How Do You Stop Stressing About Money?

00:00:00.000 | (beeping)

00:00:02.160 | - Welcome back to Ask the Compound.

00:00:13.040 | Many people in the finance industry

00:00:14.800 | love to dunk on regular people, mom and pop,

00:00:16.960 | for not knowing what they're doing,

00:00:18.560 | for being inept at saving and investing.

00:00:20.560 | I think reading about behavioral finance

00:00:23.440 | makes finance people feel somewhat superior

00:00:26.120 | to their peers, other people, not our audience.

00:00:28.480 | Every week, we get emails from people who diligently

00:00:30.080 | save their money, improve their career prospects.

00:00:33.200 | Their people are doing their best

00:00:34.200 | to achieve financial freedom,

00:00:35.160 | but they still have questions, right?

00:00:36.600 | These people are in a great place financially,

00:00:38.160 | and they still have questions,

00:00:39.200 | which shows you how difficult it can be

00:00:41.200 | because you have this uncertainty we're dealing with.

00:00:43.320 | It's okay to admit you need help.

00:00:44.680 | Every year, I feel like I learn more and more,

00:00:46.840 | and it just makes me realize

00:00:47.740 | how much more I still have to learn.

00:00:49.080 | So that's what we're doing here at The Compound.

00:00:51.240 | We're learning together, Duncan.

00:00:52.640 | Come on this journey with us.

00:00:53.480 | - Sure, I learn every week. - Our email here,

00:00:54.320 | askthecompoundshow@gmail.com.

00:00:57.120 | Today's show is sponsored by Bird Dogs.

00:01:00.000 | It's my Bird Dogs hat.

00:01:00.920 | I'm not a big hat guy, usually, right?

00:01:02.680 | Josh does the flat-brimmed thing.

00:01:04.280 | Michael does the dad hat thing.

00:01:06.840 | You have a huge collection of hats.

00:01:09.300 | You wear all kinds of hats.

00:01:10.980 | So this one, much like the Bird Dog shorts and pants

00:01:15.620 | and the warm-up sweats they have,

00:01:17.640 | it's breathable, it's stretchy.

00:01:19.640 | You know, I'm not much of a hat guy,

00:01:20.880 | but in the summer, I'm out on the lake, I'm at the beach.

00:01:24.040 | - Out to brag. - I'm doing bike rides

00:01:25.280 | with the kids and the boat, and it's a lot of wind.

00:01:28.320 | And I wear products in my hair, but still,

00:01:29.560 | sometimes it just, it's not good being outside

00:01:31.800 | so much from being so active, so you need a hat.

00:01:33.440 | And so Bird Dogs has this new hat where if you go,

00:01:37.360 | let's say you go buy a pair of their shorts, right?

00:01:39.240 | Birddogs.com/ATC for Ask the Compound.

00:01:42.800 | Put in promo code ATC and you'll get this hat for free.

00:01:45.520 | It's a nice tech-stretch hat.

00:01:46.680 | I like it, and I'm a simple man

00:01:48.880 | when it comes to investing in fashion, right?

00:01:50.520 | I like to keep things simple and not a lot of words on this,

00:01:53.520 | just a simple picture, it's white, and it's comfy.

00:01:56.520 | So again, Birddogs.com/ATC.

00:02:00.020 | Enter code ATC and you get a free hat just like this.

00:02:02.600 | I do look like I'm going for a golf game after this.

00:02:04.560 | I will admit that.

00:02:06.240 | But if you're gonna do golf or tennis or something,

00:02:09.080 | Bird Dogs are the way to go.

00:02:10.200 | - Yeah, you look like you're heading out to the courts

00:02:12.640 | right after this, you know?

00:02:13.620 | Maybe pickleball?

00:02:14.760 | Are you a pickleball person?

00:02:16.040 | - I'm a tennis pro.

00:02:17.180 | - So they also sent us this.

00:02:19.240 | So maybe foreshadowing, something to come?

00:02:21.120 | I don't know. - I like it.

00:02:22.080 | - We don't know yet, so thanks, Bird Dogs.

00:02:23.960 | - All right, let's go to some questions.

00:02:25.280 | - Oh, also, before we get started,

00:02:26.880 | your intro just made me think, for people new here,

00:02:29.080 | I guess we never really explained the setup of this show.

00:02:32.640 | I have people sometimes reach out and I'm like,

00:02:34.360 | Duncan doesn't know anything about finance

00:02:36.280 | for a finance professional.

00:02:38.140 | I'm not a finance professional.

00:02:39.720 | I'm a creative, I'm the video guy.

00:02:42.480 | I'm a producer. - You're the guy

00:02:43.520 | behind the guy.

00:02:44.360 | We pulled Duncan from, he was a professor.

00:02:48.360 | Duncan went to film school.

00:02:49.840 | We needed someone to help us make our videos look better

00:02:51.800 | 'cause we didn't know what we were doing.

00:02:53.080 | And Duncan is on the production side of things, so.

00:02:55.400 | - Right, yeah, not a financial--

00:02:57.400 | - Duncan is not a financial person.

00:02:59.740 | The Oatly call options

00:03:02.280 | should have been the sign there for people.

00:03:04.960 | - Sure, sure, I would have done it.

00:03:07.060 | (laughing)

00:03:08.600 | Okay, up first today, we have the following.

00:03:13.120 | This is a two-parter, so hang in there.

00:03:15.360 | We have a 3% mortgage and $200,000 in equity

00:03:18.340 | since purchasing in 2015, but it's a tiny place

00:03:21.600 | and we want more space for our family of four.

00:03:24.200 | With interest rates so high

00:03:25.520 | and given the fact that we love our neighborhood,

00:03:27.480 | we would rather add a second story than move.

00:03:30.000 | We don't have nearly enough save

00:03:31.320 | to cover the $250,000 price our architect is estimating.

00:03:35.920 | A HELOC seems like the only financing option

00:03:40.100 | that could make sense,

00:03:40.940 | but we need to withdraw the full amount we're eligible for.

00:03:44.420 | We could begin to pay off the loan immediately

00:03:46.920 | and would be done in about 15 years.

00:03:49.240 | Our hope is that interest rates

00:03:50.520 | would come down in the future,

00:03:51.520 | but even at the current rate,

00:03:53.520 | this would be doable

00:03:54.360 | without reducing retirement contributions

00:03:56.180 | or tapping our modest emergency fund.

00:03:58.920 | Page two, John.

00:03:59.840 | We are early 40s and federal employees

00:04:03.120 | making about $300,000 a year.

00:04:05.220 | We have no other debts and don't foresee any windfalls

00:04:07.840 | or additional income streams in the near future.

00:04:10.520 | Obviously, the safest choice would be to keep saving

00:04:12.680 | until we can pay for the addition,

00:04:14.520 | but that would take us a number of years

00:04:15.840 | during the time we'd be getting the most utility

00:04:18.360 | out of having a bigger home while our kids are still young.

00:04:21.320 | We want immediate gratification.

00:04:22.960 | Is it foolish to max out a HELOC to fund an addition?

00:04:26.740 | Is there a significant chance

00:04:28.320 | that interest rates shoot up even higher

00:04:30.000 | and leave us scrambling?

00:04:31.480 | Are there creative solutions we aren't considering?

00:04:33.640 | So, just before you get into that second to last part,

00:04:37.360 | maybe explain for people like me that don't understand,

00:04:39.880 | why would rates moving

00:04:40.960 | after they've done the HELOC impact them?

00:04:43.240 | - Because unless you're doing a cash out refinance,

00:04:45.680 | you're not exactly locking in the rates.

00:04:47.080 | These rates float.

00:04:47.920 | It's like LIBOR or something plus

00:04:51.280 | a spread.

00:04:52.120 | So, right now, my HELOC rate is like 8%.

00:04:54.240 | So, it kind of moves with mortgage rates.

00:04:57.440 | So, it's not, again, if you did a cash out refinance,

00:04:59.440 | you'd lock that in, that's your rate.

00:05:01.240 | But with the HELOC line of credit, that moved.

00:05:03.560 | So, mine was 3% a couple years ago.

00:05:05.560 | Now, it's like eight.

00:05:06.400 | And so, I know it sounds like a lot of money

00:05:08.200 | to be pulling out and a lot of debt,

00:05:10.160 | but this idea makes sense to me.

00:05:11.740 | This is the whole idea behind taking out HELOC.

00:05:13.780 | So, you have to think about it

00:05:15.160 | in terms of opportunity costs as well.

00:05:16.740 | How much would it cost if you're moving to a new house

00:05:19.740 | with a new higher rate mortgage

00:05:21.120 | plus house price appreciation?

00:05:22.640 | You'd probably be spending way more money.

00:05:23.840 | So, this is, I don't know.

00:05:24.960 | I look at this like taking on a 50 or 40 or 60% mortgage,

00:05:28.600 | however much your house is.

00:05:30.360 | So, you have no debt.

00:05:31.680 | You can afford the monthly payments.

00:05:33.560 | It doesn't impact your retirement or emergency fund

00:05:35.860 | or 529 contributions.

00:05:37.240 | You can pay it off in a reasonable period of time.

00:05:39.600 | I say, what good is that equity doing sitting in your house

00:05:42.560 | if you have the ability to use it, right?

00:05:44.620 | So, why wait if you have a family,

00:05:46.040 | you love the neighborhood,

00:05:47.380 | you obviously wanna stay there for the long haul.

00:05:48.800 | This makes a lot of sense to me.

00:05:50.240 | The whole point of the home equity loan in the first place

00:05:52.160 | is it's tax deductible interest.

00:05:54.840 | You have this asset that you can borrow against.

00:05:58.320 | Most of these lines of credit

00:05:59.600 | give you a 10-year grace period

00:06:01.220 | where you can invest and pay it off interest only.

00:06:03.560 | So, you have some flexibility there too.

00:06:04.920 | So, let's say rates could go up higher.

00:06:08.320 | I don't know, mortgage rates could hit 8%

00:06:09.840 | and this HELOC could be 9, 10%.

00:06:11.680 | It's possible.

00:06:12.760 | It's not out of the realm of possibilities.

00:06:14.800 | I tend to think eventually--

00:06:16.280 | - Right, so there's no cap to what it could go to.

00:06:18.800 | - Yeah, so rates could go higher if they keep going up.

00:06:22.280 | I don't think the economy or housing market

00:06:26.520 | can handle 8% to 9% interest rates for very long,

00:06:30.280 | but it's possible so that it could take a while longer

00:06:32.380 | than we think to go down.

00:06:34.040 | - Sorry, I meant for the HELOC rate,

00:06:35.840 | but there's no upper band.

00:06:37.960 | - If rates keep going up, it could keep going up,

00:06:39.760 | just like mortgage rates, right?

00:06:41.320 | So, then you also have 15 years

00:06:43.000 | from the time that interest-only period is done

00:06:46.360 | to then pay it off.

00:06:47.200 | So, we're talking like a 25-year period to pay it off,

00:06:48.840 | and they think they can pay it off in 15.

00:06:50.880 | So, I don't see why you need to get more creative than this.

00:06:54.280 | It's a secured loan.

00:06:55.320 | You have the equity.

00:06:56.160 | You have the ability to service the debt.

00:06:57.800 | I know it's scary taking on that much,

00:06:59.400 | but I mean, just like,

00:07:02.600 | the only thing I would be worried about

00:07:04.020 | is the fact that it's probably gonna cost more

00:07:05.960 | than you think and it's gonna take longer than you think.

00:07:08.240 | That's the thing I'd be worried about

00:07:09.240 | as much as the borrowing.

00:07:11.240 | If you wanna get creative,

00:07:12.560 | you could do, like when we did our basement,

00:07:14.680 | I've mentioned before,

00:07:15.680 | this was only like a 30, $35,000 project back in the day.

00:07:18.920 | I use 0% credit cards.

00:07:20.360 | We talked about this on Animal Spirits this week

00:07:21.680 | a little bit, and it gives you like a 12, 15,

00:07:24.080 | 18-month cushion if you wanna have that.

00:07:26.000 | Obviously, you're probably not gonna be able

00:07:27.080 | to get $250,000 worth of 0% credit cards,

00:07:30.040 | but you could use it for a little bit of spending

00:07:32.280 | if you wanted to shelter from that HELOC rates for a while

00:07:35.240 | and hope they come down in the meantime.

00:07:36.800 | But I highly doubt you'll regret this decision

00:07:39.880 | in the future, especially if you have a family.

00:07:41.440 | And again, you wanna stay in that area

00:07:42.840 | and you wanna make the house how you want to make it.

00:07:45.320 | So I see no problem with this.

00:07:47.520 | - I mean, the one thing that came to mind for me, though,

00:07:49.480 | is what you're talking about.

00:07:50.480 | How long is that gonna take to do that addition?

00:07:52.400 | So if they're really looking to maximize time,

00:07:54.800 | probably getting into another place would be faster, right?

00:07:58.040 | But I know they say they like their neighborhood

00:08:00.240 | and that kind of thing.

00:08:01.080 | - Yeah, and I think this is probably gonna be

00:08:02.840 | the cheaper route, especially since you're using the equity.

00:08:05.560 | Yes, you're still borrowing,

00:08:06.440 | but you're not borrowing the full amount of a house.

00:08:08.320 | It's this addition.

00:08:10.040 | So I'm guessing borrowing for a new place

00:08:11.840 | would be a lot more if you like the house

00:08:14.520 | and you can handle the construction period,

00:08:16.760 | which again, takes longer than you probably think.

00:08:19.220 | This is the whole point of these loans in the first place.

00:08:21.360 | I say, I don't see a problem with this.

00:08:23.620 | - Yeah, makes sense.

00:08:26.120 | - Do it.

00:08:26.960 | - Cool.

00:08:28.660 | And that was from Ian. - Next question.

00:08:29.480 | - So our next question is from Dan.

00:08:31.400 | I'm anticipating needing to replace

00:08:34.360 | both the roof on my house and a car five years from now.

00:08:37.440 | I would like to have $100,000 set aside

00:08:39.680 | for these expenses.

00:08:41.320 | I wonder how many know they're gonna need a new roof

00:08:43.200 | in five years, but that's neither here nor there.

00:08:47.560 | Five years out feels like an investment no man's land.

00:08:49.980 | Stocks seem to be a bit risky in that timeframe

00:08:52.360 | and high interest savings, while attractive now,

00:08:54.140 | will likely have lower rates

00:08:55.320 | if the Fed cuts at some point.

00:08:57.160 | I've also considered doing something

00:08:58.560 | like a target date fund through a robo-advisor

00:09:00.640 | and having it managed for stock and bond allocations,

00:09:03.160 | decreasing risk over time.

00:09:04.960 | Do you have recommendations for how to allocate savings

00:09:07.280 | given this timeframe?

00:09:09.280 | - Google tells me 25 to 30 years for a good shingle, Duncan.

00:09:12.440 | So maybe they've got the clock winding down here.

00:09:16.960 | I like this question.

00:09:17.800 | We got two renovation questions right away.

00:09:19.400 | This person is going the opposite

00:09:20.760 | where they're not gonna borrow for it.

00:09:22.160 | They're going to save every penny,

00:09:24.240 | which is a different way of looking at it.

00:09:25.780 | If we were looking at a simple lump sum

00:09:27.960 | that you had the money, you had the 100 grand right now

00:09:29.840 | and you just wanted to save it,

00:09:31.280 | this would be an easy question.

00:09:32.480 | Put your money into a five-year treasury.

00:09:34.420 | You got a perfect asset liability match.

00:09:36.080 | You can probably get 4.5% right now

00:09:37.760 | in a five-year treasury, something like that.

00:09:39.800 | Call it a day.

00:09:40.640 | That's a pretty good return for the asset liability match.

00:09:42.940 | The fact that you're saving money periodically

00:09:45.040 | and that until you reach that goal,

00:09:46.440 | it kind of changes the equation a little bit,

00:09:47.860 | but I think we can still use the five-year time horizon

00:09:49.600 | to see like, are stocks too risky for this kind of goal?

00:09:52.560 | So John, give me a chart on.

00:09:54.000 | This is five-year rolling returns for the S&P 500

00:09:57.320 | going back to 1926.

00:09:58.640 | You can see they're all over the place.

00:10:00.240 | Most of them are above zero.

00:10:02.800 | John, next chart for another way of looking at these,

00:10:05.360 | kind of ranking them.

00:10:06.200 | This is going from worst to best.

00:10:07.600 | You can see most returns over a five-year period.

00:10:09.440 | These are total returns.

00:10:11.160 | They don't include inflation and taxes and fees

00:10:13.720 | and all the usual caveats here,

00:10:15.320 | but we're talking 88% of the time,

00:10:18.400 | returns are positive on a five-year window

00:10:20.440 | over the past hundred years or so.

00:10:22.720 | The bad news is, you can do chart off, John,

00:10:25.240 | the range of returns from worst to best is huge.

00:10:28.200 | So the worst five-year return ever, down 61%.

00:10:31.600 | The best five-year return ever, up almost 370%.

00:10:34.800 | Pretty wide range.

00:10:35.640 | Now, to be fair,

00:10:36.480 | a lot of these five-year windows occurred in the 1930s,

00:10:38.800 | but even if you look at post-World War II data,

00:10:40.800 | the worst five-year return was almost a loss of 30%.

00:10:43.160 | The best was like 270% gain.

00:10:45.400 | I have a relatively high tolerance for risk,

00:10:49.320 | but if I'm investing for a specific goal

00:10:52.400 | in a specific timeframe,

00:10:53.640 | and I know I'm gonna have to spend it,

00:10:55.600 | I'm not a big fan of taking a ton of stock market risk,

00:10:58.120 | especially if it's less than five years.

00:10:59.720 | I think that's kind of my cutoff, I think.

00:11:02.240 | And since you're saving this money over time periodically,

00:11:05.720 | dollar cost averaging in, you have a lower time horizon.

00:11:10.000 | So John, do this next chart.

00:11:11.560 | This is the win rate over one, two, three,

00:11:14.520 | four, and five-year periods.

00:11:15.640 | You can still see it's pretty good.

00:11:16.920 | We've talked about this for three or four years

00:11:18.720 | the stock market's up on a one-year basis.

00:11:21.160 | It's a little over 80% of the time.

00:11:22.480 | Two years, three years, it's like 85% of the time.

00:11:25.460 | Four years, 87, and we talked about five years, it's like 88.

00:11:28.000 | So it's still pretty good win rates.

00:11:30.440 | The odds are still in your favor.

00:11:32.560 | I still think that there's just two types of risks

00:11:34.760 | in the market.

00:11:35.600 | There's avoidable risks and there's unavoidable risks.

00:11:37.760 | Volatility is an unavoidable risk.

00:11:39.400 | Recessions is an unavoidable risk.

00:11:41.160 | Bear markets, all these things, you can't avoid those.

00:11:43.680 | Avoidable risks, I think just adding

00:11:45.600 | unnecessary levels of stress to your financial life.

00:11:49.160 | So I do think the idea of maybe a target date or robo-advisor

00:11:52.640 | might make sense, because for those,

00:11:54.280 | you can determine your goals a little more.

00:11:56.080 | It's a little more diversification.

00:11:57.540 | The Vanguard 2030 target date fund is $65.35.

00:12:01.960 | 2025 is more like $60.40.

00:12:04.560 | So still a decent amount of stock risk.

00:12:08.280 | John, one more chart here.

00:12:09.920 | These are the yields for short-term treasuries

00:12:12.640 | right now.

00:12:13.800 | I don't know why you want to overcomplicate things.

00:12:16.480 | You can earn 4.5% to 5.5% from three-month T-bills

00:12:20.600 | to five-year treasuries.

00:12:22.880 | I mean, could rates fall again?

00:12:24.400 | Sure, they could, especially for T-bills and high yield

00:12:27.000 | and short-term stuff.

00:12:28.160 | That's a strong possibility in the coming years.

00:12:30.760 | But you have the ability to lock in higher yields for longer

00:12:33.800 | now, the first time in, I don't know, 15, 20 years.

00:12:36.600 | It's much higher.

00:12:37.320 | So I have three rules when it comes

00:12:39.720 | to short-to-intermediate-term financial goals like this.

00:12:42.760 | One, it has to be liquid.

00:12:44.480 | Two, I'm not willing to accept much, if any, volatility.

00:12:47.640 | And three, I don't want the possibility of large losses

00:12:49.800 | right when I need to spend it at the worst possible time,

00:12:51.680 | which can happen.

00:12:52.360 | You could have a down 20% month in the stock market

00:12:54.280 | right when you need to spend the money,

00:12:55.780 | and then your plans are out the window.

00:12:57.440 | So could you make more money investing

00:12:59.280 | in riskier securities?

00:13:00.240 | Sure.

00:13:00.880 | But I think the downside of not having that money or the money

00:13:04.360 | that you need at that time outweighs

00:13:06.080 | the upside you could get.

00:13:07.160 | So I say don't overthink this one.

00:13:08.800 | Short-term bonds, cash, high-yield savings account,

00:13:11.840 | count yourself lucky that you weren't

00:13:13.480 | saving for this goal five years ago

00:13:15.000 | when yields were much, much lower.

00:13:17.200 | It's way easier now to save for a goal like this,

00:13:19.280 | with yields being where they are.

00:13:20.960 | Sure.

00:13:21.560 | And talking about the market being difficult to predict,

00:13:24.520 | after the Nvidia earnings, why is the market down today?

00:13:28.240 | What's going on?

00:13:29.240 | Buy the rumors, sell the news.

00:13:30.720 | Right?

00:13:31.480 | I don't get it.

00:13:32.920 | If the market was my kid, I'd ground him.

00:13:36.000 | Makes no sense.

00:13:38.600 | That's the stock market, though, right?

00:13:40.120 | It's what was priced in, I guess.

00:13:43.360 | I guess.

00:13:44.320 | All right.

00:13:45.040 | All right, up next, we have a question from Mike.

00:13:48.360 | Big fan, haven't missed a single episode since you started,

00:13:50.840 | not to brag.

00:13:51.480 | Wow, that's high praise.

00:13:53.240 | Thank you.

00:13:54.480 | I'm 53, with a secure career, and have $1.2 million

00:13:57.400 | invested across IRAs, Roth IRA, 401(k), and brokerage account.

00:14:01.960 | I have no debt except a mortgage where my home has approximately

00:14:07.040 | $200,000 in equity, and I hold six months' expenses in cash

00:14:11.240 | and a high-yield savings account.

00:14:12.920 | My goal is to retire age 60 or 62.

00:14:15.640 | I'm told by all of the content pundits--

00:14:18.120 | I don't know if he's including you--

00:14:20.120 | that I'm way above average with my savings,

00:14:22.560 | but I stress every day that I'm not

00:14:24.480 | going to have enough money to retire a little early.

00:14:26.820 | I don't purchase lavish items, no extravagant mudrooms for me.

00:14:30.400 | Any advice for me on how to manage emotions

00:14:33.240 | through this journey?

00:14:34.760 | All right, two topics that are coming up

00:14:36.560 | more and more in our emails.

00:14:38.360 | One is the early retirement thing,

00:14:40.980 | and two is the psychology behind spending money.

00:14:43.200 | So let's bring in someone who's on the front lines,

00:14:45.440 | dealing with this on a daily basis.

00:14:47.720 | Financial advisor with us at Riddles, Kevin Young.

00:14:50.480 | Hey, Kevin.

00:14:51.000 | Hey, guys.

00:14:52.480 | Kevin, we get a lot of questions from people,

00:14:54.960 | what's the right asset allocation,

00:14:56.540 | where are interest rates going to go,

00:14:58.500 | when's the next recession, all these things.

00:15:00.900 | I think the biggest one most people

00:15:02.420 | want to know when they come to a financial advisor

00:15:04.500 | is, am I going to be OK?

00:15:06.540 | And you can never give someone 100% certainty

00:15:08.840 | on that question, because we don't

00:15:10.300 | know what the future holds.

00:15:11.100 | But that's the job of being a financial advisor

00:15:13.680 | in a lot of ways, is managing the emotions as much

00:15:16.620 | as managing the finances.

00:15:17.740 | So how do you help people work through these things, where

00:15:20.900 | they're balancing the need to save and invest

00:15:23.180 | for the future with enjoying themselves now,

00:15:25.720 | and then dealing with those emotions?

00:15:27.320 | Because it is a real thing.

00:15:28.740 | We get these kind of questions all the time

00:15:30.540 | from people who know something psychologically

00:15:33.540 | is holding them back from enjoying

00:15:34.940 | the fruits of their labor.

00:15:36.380 | Right.

00:15:37.180 | Yeah, and you're completely right.

00:15:38.740 | This is a really common question.

00:15:40.580 | When somebody reaches out to a financial advisor,

00:15:44.140 | I think it's more about this behavioral aspect

00:15:46.060 | of, I need to sleep at night, knowing

00:15:49.820 | that things are going to work out for me,

00:15:51.940 | regardless of maybe what happens in the markets.

00:15:54.900 | And so for this question, to answer a question

00:15:58.660 | with a question is, well, how much are you spending?

00:16:01.260 | Like, if you're planning on spending $40,000 a month,

00:16:05.540 | you're not on track.

00:16:07.220 | If you're on maybe $4,000 a month,

00:16:10.300 | you're perfectly on track.

00:16:11.740 | So a little bit of it depends on the spending habits

00:16:14.340 | that you're going to be envisioning yourself having

00:16:16.420 | in retirement, which that's another really good question,

00:16:19.780 | because I think a lot of people just imagine, OK, well,

00:16:22.140 | whatever I'm doing today, that's how much

00:16:23.820 | I'll spend in retirement.

00:16:25.580 | I like to think about it that, if every day were Saturday,

00:16:29.020 | would I spend more money than I do now?

00:16:30.860 | And the answer is yes.

00:16:32.140 | I would go out to dinner.

00:16:33.480 | I would play more golf.

00:16:35.420 | I would do whatever.

00:16:36.220 | I would do things that cost money.

00:16:38.140 | And so you might want to think to yourself

00:16:40.380 | that whatever you're doing now, maybe plus 20%.

00:16:43.300 | And then whatever that number is, sort of the rule of thumb--

00:16:47.020 | and I use that term very loosely in financial planning--

00:16:50.100 | is generally around a 4% rate of withdrawal

00:16:53.420 | is pretty acceptable.

00:16:55.580 | And so if you do that math and you're around 4% right now,

00:16:59.100 | I'd say you're back in the envelope.

00:17:00.940 | You're on track.

00:17:02.620 | But our goal as financial advisors

00:17:05.580 | is to make sure that, if you are going out and spending

00:17:08.980 | that money, that you're actually enjoying spending it.

00:17:12.940 | If you're going to Italy for a week

00:17:15.300 | and you're worried about every single dollar or euro

00:17:19.220 | that you spend, you're not really enjoying the money.

00:17:22.640 | So you've got to kind of find that perfect middle ground

00:17:25.660 | where you feel comfortable in the plan,

00:17:27.940 | you're withdrawing at an OK rate,

00:17:29.860 | and that you're actually enjoying it.

00:17:31.540 | Right, the old Nick Murray quote is, if you're still worried,

00:17:34.040 | you're not really wealthy.

00:17:35.300 | But let's say someone comes to you and says,

00:17:36.760 | I want to take this extravagant vacation for six weeks

00:17:39.580 | on the Amalfi Coast, or I want to buy a convertible

00:17:42.680 | because I'm having a 3/4 life crisis,

00:17:45.060 | or I want to buy a vacation home or whatever.

00:17:46.980 | How do you help them work through the finances behind that

00:17:49.900 | and also the emotions of, like, here's your financial plan.

00:17:53.140 | Here's what you usually do.

00:17:54.260 | If we take this one big lump sum here,

00:17:56.020 | it's going to impact you.

00:17:57.060 | And yes, you're OK, or no, you're not OK.

00:17:59.580 | Yeah, so we talk a lot about just

00:18:02.100 | having a framework for decision making

00:18:03.900 | when it comes to this stuff.

00:18:05.220 | So instead of saying, yeah, like, I'm looking at the numbers

00:18:07.940 | and you should be OK, like, that's not a great answer.

00:18:10.420 | So we use a variety of types of software

00:18:12.700 | and just kind of our institutional knowledge here

00:18:15.220 | to understand, well, how would this impact it?

00:18:17.340 | And it might just be saying, well, normally, I

00:18:19.260 | spend $100,000 a year in retirement.

00:18:21.140 | If I bump that up to $130,000 this year,

00:18:24.300 | and then we rerun the projections,

00:18:25.820 | and if everything still looks good and makes sense,

00:18:28.140 | and the plan is still really strong,

00:18:30.060 | it gives us the ability to say to that person, yeah,

00:18:33.420 | go ahead and do this.

00:18:34.300 | And it gives the client the feeling that, hey, like,

00:18:38.420 | this has been thought through.

00:18:39.860 | It's not just Kevin, or Steve, or Sally,

00:18:43.620 | or whoever your financial advisor is saying, yeah,

00:18:45.980 | you're good, trust me, because that's not a great answer

00:18:47.940 | either.

00:18:48.620 | Yeah, and do you think that a lot of times

00:18:49.780 | they're looking for permission for you,

00:18:51.400 | or they're just looking for some reassurance that, OK,

00:18:54.580 | I was worried about this, and I want to do it,

00:18:56.540 | but I just don't know if I can?

00:18:58.340 | Yeah, that's definitely the case.

00:19:00.380 | It's certainly not permission, but I

00:19:02.980 | think the reassurance part of it is big.

00:19:05.580 | And I think, broadly, financial advisors

00:19:09.380 | would agree that one of the actually more challenging

00:19:14.060 | aspects of our job is getting people to spend money.

00:19:17.660 | It's a hard psychological flip to switch,

00:19:20.300 | that I've been doing nothing but save, save, save, save, save

00:19:23.580 | every two weeks into my 401(k) for 35 or 40 years,

00:19:27.020 | and now you're telling me that I'm not going to make

00:19:29.220 | contributions anymore.

00:19:30.180 | I'm just going to be taking money out.

00:19:31.900 | And that can be a challenge psychologically.

00:19:34.260 | So that's what I think we do, and financial advisors

00:19:37.300 | can help people manage that emotional aspect.

00:19:40.900 | It's like Ben Graham said, more money, more problems.

00:19:43.140 | Up next, we have a question from--

00:19:48.660 | Hey, you gave me the drum chime on "Animal Spirits" this week.

00:19:53.460 | You deserve one for that, too.

00:19:54.780 | OK, I appreciate it.

00:19:55.940 | No, that was funny.

00:19:56.980 | That was good.

00:19:57.780 | And Michael never gives you credit

00:19:59.200 | for your jokes on the show.

00:20:00.780 | You always make jokes, and Michael just steamrolls ahead.

00:20:04.420 | Never sells me.

00:20:06.620 | OK, up next, we have a question from Chris.

00:20:09.340 | Hi, Ben and Duncan.

00:20:10.140 | I have a question about what to do with the dividends

00:20:12.460 | from municipal bonds.

00:20:13.740 | For several years, I have bought shares

00:20:15.740 | on a quarterly basis of a municipal bond ETF

00:20:18.900 | from my state, New York, for the tax-free dividends.

00:20:22.140 | Does it make more sense to reinvest the dividends

00:20:24.260 | and buy more shares of the ETF or to allocate the dividends

00:20:27.460 | elsewhere, given owning more shares of the ETF

00:20:31.500 | will likely lead to a bigger capital gains tax bill

00:20:34.180 | if I sell the shares in the future?

00:20:36.340 | This reminds me of something I was pretty late to figuring out

00:20:38.500 | and thinking about that now seems obvious.

00:20:40.260 | But when you have drip set up, it can mess up.

00:20:44.100 | It can cause a wash sale whenever

00:20:45.980 | you get out of something, which I'd never really--

00:20:49.020 | I'd never thought of until I saw it actually happen in my account.

00:20:51.980 | I think the spending, getting out and selling or spending,

00:20:54.540 | is probably a big piece here.

00:20:56.900 | But I think my inclination, unless you're

00:20:59.900 | using that income for living circumstances,

00:21:02.980 | is you reinvest the dividends automatically.

00:21:06.140 | No matter what, because when you're setting expectations

00:21:09.820 | for asset classes, especially for bonds,

00:21:12.740 | that's the biggest part of the return, is the income.

00:21:15.860 | So if you're trying to keep things in balance asset

00:21:18.180 | class-wise, it makes sense to reinvest.

00:21:20.740 | Is there another tax implication, Kevin,

00:21:23.180 | that I'm not considering here?

00:21:24.420 | What do you think?

00:21:25.740 | Well, it obviously depends on which way.

00:21:29.940 | I'm assuming this person's buying a muni bond ETF.

00:21:32.620 | Or even if it's just regular muni bonds, it's fine.

00:21:34.900 | But as you're reinvesting dividends into things,

00:21:39.500 | if the price of that ETF, or bond fund,

00:21:43.500 | or whatever it might be, is rising over that time period,

00:21:46.420 | you're buying in at higher costs.

00:21:49.020 | So your average cost when you go to sell

00:21:51.060 | will actually be higher.

00:21:53.820 | Yeah, right.

00:21:54.380 | You're not reinvesting at the original cost basis.

00:21:56.900 | Exactly.

00:21:57.460 | Exactly.

00:21:57.980 | So what I would maybe think about

00:22:00.620 | is you don't want to let the tax tail wag the portfolio dog.

00:22:06.620 | So I wouldn't be thinking about capital gains

00:22:10.140 | on selling a municipal bond as sort

00:22:14.020 | of the thing that's going to drive the allocation decision.

00:22:17.140 | And you're probably not going to have a huge capital

00:22:19.300 | gain there anyway in bonds.

00:22:20.780 | Probably not.

00:22:22.580 | This is not a large growth tech ETF.

00:22:27.580 | It's probably going to be relatively slow and steady.

00:22:30.140 | So the capital gains shouldn't be super significant.

00:22:34.700 | Yeah, it's funny.

00:22:35.660 | I mean, I had a call with Bill Sweden, a client this morning.

00:22:38.300 | He said the exact same thing.

00:22:39.460 | And he's a tax guy.

00:22:40.260 | He said, if there's a hierarchy, investing comes first.

00:22:44.380 | Tax is a part of it.

00:22:45.620 | But that's where you kind of improve on the margins.

00:22:48.740 | That's not like your first line of--

00:22:50.620 | because if it was all taxes, people

00:22:52.740 | would have all their money in municipal bonds.

00:22:55.020 | And that's not ideal for most people either.

00:22:57.860 | Yeah, exactly.

00:22:58.820 | Eventually, when you go to take money out

00:23:01.140 | of whether it's a bond ETF, or an individual bond,

00:23:04.020 | or a stock, or a stock fund, you're going to pay taxes.

00:23:08.940 | So that's part of this.

00:23:12.180 | And as Bill likes to remind us, when

00:23:14.020 | you're paying taxes on an investment, that means you won.

00:23:16.500 | It's not a bad thing.

00:23:17.860 | You want to shelve them as much as possible,

00:23:19.320 | but it means you won the game.

00:23:20.700 | It's better than the alternative of selling

00:23:23.060 | Oatly stock down 90%.

00:23:24.780 | Yep, exactly.

00:23:26.420 | Hey, that's tax-loss harvesting, you know?

00:23:29.180 | For years to come.

00:23:30.220 | Yeah, I'm going to be set.

00:23:33.380 | All right, let's do another one.

00:23:35.020 | One more.

00:23:35.700 | You joked, but I think it did just hit a new all-time low.

00:23:39.820 | I don't even need to look anymore.

00:23:41.240 | I can just judge by the expression on your face

00:23:42.820 | every day.

00:23:43.320 | Hey, my TQQQ is looking pretty good, though.

00:23:46.460 | OK, last but not least, I'm lucky enough

00:23:49.140 | to work in the finance industry in Manhattan, which

00:23:51.540 | has allowed me to build up a good cushion of assets

00:23:53.820 | that I keep in a diversified portfolio and a brokerage

00:23:56.460 | account.

00:23:57.140 | However, when looking to buy a home,

00:23:59.380 | are you supposed to feel uneasy about liquidating

00:24:01.380 | a portion of this portfolio for a down payment?

00:24:03.460 | I understand that real estate becomes the largest

00:24:05.500 | portion of your overall wealth, but it still

00:24:08.740 | seems odd to tap into accumulated savings.

00:24:12.380 | Another emotions-based question here.

00:24:14.540 | It's bizarre, because the whole point of saving

00:24:16.660 | in the first place is that you're

00:24:17.820 | going to spend that money at some time in the future.

00:24:20.020 | But I think once you start seeing the numbers go up

00:24:22.960 | and reach different goalposts, you're kind of hoarding this,

00:24:26.020 | and you're wanting to let go of it less and less.

00:24:29.260 | I know certain clients over the years have--

00:24:32.180 | it's funny.

00:24:32.820 | Some people look at returns and say,

00:24:35.080 | if I don't hit this return, I'm going to be upset or whatever.

00:24:37.620 | Other people, it's like a line in the sand

00:24:39.580 | of big round numbers, right?

00:24:41.300 | If my portfolio is above $1 million, I'm happy.

00:24:43.980 | If it's below $1 million, I'm not happy.

00:24:46.140 | Not taking into account spending and all these different things

00:24:50.340 | that happen and markets fluctuating.

00:24:52.380 | But I think it is difficult to let go,

00:24:53.960 | even though doing this would be trading one financial asset

00:24:56.880 | for another, right?

00:24:58.080 | You're essentially rebalancing your personal balance sheet.

00:25:01.060 | But how do you think through this stuff with people

00:25:03.180 | when it's, OK, this is a financial goal you've

00:25:05.740 | been thinking about and planning for.

00:25:07.460 | And at a certain point, you just have to let go and accept

00:25:10.420 | that this was the whole point of the goal in the first place.

00:25:13.340 | Yeah, exactly.

00:25:14.300 | I mean, if you're not emotional about a home purchase,

00:25:19.300 | you're not human.

00:25:20.660 | So that's number one there.

00:25:23.700 | It's not an easy decision, regardless

00:25:25.380 | of what's going on with rates or prices.

00:25:29.020 | And yeah, I think what you just said is perfect.

00:25:31.900 | You probably started saving in this portfolio

00:25:34.620 | to achieve a goal.

00:25:36.140 | And if the goal was, I'm going to use this money

00:25:38.460 | to buy a house, this portfolio is just a tool

00:25:42.100 | in order to achieve that goal.

00:25:45.380 | The other thing I think about is,

00:25:48.420 | is the home purchase something that is the goal?

00:25:50.620 | Or is it just you feel like you should buy a house

00:25:52.700 | because that's what people do when they're growing up

00:25:57.540 | or becoming adults or whatever?

00:25:59.500 | If you don't need to and you feel better

00:26:02.520 | about your financial world being liquid and having

00:26:05.300 | this portfolio and continuing to pay rent, which right now it's

00:26:08.300 | not a bad deal, then that might be the right answer.

00:26:12.740 | Especially in a high cost of living area like Manhattan,

00:26:15.860 | where it's going to be very expensive.

00:26:18.180 | I think the other thing is you can look at the portfolio value

00:26:21.060 | change in your brokerage account on a daily basis.

00:26:23.540 | You don't really see that in your--

00:26:25.000 | you can go to Zillow if you want.

00:26:26.380 | I guess most people don't think of it that same way as,

00:26:29.340 | here's the value of my home, and it's worth this much money.

00:26:31.840 | Because whatever, it's a form of consumption.

00:26:33.860 | But you're right.

00:26:34.540 | I think a lot of people feel peer pressured

00:26:36.300 | because it's like, well, that's the next logical step.

00:26:38.580 | You have to buy a house.

00:26:39.580 | It's not for everyone.

00:26:41.540 | Renting offers you way more flexibility.

00:26:43.860 | No, yeah, you don't have to buy a house just because you

00:26:46.860 | think you have to.

00:26:47.860 | But the other thing, if this was the whole point of saving

00:26:50.320 | in the first place, then that's what you want to do.

00:26:53.580 | And you're going to own this house, or this apartment,

00:26:55.820 | or condo, or whatever, for a long time,

00:26:57.500 | then you're thinking about it the right way.

00:26:59.460 | And that's just part of saving.

00:27:00.860 | That's how it works.

00:27:03.100 | I think an underrated aspect of renting

00:27:05.260 | is the ability to be like, yeah, I

00:27:07.240 | don't really like this neighborhood.

00:27:08.740 | We'll just move next year.

00:27:11.500 | If you move to a new neighborhood and buy a house,

00:27:13.620 | you're probably going to convince yourself

00:27:15.540 | that you love the neighborhood, even if you actually secretly

00:27:17.980 | hate it.

00:27:18.380 | Yeah, you're stuck.

00:27:19.140 | The flexibility is a huge thing for renting

00:27:20.940 | that doesn't come up very often.

00:27:22.580 | If you're going to move for remote work or other career

00:27:25.260 | option--

00:27:25.940 | I think this is similar, though, to Kevin.

00:27:27.140 | You probably get this, too, is some people

00:27:29.140 | get to the point of, I don't want to touch my principal.

00:27:31.880 | I want to live off the income.

00:27:33.260 | And they think if they touch their principal,

00:27:35.300 | then they are somehow taking two steps back,

00:27:38.180 | and that they're depleting.

00:27:41.060 | It's OK to spend your principal.

00:27:43.360 | That's what you saved for.

00:27:45.020 | It's not going to be the end of the world

00:27:46.140 | if you spend a little bit of money

00:27:47.820 | and just live off something besides the income.

00:27:51.140 | Yeah, 100%.

00:27:52.740 | I think the other thing to think about is you can--

00:27:55.620 | you might get a lot of joy opening your portfolio

00:27:58.540 | and seeing it up, or seeing, oh, great, we were up 2% today,

00:28:02.900 | or we're up 1% today, or I'm up 8% on the year.

00:28:05.560 | You're not going to get that same emotional kick,

00:28:07.600 | like you said, pulling into the driveway of your house.

00:28:09.900 | There's not a ticker symbol floating above your house

00:28:12.100 | that tells you what it did that day.

00:28:14.220 | But there's a nice emotional component to that.

00:28:16.440 | If you've got a family, like knowing

00:28:17.980 | you've put a roof over your family's head,

00:28:19.500 | knowing you've got a place to go,

00:28:20.820 | knowing the memories that are going to be made there,

00:28:22.700 | et cetera, you're not going to get that out of a portfolio.

00:28:25.160 | Do people check the Zestimate regularly on their house,

00:28:27.780 | though?

00:28:28.280 | Is that kind of the closest you get?

00:28:29.780 | I would bet that people the last couple of years

00:28:32.300 | have checked their Zestimate way more

00:28:34.060 | than they would have in the previous three years.

00:28:36.100 | Because it's moved more than it did before.

00:28:37.620 | Yes, this is what happens when we get the middle age.

00:28:39.860 | You check Zillow all the time.

00:28:41.220 | And if you don't check, they'll send you

00:28:42.340 | an email reminding you of it.

00:28:43.700 | Yeah, yeah.

00:28:44.320 | Wherever you are that's a new place,

00:28:45.860 | you're hopping on Zillow no matter what.

00:28:48.620 | Yeah.

00:28:49.100 | But again, we've had questions today

00:28:51.100 | from all sorts of people who are very financially secure,

00:28:54.220 | or they have a high income, or they have a lot of money saved.

00:28:57.060 | And there's just some sort of emotional hurdle

00:28:59.140 | that's causing them to stop and think.

00:29:00.920 | And I think it's just worth pointing out

00:29:03.140 | that sometimes this stuff sounds easier on paper

00:29:05.740 | than it is, because a lot of times

00:29:07.340 | there is no right or wrong answer, right?

00:29:09.100 | Buying a house could be the right answer here.

00:29:11.020 | Or holding out and renting, and then

00:29:13.060 | saving the difference or whatever

00:29:14.380 | could be the right answer.

00:29:15.460 | But either way, it could be the right answer,

00:29:17.500 | depending on how they feel in their circumstances.

00:29:19.820 | Yeah, there's a spreadsheet answer,

00:29:21.820 | and there's the personal answer, right?

00:29:23.580 | And just because it makes sense on a spreadsheet

00:29:25.580 | doesn't necessarily make sense for you as a person.

00:29:29.860 | Bingo.

00:29:30.420 | OK.

00:29:31.220 | Thanks to Kevin for joining us again.

00:29:33.220 | We appreciate everyone.

00:29:34.460 | Great questions every week.

00:29:36.380 | Every week I get a Google Doc sent to me of new questions.

00:29:39.100 | And it seems like more and more questions every week.

00:29:40.620 | They're always really good.

00:29:41.740 | Or you can email us, askthecompoundshow@gmail.com.

00:29:44.660 | Leave us a comment or a review.

00:29:47.420 | What else?

00:29:48.340 | This is the only time you'll ever see me wearing

00:29:50.340 | a hat on this show, probably.

00:29:52.140 | Duncan, you can have this one.

00:29:53.780 | We have Future Proof coming up very soon.

00:29:55.780 | Looking forward to that.

00:29:56.780 | Future Proof in a couple weeks.

00:29:57.780 | Everyone come say hi if you're there.

00:29:58.820 | Kevin's going to be there as well.

00:30:00.200 | Duncan, me.

00:30:01.940 | And we'll see you next week.

00:30:03.460 | See you, everyone.

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How Do You Stop Stressing About Money?

Chapters