. So, corporate culture stifling. They were dreading Mondays. They didn’t feel like they work was valued, and they just felt like they could get more return on their time using it the way they wanted to. So, I was just curious what you’ve heard in your community and doing your podcast around how do people know when it’s time to get serious about financial independence or make the transition to it.
Paula: So, among the people in my community, in the Afford Anything community, there’s a wide variety of motivations that people have. The Afford Anything community spans people in their early 20s all the way up to people in their 60s and 70s. So, people find financial independence at different stages of their life. For a lot of people who are younger, sometimes it’s something as simple as they graduated from college and were disappointed in the first job that they got or they went into a major that in hindsight they did it because they thought they could get paid well, but now they’re in their first job out of college and they absolutely hate it, and they’re trying to figure out how they can be a little bit more agile on how they can base their living off of the internet and do something that’s a little bit more flexible and remote and online, but they’d like to get a base buildup first.
Paula: So, that’s typically oftentimes the motivation that I see from people in their 20s. When people get to their 30s and 40s, a lot of times it’s they want to spend more time with their children. So, they’re interested in financial independence so that one or both spouses can dedicate more time to family life. Then I’ve got people in the community who are in their 50s or 60s and they’re saying, “Hey, we really want to travel, and we’re starting to recognize that our whole lives we thought, ‘Well, we’ll work until we’re 67-68 years old and then we’ll travel in our 70s.’ Now, we’re starting to realize we want to do this while we still have good health.”
Paula: Travel at the age of 70 is going to be very different than travel at the age of even 65 or 60. So, to the extent that they can retire even two years, three years, four years earlier, I mean, that is a significant difference when it comes to the amount of energy that you have if you’re jet setting off to Europe or going on Safaris in South Africa.
Steve: I remember for your own story, you took almost a sabbatical mid-career, and then, I guess, decided, “This is great. I’m going to keep trying to do this.” Is that right? I mean, how was your own thinking on this? How did that evolve?
Paula: Well, so with my own thinking, so first of all, I do want to emphasize that I do not consider myself to be retired. I’m totally into the financial independence piece of it, but not the retirement piece of it. I very much see myself as an entrepreneur, as a business owner, somebody who works more than full-time, and I love doing that. My hope is that when I’m 200 years old I’m still healthy enough to continue working everyday.
Paula: For me, I worked at a newspaper. I was a newspaper reporter from 2005 to 2008. In 2008, I quit my job in order to go travel. If you think about how little sense that makes, we’re in the middle of the great recession. Truly, we’re at the start of the great recession. The newspaper industry is in decline. All of these major newspapers are shutting down. The ones that are still open are on hiring freezes, and there’s a recession. It’s the worst time you could possibly voluntarily quit a job, but I had long held this dream of going off to travel. I didn’t want to defer it any longer. I had already deferred it for several years while I was saving up money to do it, and I also had a sense that the future of journalism was going to be freelance and independent and online.
Paula: So, it seemed to me as though my best career prospects were not going to be competing with thousands of other candidates for one coveted reporter spot at a major newspaper, but rather to start my own independent voice online, and I didn’t quite know what that was going to look like, but I did get the sense that if I wanted to pivot and I wanted to embrace the direction that the industry was going in, that that was going to require doing this on my own.
Paula: So, 2008, I quit my job. I flew to Egypt on a one-way ticket. I ended up spending about a year in Southeast Asia and then another year in Australia. When I came back to the United States in 2010, that was when I really dedicated myself full-time to make a go of it as a full-time, initially as a full-time freelance writer, and then later that morphed into lots of other public online activities that turned into its own company and its own little miniature online empire.
Steve: Empire, yeah. That’s good.
Paula: Throughout that, I was very conscious of the fact that I had no safety net. I didn’t have the stability of a W2 paycheck that was coming in biweekly or monthly. I did not have any type of pension plan or any company-sponsored health insurance. I was single. I didn’t have a spouse with an income that I could rely on. So, I knew that I needed to build my own safety net. I was going to need to build out some foundation that would allow me to take greater entrepreneurial risks.
Paula: So, really, everything worked in tandem. The more that I reinvested money back into growing my business, the more that that business grew. So, that business growth was I think the most foundational and most fundamental piece of growing my net worth, and then investing in a variety of different assets, including index funds, including real estate, and, again, including back into my own business. All of that really dovetailed together to help me build my net worth and build out a safety net that I knew would catch me if I were to fall.
Steve: Yeah. That’s amazing. It’s a great story. Did you initially set out to focus on this idea of financial independence or you’re doing it for yourself and then you’re like, “Look at what I’m doing.”
Paula: Yeah, yeah. You know what? I never thought of it as financial independence. I simply thought of it as building a safety net. Yeah.
Steve: Yeah. That’s cool. That’s a great story. It’s also very inspirational, I think, for people to realize, “Hey, it is doable and it can be an example.” So, a question, I mean, actually, I like your core theme here of you can afford anything but not everything. I mean, that really did resonate with me. You have a couple of key questions that when I was listening to one of your podcasts you talked about, and I was wondering if you could share that with our audience and why you ask those key questions.
Paula: Sure. Do you mean the questions of like, “How do you want to spend your time, your money, your energy, your attention?”
Steve: Yeah. The way I heard you articulate it was, one, what matters to you, and then, two, how do you align your daily, weekly, and monthly, and yearly decisions to reflect that which matters most?
Paula: That which matters most, yeah. Exactly. So, what was your question about those questions?
Steve: Well, how did you distill it down to those questions and what do you see that eliciting from folks when they really dive in to those questions?
Paula: Sure. Well, so the notion of afford anything is the notion of opportunity cost, that every yes comes with a trade off and every dollar that you spend on something, every hour that you spend on something, every modicum of brain space that you devote to something comes at the expense of everything else, all other possible alternatives that that could be dedicated to. So, I think oftentimes people are unconscious to the trade offs, and people can fall in to what the author Cal Newport refers to the any benefit hypothesis.
Paula: If there is any benefit at all, then people will say yes to something. Is there a benefit to clipping coupons? Sure, yeah, there is some benefit. Is there a benefit to pursuing this opportunity to be a mystery shopper so that you can make an extra $15? Sure, yeah, there is a benefit to that, and that benefit is 15 bucks. So, oftentimes, if there is any benefit at all, people will say yes without considering what that benefit comes at the cost of.
Paula: So, those two key questions that you focused on, number one, what matters most, and number two, how do you align your decisions accordingly, those highlight the fact that given the reality of opportunity cost, the question is not, “Could this be beneficial?” but rather, “What am I willing to give up in order to do this? Is this the most important thing?”
Steve: Yeah. I think that makes a lot of sense. I mean, like in our business, we’re trying to stack rank the things. We have lots of things we could work on or do, services, and vie for our audience, but which ones make the most difference for the most people, and we’re continuously juggling that.
Steve: I was also reading, actually, I listened to this podcast from Invest Like The Best with the founder of Asana. He was one of the early Facebook guys, Dustin, I forget his last name, but anyway, he talked about this pyramid of clarity, which is pretty interesting that, “Hey, what’s your vision that you want to get done at the top and then what’s your strategy for achieving that, and then how do you break that down into individual goals across your company and then get those out?” You could apply some more thing to personal finance, I think, in your own time, but like you’re pointing out, probably many people don’t think about it that deeply by default, but one way to think about it.
Steve: So, I want to talk a little bit about like, as people, are earlier and thinking about financial independence, do you have a way that people should approach getting oriented to getting on the path to achieving it?
Paula: Sure. So, there are a few things. First of all, I break with conventional wisdom on the topic of financial independence in many ways. So, I want to outline a few of those. Conventional wisdom says that you should pick a FI number, which is often calculated as 25 times your current annual expenses. I do not believe that. So, the reason that I don’t believe that is because if you think of your expenses across the graph of your life, if you were to create a graph of your adult life and have your annual expenses for each year of your adult life, those expenses would vary year by year.
Paula: So, to peg an FI number to the year in which you stumbled across the notion of FI is to peg this goal to what is literally just a random data point. So, rather than tether yourself to an FI number or get caught up in questions such as, “Precisely, what are my living costs going to be?” and rather than getting caught up in the minutia of it, my recommendation would be instead to use FI as motivation to have really good financial habits, motivation to grow the gap between what you earn and what you spend, and that gap can be grown in two ways. You can either spend less or you can earn more or some combination of the above, but grow that gap, invest that gap, repeat.
Paula: If you do that consistently while also living a life that you enjoy now in the moment, then, over time, eventually, that gap invested and compounded will grow to a point where it gives you a very, very solid footing. That footing might end up being enough to cover your living expenses in the future. If things go right, if the markets do well, if that combination of skill and timing works out just so, then absolutely that could happen, and if that does happen, it’s wonderful, but I would caution people not to get so caught up in trying to hit some FI number that they miss out on their life right now in the process.
Steve: Right. Yeah. I see some of that, and Mr. Money Mustache, and some of the cronies that are fans of him where it’s like it’s all about total austerity, I’m eating, I manage my food budget, I manage my transportation budget, and it’s like it doesn’t feel like they really are willing to indulge in any entertainment that’s paid, stuff like that. So, you wonder, “Well, are you weighing the value of your time that you’re not going to get back?” If you choose like, “Hey, I’m not going to go travel to Egypt or Southeast Asia this year or for the next 20 years, and then I’m going to wait till I’m financial independent but then I’m 60 years old.” Have you really traded off a huge opportunity for yourself?
Paula: Right, right. Exactly. Exactly. The flip side to austerity is like my friend Joe Saul-Sehy, who is often on the podcast, on the Afford Anything Podcast with me, he has a great quote where he says, “You can’t shrink your way to greatness.” You were put on this Earth with skills and talents and abilities, and if you spend your entire life trying to cut back, you are fundamentally focused on consumerism. You’re focused on consuming less, but you’re still focused on consuming rather than creating. So, why not use your skills and talents in a way that contributes to society and maximize your impact rather than try to shrink your life to be so small that not only do you yourself miss out, but the world misses out on you.
Steve: Yeah. That’s a great point. So, for yourself or for people in your audience, it feels like you, especially since you’re far younger than a traditional retirement age, like our audience that are thinking about, “Oh, how do I claim Social Security? Do I use my pension?” How do they use those things to create an income floor and then maybe use their investments to create the rest of the income that they need, drawdowns and so forth, but it sounds like for you you’ve done a lot with real estate, just an eclectic mix of investments. I mean, do you have any recommendations on different vehicles people should look at or how can they put these things together to get that safety net that you built?
Paula: Well, I’d say start with the end in mind. So, rather than looking piecemeal at various tactics, real estate is a tactic. Index funds are tactics. Having intellectual property that produces royalties, that’s a tactic. All of these are income producing vehicles, but rather than hyper-focus on a list of tactics that is absent strategy, I would start first, as you were talking about with the Asana pyramid, start first with goal, ultimate goal, and from that goal, then go to strategy, and then after strategy, then go to tactics.
Paula: So, if that ultimate goal for a given person is to have X amount of cashflow or income every month and for that to be consistent, then a strategy and, therefore, the tactics that they’re going to use are going to be very different from someone else who has a goal of X amount of net worth.
Steve: Right. I think it’s a great point. I mean, we’re actually having that discussion with our product right now, which is, or talking about ourselves in terms of, “All right. We’re really trying to help people with strategic planning for their money. So, it’s not like budgeting or just investment management, but it’s like how do you put the whole thing together, and then align everything else by it.” I would say we’re not there yet. This is a work in progress, but, yeah.
Steve: Someone on our board, actually, we recently got a board for our company and they were like, “Hey, what’s you’re strategy?”
Steve: I was like, “Oh, that’s a great question. What is our corporate strategy?” Right?
Steve: So, when you sit back and be like, “Okay. Let’s build our strategy,” you are forced to think through how are we going to move the pieces in a synchronous way over a longer period of time to get done what we want to get done. It was definitely good as a course in function.
Steve: So, if someone approaches financial independence, how do people know that they have enough? You talked before you don’t believe in the 25 times thing, which I get. So, what do you see people doing and say, “Okay. I can’t have enough confidence”? I mean, in our audience, we see a lot of people like, well, the one more year syndrome, “I should work one more year because I saved that much more. My money can work longer,” and so forth, and they’re just not sure and then they wait. The bias is to wait.
Paula: Right. Exactly. Exactly. The question of how do you define enough is such a philosophically interesting question. There is on one hand, enough is a moving target. It’s not just a moving target because of Hedonic adaptation. It’s not just a moving target because our discretionary desires change. That’s the piece of the story that everybody likes to focus on because that’s the piece of the story that we can control. If enough changes for the reason that our lifestyle tastes inflate, well, then it can be very easy to control that with some mixture of internet moralizing and everything that you see in the FI community.
Paula: Where the definition of enough gets trickier is that our needs change, our genuine healthcare needs, our activities of daily living as we age, if we need assistance with those types of activities of daily living, I mean, those are genuine valid reasons why cost of living changes in ways that are unpredictable.
Paula: It may be the case that for some people they’ll spend more in retirement during their 60s and 70s because they’re traveling, they’re playing golf, they’re splitting their time between their Michigan home and their Florida home, and so during that time, maybe they’re spending is high and they anticipate having lower spending in their 80s and 90s because they anticipate staying at home more, and maybe they’re right or maybe their healthcare needs change and the out of pocket costs on that are significant during their 80s and 90s, right?
Paula: I mean, any number of things can happen that cannot be predicted. If we look at history, not just at history of societies, but at people’s personal history, the only consistent lesson that we can find is that it is consistently surprising. So, I think that retirement planning begins with the acceptance that we can never truly have a sense of how much is enough, but what we need to do is, number one, protect against the risk of ruin, so protect against worst case scenario downsides, and number two, build a plan that is flexible and agile.
Paula: So, in so far as protecting against that risk of ruin goes, having adequate protection, and I’m using protection in a general term. A lot of people jump to insurance, and insurance certainly is big, adequate homeowner’s insurance, adequate auto insurance, adequate healthcare coverage, longterm disability insurance. Certainly, insurances are a piece of that, but even outside of just insurance itself adequate protection against worst case scenarios in whatever form that may take. For some people, that may take the form of having very, very strong cash reserves that can get them through two years or three years of living expenses before they have to draw down on their portfolio, so that they’re less exposed to sequence of returns risk.
Paula: For other people, that may be having a portion of their portfolio that is truly an income-producing portion either because it’s invested in dividend-paying assets, because it’s invested in rental-producing assets. I mean, some form of a strong income-based component of a portfolio could be another form of protection. For people who do have a pension, that’s another form of protection.
Paula: So, building out the piece of the puzzle, the talk of retirement is a three-legged stool with social security, your portfolio, and pension, those being the three legs of the stool, that’s a great framework, but those three legs, again, focus on tactics. They focus on the how. So, what I’m talking about is more the less the how and more the what. And the what is a foundation of protection, a foundation of downside protection, and then on top of that, a layer of flexibility.
Steve: Right. I really like this way of describing it. I mean, we definitely see, I mean, our audience are planners today. They attended the opting in, so they’re thinking about this, so I think they’re more risk averse. They’re trying to hedge out those risks. And I do think you have to accept that life is uncertain. You can’t hedge against every risk. It’s impossible. So, you have to learn to live with that uncertainty, but, yeah. Helping people see what they want to manage against if it’s like, “I want to have maximum wealth at some point,” or “I want to have a good income floor,” or “I’m worried about predeceasing my spouse,” or something like that.
Steve: You could work with them to understand those risks and then, I mean, we all see this. Every plan is so different. Everyone has very different goals and ways of approaching it, and personal circumstances. So, the idea of, “Hey, create a sustainable system that you understand that gives you some level of protection but is adaptable, and then live with it, live with the risk and, hopefully, do something with your time that you really love and enjoy,” is a great approach. So, that makes a lot of sense.
Paula: The one thing I would add in terms of protecting against risk, and I don’t think this gets talked about enough, especially in traditional retirement circles of people who are in their 50s and 60s, review your prenups, and if you don’t have one, get a postnup. I know a woman who her husband left her when they were in their 70s. He had just turned 70 and he left, and it put her in a very, very bad financial position. So, the assumption that just because you’re in your 70s that means your marriage isn’t going to disintegrate is unfortunately not true and that is a bad time to learn that the hard way. So, test those assumptions.
Steve: Yeah. We talked a little bit about this, but I think it’s something that we can call out more. I think gray divorce, yeah, it’s a real risk. I mean, it happens, and it can be financially very destructive to one or both spouses. So, interesting.
Paula: Exactly. There is the assumption. A lot of people think, “That’s never going to happen to me because I am not going to agree to a divorce.” So, a lot of people think that they have personal agency, and as long as they don’t agree to a divorce that means it’s not going to happen to them. The reality is you don’t have personal agency. If your spouse leaves you, there’s nothing you can do about it. You have no personal agency there. So, I hate to be so blunt about it, but if I can spare even one person for making the erroneous assumption that they have agency in whether or not they get abandoned because let’s call it what it is, it’s abandonment, that does happen. It absolutely happens, and it happens across all ages.
Paula: So, you need to protect yourself from the risk that that could happen to you after you’ve retired and you don’t have the benefit of being in your 20s or 30s or 40s and starting a second career. If you’re in your 70s, that’s a much worse time for that.
Steve: Yeah. No, that’s a great point. Okay. Cool. So, one thing that occurred to me as you’re describing people building more sustainable ecosystem is what we’re seeing with COVID, I’m going to diverge here a little bit, but I was talking with one of our team members earlier about just the movement that’s happening, especially with young people where they’re like, “Hey, I live in Brooklyn,” or “I live in San Francisco, and I make a lot of money, but it’s impossible to buy a house here, and I want more space.” We’d love to see if you’re seeing this in your community. I mean, what we’re talking about is people are going to these smaller towns in a material way, but still grouping up with a bunch of maybe somewhat like-minded folks and creating these smaller communities but in a much more sustainable, lower cost of living areas. Are you seeing that in your community?
Paula: I mean, that, in my community, did not start with COVID. In the Afford Anything community, that’s been going on for a long time. People who have remote work or who have the option of being able to work from home, being able to work remotely, even prior to COVID were often going to a low cost of living areas, typically not small communities. I’m talking about places like Cincinnati, Indianapolis, Detroit, Louisville, Kentucky. I realized I’m naming a bunch of places in the Midwest, but Phoenix, Las Vegas, San Antonio, places that they’re large enough that they are still cities, they’re large enough that they still have airport, big international airports, they have accessibility, they have a lot of the benefits that come from living in a mid-sized city, but they don’t quite the price tag of a place like San Francisco or New York.
Paula: So, I’ve seen that trend in the Afford Anything community for the better part of the last seven, eight, nine years, and I think COVID has accelerated that among people who are not part of the personal finance community. The pandemic, I think, accelerated it for a mainstream audience, but I’ve seen that happening in the Afford Anything community since forever.
Steve: Right. It doesn’t feel like it’s going to reverse even we get or, hopefully, when we get the pandemic under control. I think people are seeing, well, it’s a couple of things. One, companies, especially tech companies out here, they’re like, “Well,” sales process is are like, “Well, guess what? It’s remote forever.” Twitter is like, “It’s remote forever.” You don’t have the option. So, I think folks are really like, “Okay. Let’s look across the whole US. Where is a great work-life balance? Get some fiber optic cabling and go to town.”
Paula: Well, so, yes, the trend is happening, but I would push back on the it doesn’t seem like it’s going to reverse. I don’t see it in such a linear framework because what’s happening is that as people have the ability to work from anywhere, those who prioritize cost of living and more space seek out homes in places like Indianapolis. By contrast, those who prioritize let’s say being around cultural communities, those who prioritize the types of things that a city like New York can offer that Indianapolis just cannot, they now have the ability to move to somewhere like New York or San Francisco and at least at the moment, rents are significantly lower than they ever have been.
Paula: If you want to move there now, particularly in Manhattan or in certain neighborhoods in San Fran, landlords are giving three months free rent, all kinds of concessions. So, I don’t see an exodus of people happening. I see a reshuffling, people who’ve spent the last 10 years in Indianapolis but have secretly always dreamed of living in New York but it was never the right time, this is a really good time to go there.
Steve: Yeah. That’s a good point. I mean, I tend to know people that have been living in Brooklyn and New York or San Francisco, and whatnot. So, those people are like, “Oh, well, I’m living. I’m going to Austin,” or whatever. Yeah. So, I could totally see it going the other way. I think that makes sense. It’s probably healthy. Look what happened in Detroit, right? Detroit tanked. You used to be able to buy a building in Detroit for whatever, 20 million bucks, just like a skyscraper or something, and now it’s come back in a big way because it got low cost enough and creative folks or engineers or whoever could move back in and make it work.
Paula: Right, right.
Steve: So, one question before we get into user questions. Once you’ve achieved financial independence or some level of it, how do you see people approaching finding purpose and staying highly motivated? So, you’re financially independent, and clearly highly motivated doing better every year, right?
Paula: Some days, some days. It ebbs and flows.
Steve: Is there some kind of method or a process that you think people should people or books that they should touch on to think this through? I mean, I’ve talked to Jay Roth about this a little bit. He’s big on purpose, but I’d love to hear your take on it.
Paula: Yeah. So, if you think of the people who we traditionally regard as rich, Elon Musk, Justin Bieber, anyone who we traditionally, Beyonce, anyone who we regard in the mainstream media as conventionally rich, they are, at least the vast majority of them, are financially independent. They are not working in order to buy groceries, pay their utility bills. They’re working because they enjoy what they do and they’re finding projects that interest them. And that, I think, is the key to …
Paula: I don’t see a big difference between life before and after financial independence. Financial independence just means that you’ve got enough money that you can generate from investments to provide a stable income floor. That does provide a sense of psychological relief, but regardless of whether you have that income floor or not, you still ideally want to be engaged in work that you enjoy. Whether you’re Elon Musk and you’re trying to build electric cars and create a colony on Mars or whether you’re Beyonce and you’re writing songs, no matter what you’re doing, it’s work that occupies autonomy, mastery, and purpose.
Paula: You have a degree of autonomy in the work that you’re doing. You have a degree of mastery, meaning that it’s aligned with your talents, your natural talents, skills, and abilities, and you have some purpose in what you’re doing, meaning that in some way or another, it is benefiting society. As long as those three factors are present, then I don’t really see a difference between pre or post FI. Good work is good work no matter how big your investment portfolio is.
Steve: Right. Well, what I see in the FI community are people that have that confidence and agency to do what they want to do is they tend to do probably better work. I mean, they’re definitely more invested in it, right? So, they probably are completely aligned with the work they’re doing. Yeah. I like the autonomy, mastery, and purpose framework. So, it’s great to see that. Okay. Cool.
Steve: Well, I wanted to appreciate all the context on financial independence. We have some questions from our users who are very familiar with you. So, you have a lot of fans out there, which is great.
Paula: Oh, excellent.
Steve: Yeah. They’re like, “Oh, good.” So, first one is from Jeff C., “I’d like to know what Paula recommends for someone who has money set aside to allocate towards real estate but not the time to manage it themselves.”
Paula: I’m guessing that what he means is that he doesn’t have the time to find it because the management part of it is actually quite easy. It’s the finding part that requires a bunch of work. So, you don’t need to manage your property yourself. You can hire a property manager and that property manager’s job is to manage it. So, if you want to purchase rental real estate, then what you would need is time for the finding piece of it, and the good news is that the finding piece is not something that’s ongoing. It’s a one-time project that you only need to do once.
Paula: So, it could be as simple as you take a two-week vacation, and during that two-week vacation, you binge learn a whole bunch during let’s say the first week. Second week, you set yourself up with all of the people on your team. You take what you’ve learned in that binge learn in that first week. Set yourself up with a good team, and get an agent and a property manager, and get the people who are going to be boots on the ground doing that search for you.
Paula: If you just knock it out of the park during a two-week vacation, you’ll have the dominoes lined up so that you’ll know what city and state you’re looking in, you’ll know what class of property you’re looking for, you’ll know what your search parameters are. You will have an agent lined up or you’ll have initiated your deal finding campaign, whether it’s driving for dollars or doing a direct mail campaign. You’ll have all of that set up.
Paula: Basically, you can take a two-week vacation from work and knock it out then, and then you’ve got the property or at least you’ve got the system for finding a property built. What you want to do is build that system and then let the system do the work.
Steve: Wow. So, as someone who has never purchased. I mean, I bought commercial real estate but through a friend who does this full-time. I co-invested in a syndicate that he did. What you’re saying sounds awesome, but are you really seeing people that are like, “Hey, I’m going to go from … I’m thinking about owning real estate and managing it as a landlord,” to “I’m going to learn about it. I’m actually going to be buying it and owning it within weeks”?
Paula: Well, typically, what happens is people learn about it while they’re saving up the down payment. So, most of my students, I teach a course on real estate investing, the majority of my students who come in come in with the goal of buying a rental property within one or two years, and as they’re going through the process of setting up a down payment or as they’re going through the process of saving a down payment, they want to learn about it. So, once they have the down payment saved, then buying it is instant.
Paula: Now, this particular, Jeff is his name?
Steve: Yeah, Jeff C. I didn’t write his last name.
Paula: Yeah, Jeff C. Yeah. So, Jeff’s situation is unusual in that he already has the money, and we don’t see that very often. Typically, people are doing the learning as they’re saving the money.
Steve: Yeah. I mean, for what it’s worth, I think that for our audience, our audience is 50 today, mass affluent around retirement, they actually tend to have money, and they don’t have enough income or, well, they’re worried about having enough income. I think that things like commercial real estate could be interesting for them since it’s hard today in a super low interest rate environment to find fixed income products that generate income that you need. You have a million bucks, you’re paying 1%, that’s 10 grand a year. It’s not a lot.
Paula: Yeah. So, I’m going to pushback on Jeff’s. So, I suggest the two-week vacation binge for a person who truly does not have any time, but I’m also going to pushback on Jeff’s assumption that he doesn’t have any time. What would happen if he eliminated social media from his life? Not forever, but just for three months or four months. How much time does he spend on Facebook, Instagram, Twitter? How much time does he spend watching TV? If he were to replace that with learning about real estate and then, again, building the system that will look for a property for him, then he doesn’t have to take a two-week vacation.
Paula: The two-week vacation angle is for people who have already cut out social media, they’ve already cut out TV, but they still don’t have the time. They have a newborn twins and a 60-hour a week job. So, they truly, truly don’t have any time. If that’s his case and he’s juggling these newborn twins, then all right, cool. I get it. My best friend, she doesn’t have a twin. She has a one newborn, but she’s in exactly that position where in her day-to-day life, in her week-to-week life, she really doesn’t have a whole lot of time. So, if she wants to focus on something, she’s a programmer, if she wants to just write code, she needs to let grandma and grandpa take the baby for a week and then check in to a hotel so that she’s not tempted to clean or do laundry and then just write code. She needs that complete escape.
Paula: So, that’s what I would suggest to Jeff. If Jeff’s situation is that he truly does not have time, truly, truly, in the way that my best friend does, then, yeah. Give the baby to grandma and grandpa for a week, check in to a hotel, and binge it.
Steve: I like the tough love coaching approach, which is like let’s challenge your core assumptions here about, “I don’t have enough of this or that.” Right. No, it’s cool. Well, here’s a related question from Brian P. He just was like, “Rates versus owning the real estate.” That’s all he wrote. It’s very short. Do you have an opinion on rates versus owning the actual asset directly?
Paula: Yeah. They’re entirely different. I mean, it’s not even apples and oranges. That’s like apples and a river. They’re so far apart that comparing them is silly. One is building a system, building a business, building a team, making decisions, having your decision making directly influence the outcome and the other is just chocking your money at something and hoping it goes well, and not to denigrate that. That’s what I do with index funds all the time. With index funds, I chock my money at a total market index fund, and I hope that the underlying companies are performing well or, in fact, if we want to go outside of index funds, if I’m buying Coca-Cola stock, I’m just throwing my money at Coca-Cola, and I’m hoping that they’re management does a good enough job of growing Coca-Cola that the money that I’ve invested in their stock does well, but I myself do not have any agency in determining the outcome of Coca-Cola as a company, right? So, it’s like the difference buying Coca-Cola stock versus buying your own soda company.
Steve: Right. So, it sounds like from your perspective, I mean, in the way you’re living your life that you’re more of a proponent of own your own business if it’s a portfolio of real estate that you do or if it’s building your own digital media empire, at least have that be a decent part of your portfolio. For you, I’d be curious, I don’t know if you want to share it, but what percentage of your net worth is in your real estate that you own versus, I mean, I don’t know, I don’t want to scoop out your business, but other, I guess, the more passive normal stock market indexes and stuff like that.
Paula: Yeah. I honestly don’t know because the valuations change. If I had to make a guess, I would say probably 50/50. Yeah, 50/50 index funds versus real estate, but, yeah, but that’s not including the value of Afford Anything.
Steve: Right. Sure. We had a Melissa Fredette who was a person in Choose FI. She was like, “Hey, I’m 50 years old, and I’m achieving financial independence, and I own 11 doors. It’s 60% of my portfolio and the rest is in more traditional investments.” We talked through her situation. It was pretty interesting to hear how she had built these things and acquired her way through this and was managing it herself, and then she was like, “I’m stopping. I don’t want more because it’s enough.”
Paula: Yeah. I think that’s great. I love that. Have a good sense of how much is enough because there’s no reason to take on additional risks that you need to take on.
Steve: Totally. Yeah. I thought it was pretty thoughtful for her to be there. So, David W. asks, “I would like Paula to comment about Roth conversions to lower RMDs, required minimum distributions, especially to protect a surviving spouse, when a spouse dies from a tax bomb and Medicare surcharges as a single tax filer.” I don’t know. This might be-
Paula: I don’t think-
Steve: How do I get out of this one?
Paula: Yeah. I think that’s not something that I can answer on the fly. I think that your situation is complicated enough that you should talk to a financial planner who has a fiduciary duty to you.
Steve: Yeah. I think that’s the right answer. I actually wasn’t even trying to trap you, but when I was reading this, I was like, “That’s really a lot here.” It does get really complicated. I mean, this is stuff that we’re starting to look at for our software, but there are all these considerations. I think the takeaway for folks is, yeah, taxation, Medicare surcharges or the IRMA NMIMS test, Social Security income, other passive income, it all hangs together, and it’s not simple as you age. You are forced to draw down these assets. So, it can create consequences for you. So, it’s good to be thoughtful about and aware of what’s coming.
Paula: Right. Well, and I think the other takeaway is that financial media is not a substitute for financial advice. Financial media is media. It is an unregulated industry. Whereas a financial adviser who is licensed and who has a fiduciary duty to you, a financial adviser is going to be able to guide you on your individual situation. Financial media, by its very definition, is going to be speaking to the mass market.
Steve: Yup. Right. All right. Another question. Brack B., “Please ask Paula about the transition from retirement saving to retirement spending.”
Paula: Hmm. So, this can put you in a very strange head space. I experienced this in a small way when I quit my job and I was living off of savings for two years. It really messed with my mind because having been a perpetual saver for so long, to flip that switch and to watch my balances only moving one direction, which was down rather than continue to grow, it triggered a lot of anxiety to be perfectly honest.
Paula: So, I think that being aware of your financial scripts, there’s a great financial psychologist by the name of Dr. Brad Klontz, K-L-O-N-T-Z, who has published a number of books. We’ve interviewed him twice on the Afford Anything Podcast. He talks a lot about the scripts, the money scripts that you have, the money behaviors that you have. So, I think being aware of your psychology when it comes to money and the anxieties and fears that different money situations trigger, I think that’s a big piece of the psychological aspect of being okay with spending after you have spent a lifetime having the opposite mindset.
Steve: Yeah. Right. I know anxiety is top of mind for many people as we live in COVID. One thing a doctor friend of mine said is anticipatory anxiety is much worse than the actual event in almost every case. People always worry about what’s coming and how bad it’s going to be, whatever it is, if it’s being sick or like, “I’m going to retire,” or whatever it is, and then they get there and they’re like, “Okay. That actually was not bad,” or I’m going to have surgery or something like that.
Steve: All right. So, Tommy V. says, “Paula does a fantastic job summarizing the key takeaways from each Afford Anything Podcast episode. What practices do you, Paula, recommend for someone trying to improve their own ability to get to the core ideas from what they’re consuming?” I’m assuming this is, I guess, media.
Paula: Ooh. Hmm. Core ideas? I would say it can be very easy to get caught up in the minutia of different topics. So, anytime you find yourself doing that, zoom out and try to look at what’s being said from that 30,000-foot perspective. To analyze something is to break it apart. To synthesize ideas is to put it back together again. I think when you’ve analyzed enough ideas and you’ve broken them apart, you can synthesize across platforms or across mediums or across… speakers and philosophies and verticals, and it’s that synthesis of ideas in new and different ways that produces insight.
Paula: So, I guess my two pieces of advice are number one, constantly zoom out and ask yourself, “At a high level, what are we talking about here? At a high level, what’s the spirit of the discussion?” That’s the first piece of advice. Then the second piece of advice is to listen and read and take in information broadly, not just from people who are talking about finance because that can be very echo chambery, but also from people who are discussing anything ranging from habits and productivity, those adjacent verticals, habits, productivity, motivation, business, entrepreneurship. Those are all adjacent verticals.
Paula: I’d even go a step beyond that. What are people talking about in the fields of health, of fitness, of fashion, of sports? What’s happening there? What are some of the modalities of thinking or the mental models that can apply in an interdisciplinary manner?
Steve: Yeah. That’s a great answer to probably an unusual question. I know one thing that I’ve seen is from people that are good thinkers that think broadly is that they very often take ideas from one context, and then they reapply it to other ones. Then that allows them to think outside the box. I don’t remember the exact story, but I remember I think it’s the founder of FedEx, when he was coming up with the idea for, “Oh, let’s try to be able to deliver packages overnight,” one of the key insights was we need this hub and spoke model, but that hub and spoke model, I don’t remember exactly where it came from, but it wasn’t in the logistics business, but he was like, “Oh, I can really apply this idea here and it will really make a big difference.”
Steve: Another thing I saw that was interesting was there’s some McDonald’s franchise owner that was like, “Hey, we have all those people going through drive-thrus. You know what I’m going to do? I own 10 stores or 15 stores. I’m going to make a call center for the drive-thrus. So, when you go up to the drive-thru, you’re actually calling a call center somewhere else at another store. They’re placing the order and then it shows up when you move forward to the window.” I was like, “Oh, that’s an interesting insight,” right? People are doing stuff like that. So, anyway-
Paula: Wow. Interesting. Interesting. Yeah. I heard that the idea behind Netflix came about when the founder went to a video store, he went to Blockbuster, and he had to pay late fees on his videos. He was like embarrassed about the fact that he had to pay these late fees, and then immediately after leaving the video store, he went to the gym and he thought, “Oh, this is a much better model. You just pay a flat fee every month and you can come and go as many times as you want for as long as you want.” So, it was taking that gym membership model and applying it to a video store was the inception of Netflix back at the time when Netflix was still mailing DVDs.
Steve: We have to give a shout out to Reed Hastings here for … Hey, let’s start mailing DVDs, and then when the cloud comes, let’s put everything on the cloud and make it on-demand and pivot the whole thing and make that work.
Steve: Another big takeaway that he has that I love and I share with our team is when he’s building his company, he has this whole deck on culture, which is worth 160 pages that’s been shared around, but he talks about we’re a sports team. We’re not like a kids sports team. We’re a professional sports team and every player has to perform and they have to perform at a high level or you’re not going to last.
Steve: I think that framing up of talent that way is a great way to approach it if you’re building businesses. We’re going to hold each other high standards and you’re not going to get a participation award here if you want to build something great, right?
Steve: Okay. Last question. Paramartha J., “I’m wondering if the pandemic has forced Paula to struggle with ethical issues as a landlord. How does she deal with non-paying tenants, if any, who have lost resources of income?”
Paula: Oh, in fact, the pandemic has made me so happy that I am a landlord and even more enthusiastic about acquiring more properties and encouraging people in my audience to acquire more properties because if people like you and I do not acquire properties, if people who don’t care about their tenants sit out the game, then the people who are actually going to be jackrabbits, you know the landlords who are complete jackrabbits to their tenants are the only ones who will continue to be landlords.
Paula: So, the pandemic has made me even more mission-driven to make sure that we produce. Good people become landlords because if good people are landlords, then fewer bad people are going to be landlords. So, what I’ve constantly, constantly told my students, and I’ve written about this on the blog as well, is when the pandemic started, I texted all my tenants and said, “Hey, I never ever, ever want you to drive for Uber with a cough for the sake of paying rent. As your landlord, I want to be very clear that saving lives is more important than paying rent. So, if you find yourself in a tough situation, reach out to me and we will figure it out together, but please never drive for Uber with a cough for the sake of paying rent.”
Paula: One of my tenants called me and he was like, “Are you serious?”
Paula: I was like, “I don’t want your blood money.”
Paula: He just laughed, and he was like, “That’s cool. I’m good. I still have my job, but that’s really good to know.”
Paula: So, what the world needs are landlords who do that. What the world needs are landlords who tell their tenants, “Don’t drive for Uber when you have a cough,” or landlords who tell their tenants, “Hey, if you hit upon hard times, come reach out to me and let me know, and we will figure this out. We can work out a deal.”
Paula: For example, when there’s a tenant turnover, you’ve got to pay for a vacancy, anyway. So, if your tenant can’t pay rent because they’re between jobs, why not, and if they’re good tenant, you want to keep them, why not just tell them, “Hey, I’ll tell you what. If you renew your lease for another year, then I’ll give you two months free,” because you’re going to have to pay that anyway if they move out and there’s a one month vacancy. That’s one month’s rent right there. Plus, if you’re paying a property manager, that property manager is going to charge you another month’s rent right there. So, boom, there’s your two months. If you get that tenant to renew a lease for a year, then you’ve just saved two months’ worth of rent and you’ve passed those savings on to them. So, that’s a win-win.
Paula: The problem I think in real estate is that we have these people who are complete Ebenezer Scrooges, and they give all landlords a bad name, and then you have these highly moral people, who have money negativity, and they’re like, “Well, I keep hearing on the news that landlords are evil, and I don’t want to be evil and, therefore, I’m not going to be a landlord.” So, then you have good people who sit out the game, which means that more Ebenezer Scrooges become landlords. So, we got to stop that. That’s why it’s so important for good people to be landlords.
Steve: That’s a great answer. That’s awesome. All right. I’ll definitely check out your course at some point. There’s someone on our team who’s actually, she’s doing this right now. She left Brooklyn. She’s going to a broader area, and she’s starting to buy houses and she has this vision of building a mini real estate empire or a real estate empire. Okay.
Steve: So, this is great. So, one more question, just about what’s next. Any color that you have on how you see your own efforts unfolding over the next four or five years if you want to share that. If not, we can wrap it up.
Paula: Oh, yeah. So, well, I’ve never written a book. So, I hope to do that some time in the next five years. Honestly, I’ve thought about going back to school for an advanced degree. That’s in the possibly category. We’ve talked about releasing more courses. So, we just had a company, a team meeting today where we talked about whether or not that would happen this year.
Paula: We are going to be doing live events starting in 2022. We’re not even going to try 2021. We’ll wait until the pandemic is firmly over, but 2022, we like to start doing live events, workshops, weekend retreats. We are interested in building out a journal and a planner. So, this thing, this kind of a goals casting the next 10 years journal, where people can sit down and at a high level plan out what their life is going to be like over the next 10 years, followed by a planner where they start big and then they go small. So, start big with the journal, where you figure out the next 10 years, and then go small with the planner, where you figure out how that translates to the next week, the next month.
Paula: So, that’s another project that’s in the works, and we have a tool that we’re building. This one’s going to get released probably some time in the next couple of weeks, I’d take that back, maybe in the next two months-ish, three months at the most. So, this tool is called Your Next Rental City, and it is for people who are trying to figure out what city or state they want to invest in. So, it’s for out-of-state landlords, and it’s a crowdsource tool, where you get all of this information about different cities.
Paula: So, if you live in San Francisco or Boston or Seattle, but you want to know more about Wichita or Oklahoma City, this is a big crowdsource tool where you can learn all about these different cities, you can learn about different neighborhoods, and you can really drill down and identify where you want your next real estate investment to be.
Steve: Interesting. Well, as you do that, we’ll throw some business ideas out there. One thought is I definitely always thought that from a capital formation perspective, we have these users that have money, they want income. Not all of them want to become landlords, but I could see some of them saying, “Hey, I would invest if I had trusted people managing the properties,” and maybe there’s some. I’m sure some of your audience is saving up for their first down payment and get going. I know that when I’ve done commercial real estate, I’m part of a syndicate, so someone is piling together 20 people and we’ll buy a strip mall for two million bucks or something like that, and then they’ll run it, and then we’ll get the dividends. So, it’s this in-between thing, but it works pretty well. The investor doesn’t have to deal with it. They’re completely hands-off. I mean, they pay a price for that because someone else is managing the deal, but it has work. It is risk-intensive. It’s not necessarily for everybody.
Paula: The thing is even when you have people who are very honest, even when everybody and everything is above board, trust isn’t just, “Are they going to screw me over?” Trust is also how good is their judgment, their judgment as a business leader. How good is their judgment in terms of management and operations? So, even in an ideal case, in the best case scenario where everybody is honest and ethical and above board, and nobody does anything shady, even in that best case scenario, there are still going to be differences in judgment when it comes to the management and operations of an asset.
Paula: So, I’m not a huge fan of … I’m a big fan of you can delegate the work, but you cannot delegate the thinking. So, you see this with turnkey companies that pretend to be hands-off, but the reality is they’re not because if you’re actually doing your due diligence, and you’re actually involved in the high level decision making, then that’s not for you.
Paula: So, they’re selling the dream. They’re trying to sell like it’s easy money. I’m opposed to that. I think if you want to own a business, which is what owning a piece of real estate is, then own a business.
Steve: Right. Yeah. I had Chris Tokarski. He’s someone I know pretty well and invested with, but he was on our podcast, and he’s a commercial real estate expert. He does this for a living. He invests billions of dollars. He’s looked at a lot of these crowdfunding sites, not real estate sites, and many of them haven’t worked. Some of them flamed out. His takeaway is that, “Okay. They know how to raise money, but they don’t know how to evaluate them by real estate, and they don’t manage it.”
Steve: It’s all tech guys or people or women, and that’s what I fall over.
Paula: Yeah. Exactly.
Steve: That’s why it’s still hard.
Paula: Exactly. Exactly. Yeah. Those are two different skillsets. Raising money and running a company are different skillsets. The same thing with anyone like a turnkey company that purports that they’ll do it for you. Being good at marketing is not the same thing as being good at running real estate.
Steve: Yeah. All right. Well, good. All right. So, Paula, I’m going to wrap it up. Thanks, Paula, for being on our show. Thanks, Davorin Robison, for being our sound engineer. Anyone who’s been listening, thank you for your time and I hope that you found this useful. Our goal at NewRetirement is to help anyone plan and manage their retirement or financial independence journey so that they can make most of their money and time. If you’ve made this far, definitely check out Paula’s site, Afford Anything, or her podcast or our Facebook group.
Steve: Any reviews are welcome. We read them and try to do better every time. That’s it. So, everyone, thanks for your time. Appreciate you, Paula. Appreciate your time being on here.
Paula: Absolutely. Thank you.
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