Finance Friday: The Median Earner’s Guide to Fast-Tracking FI

Mindy:
Welcome to the Bigger Pockets Money podcast, show number 318, Finance Friday edition, where we interview Amanda and talk about zooming out and taking a long term approach to finances.

Amanda:
I feel like in about 10 years, I said I’d wanted to scale back working. I feel like it would be reasonable for me to make enough through those years to live off of so that I’m not touching anything that I’ve saved. That’s kind of how I was thinking about it is that if I just covered my living expenses and nothing else, then I’d let everything that I’d invested grow. But I don’t know if that’s a reasonable tactic. I’m not really sure about my plan.

Mindy:
Hello, hello, hello. My name is Mindy Jensen and with me, as always, is my never going to IM you about crypto cohost, Scott Trench.

Scott:
Thank you, Mindy. While I’ll never IM you about crypto, I am the long lost descendant of a notable royal family, and I just need a few hundred dollars in order to obtain some documents that can help me access that fortune, so I will DM you about that. And if you could please wire me the money, that would be great.

Mindy:
Yes, you can reach out to him at [email protected] Scott and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business, or just get a little bit of flexibility 10 years down the line, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Scott, today’s guest is Amanda. She’s working as an accountant, getting her accountant degree at night and on the weekends and she is looking forward to financial independence in 10 years, something that was not even on her horizon just a few years ago. She’s changed her financial outlook, changed her expenses dramatically, and is now starting the path to financial independence.

Scott:
That’s right. Amanda has a really good optimism and outlook and ability and command of her finances. And so I’m excited to see what the future holds for her.

Mindy:
Okay. Before we bring in Amanda, let’s make our attorney happy by saying the contents of this podcast are informational in nature and are not legal or tax advice and neither Scott nor I nor Bigger Pockets is engaged in the provision of legal, tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants, regarding the legal, tax and financial implications of any financial decision you contemplate.

Mindy:
Amanda is a recent empty nester and went from renting a giant house to renting a studio and dramatically decreased her expenses in the process. Hooray. Now she has money to invest and she wants to make sure she’s properly allocating her investments. Amanda, welcome to the Bigger Pockets Money podcast.

Amanda:
Thank you so much. I’m very excited to be here.

Mindy:
I’m super excited to talk to you. Let’s jump right into it. What do you make and where does it go?

Amanda:
So my take home pay after tithing is $3572 a month, and I get $1,200 a month in alimony, so my total income is $4772. My monthly expenses total $3270. You want me to go over them line by line?

Scott:
Yeah, let’s go. Let’s do a quick overview.

Amanda:
Okay. So my rent, it includes all utilities except electricity and it is $1425 a month. My renter’s insurance is $7. Electricity is about $15. Gas? I wrote $200, but it’s getting higher by the minute. I commute to work. Car maintenance, I set aside $75 a month. My car insurance is $77. Groceries, I spend about $250 and restaurants about $250. A lot of that is I still feed my kids. They don’t live with me, but they’re young and don’t know how to cook that well, so I help them.

Amanda:
My son is in college and so I help him out with rent and that’s $450 a month. I got a counseling expense for the kids that’s $100 a month. I spend $22 on Netflix. My internet is $15. The cell phones are $128. My kids each pay for their own payment and the additional to add them, but I pay that base for everybody. And my life insurance is $6. Spend about $25 on laundry. I don’t have a washer and dryer here. I bundled up clothes, hair, makeup. About $75 a month. I set aside $50 for Christmas and gifts and about $100 for entertainment and just miscellaneous things. And so that leaves a difference of $1502 that I am currently investing in a Roth IRA and index funds.

Scott:
Love the complete command of your budget. That’s awesome.

Amanda:
Thank you. I work in accounting, so I can’t really help it.

Scott:
Awesome.

Mindy:
That’s great. You mentioned alimony. Does that have an end date?

Amanda:
It does. It ends December of 2023, which coincides with the month that I’ll finish my bachelor’s degree in accounting, so I’m just assuming that I will have a better job and make that up in income around that time.

Scott:
Sounds great. What’s your net worth look like? What are your assets and liabilities?

Amanda:
So in retirement accounts, I have a total of about $47,000. $6250 is in a Roth IRA and that’s invested in index funds. I have $22,100 in a rollover IRA and that’s a target date fund. And I work for a school district, so I have a SERS plan and that is, right now, at $17,000. And I contribute 10% of my pay every month, which is about $610 goes into that. I also have a pension plan and I’ll be fully vested October 2023. And then I have Viva account that came from the last job I left and that’s got about $1600 in it.

Amanda:
And then for my non-retirement savings, I have $13,000 in a brokerage account in just index funds. And then I have a savings account with a little over $23,000 and I have that allocated into $16,000 for a six-month emergency fund, $4,000 for college for myself, about $2350 for travel, a little over $500 for car expenses and about $500 for Christmas and gifts. So when you add that up, I’ve got a net worth of about $83,000 and no debt.

Scott:
Awesome. And you said you have a pension plan. Can you walk us through what that pension plan looks like from an asset perspective?

Amanda:
So I’ll be fully vested in October of 2023 in that pension plan. It’s a school district, so it’s based on length of service and your average income over those years. So it’ll be five years that I’ve been with a school district at that point. And then I believe it’s 1% times your years of service times your average salary. And then you get that as a monthly payment when you retire. So if I left that job then, at the end of 2023, that would be about $250 a month. If I stay with the school district a long time, it could be a lot higher just depending on my pay.

Scott:
Okay. Awesome. Makes sense. And what are your goals?

Amanda:
So my kids right now are almost 19, 21 and 23. And my 23 year old’s married. And I feel like, in about 10 years, I’ll probably have some grandkids and I’m still… I’m 44 now, so I’ll still be fairly young then. And I want to be able to work less and play with my grandkids and travel and live a fun life without having to go to work Monday through Friday. So I don’t necessarily want to fully retire in 10 years. I don’t think that I could and I don’t know what I would do all day. So I would just like to have the flexibility to work less, probably still in the same field, but yeah, just not have to work every single day.

Scott:
Awesome. Well, let’s go through. Let’s look at this. Where are you putting your $1,500 that you’re saving each month today? where is that typically going?

Amanda:
So I’m putting $500 into the Roth IRA. And that’s part of my question. I have that. So it didn’t… This is all new to me. I haven’t had extra money until a few months ago and so my son is the one that told me about the podcast, told me that I could be FI and I was like, “That’s cute.” No, it’s not. That’s not what people like me do. I’m just going to work until I’m old and maybe you can be FI.

Amanda:
But then I started looking into it and thinking and listening to your podcast and all of his advice and realizing I could do something with this. But then when I opened these accounts, I didn’t know you had to invest them in something and you had to pick what you were going to invest them in. And that was a little confusing. I thought you just opened an IRA and it just invests itself. So I put it in index funds, but I don’t know if that’s what I should be doing. I just guessed at that. And so I don’t… So part of my IRA is in a target date fund. I don’t know if that makes more sense, but so the Roth IRA right now is just index funds. And then I put about $1000 a month into an after-tax brokers account that’s just index funds. So it’s all index funds.

Scott:
I think that’s great. I think that the question is how do you get… Your goal is flexibility in 10 years from now. And the question is, how far do we want to go in order to get that flexibility, I think would be how I’d frame it. Let’s ask. I have a couple more questions about your background here. So right now you do not have a bachelor’s degree and you’re doing accounting. And you said you’re going to get your bachelor’s degree this year, next year?

Amanda:
The end of 2023.

Scott:
And what do you expect to do after you get the bachelor’s degree? What will that change about your income, for example?

Amanda:
Well, I’d really like to stay with the school district that I’m in or at least in school district work, and it just would automatically make me eligible for better positions. And so that’s where all my experience is at and I’ve spoken with my direct supervisor and kind of told her what my goals are with the district. And I think there’s a really good path to stay in accounting with the school district as I get my degree and to just keep going up. So from my estimation, I feel like I will be making maybe $40,000, $50,000 more a year in the next five-ish years.

Scott:
$40,000, 50,000 more per year? Okay, awesome. Right now, you’re saving $1,500 per month. And at the end of 2023, you will be eligible for promotion, but you’ll also be losing alimony on a go forward basis. So, net, I wouldn’t expect a big change in cash flow coming out of finishing your bachelor’s degree. It will be basically a bridge to continuing your current savings rate at that point in time.

Amanda:
But then I feel like from there, it’s just going to be a runway up.

Scott:
Perfect. Yep. Walk me through your commute. How far are you traveling every day?

Amanda:
It’s about 20 miles each way.

Scott:
And what part of the world do you live in?

Amanda:
So I live in Seattle and I actually commute to a suburb. So kind of the opposite commute of everyone else, but.

Scott:
Okay. Let me think through something here. How much do you like your house?

Amanda:
It’s an apartment. It’s a studio apartment that I pay about the least amount you could pay anywhere in the area for and I love it. I don’t want to live in the suburbs and it would cost me more to live in the suburbs. So, for that reason, I really love it.

Scott:
Fair enough. I was going to encourage you to consider the idea of a house hack close to work, right? You don’t have any kids living at home anymore, so if you were to buy a place that was nearby to work and rent out a couple of the bedrooms or the other duplex or triplex, that could meaningfully reduce your net payments for rent, give you a rental income property that you could have flexibility with and reduce your commute time, which is a major factor in your budget here for the $200 bucks a month in gas.

Amanda:
Right. And I thought about that. Where my work is is a upscale suburb and I don’t know that I could afford any sort of house there that… I mean, I haven’t seen anything less than maybe $800,000 for just a house that I could rent a bedroom out of. So I don’t… That was kind of one of my questions for you, too, is the cost of living is so high here. I don’t know how I can get back into real estate. I had a house that was actually in the same city where I work now. That’s where I raised my kids and we sold it in 2019, so right before the market went up. And from that point, it’s almost doubled in value and that house is close to a million dollars in value and it was not something I would consider a million dollar house.

Scott:
What about within a five mile radius of your school district?

Amanda:
Yeah, If I told you where it was, you could probably understand it and not really. Yeah. I don’t know that I could get… I mean, I could probably find something in a suburb that’s maybe equal distance from where I live now, so I’d still have a commute, but I could maybe buy a house.

Scott:
Well, what about the school district itself? Is there a particular advantage to this school district or this area versus switching the job to a different location?

Amanda:
So I was at a different school district doing this exact same job that I have now and then I moved to this particular school district because the pay was about $10,000 more a year for the same job. So that’s why I’m here now. I just started it, let’s see, the beginning of February. So, I mean, if there was an opportunity at another district that paid higher, I mean, I would be all for that, but I just started here. But, I mean, I’ve talked to my boss about it and she knows that once I have my degree that I’m open to going anywhere or whoever’s going to pay me the most.

Scott:
Okay. Well, here’s what I’m trying to figure out. You have $1500 a month in cash savings and that’s likely to continue for the foreseeable future. There will be some puts and takes with the bachelor’s degree. Might be able to save a little bit more. It might be a little bit less net of the alimony and the raise that you’ll get at that point in time. But that gives us $18,000 per year with which to invest and play with.

Scott:
We can accelerate that a lot if we can play a game with the job and housing situation, which is the elephant in the room. Half of your expenses are going to housing right now. So actually, more than half are going to housing and commute as a combo. And so if you could live in a place that you could Airbnb the main unit or live in a multi-unit property and rent out a few of the other properties, that would have a net $1,600 per month impact on your financials, which what does that come out to? That comes out to like $18,000, $19,000 per year, which could mean that you could accept a lower paying job, for example, to some degree, in order for that to offset. So just something to noodle on. If that’s not an option, we can go elsewhere in your financial profile and look for the basics of investing.

Amanda:
So with my salary, I just would wonder how I would qualify for a loan to buy a house.

Scott:
Yeah. What is your annual income right now?

Amanda:
My salary is about $72,000 a year.

Scott:
Okay. So I would imagine that would qualify you for 300, 350, 375 in housing. Is that about the lines what you expect?

Amanda:
Yeah. I couldn’t buy anything for that here. I mean, I could maybe buy a condo. So that’s kind of where I’m trying to figure out how I could do that. If I moved to an extreme suburb, then maybe I could in the real outskirts of the city, but then I just can’t see commuting or finding a position that pays that much here. So that’s where I’m kind of stuck is just figuring out I could only qualify for so much of a loan and there’s not really anything available right now in that price range in the greater Seattle area.

Scott:
And is your family all in Seattle? Is that why you want to be in Seattle?

Amanda:
Yeah, my kids are all here. Yeah.

Mindy:
So I want to look outside of school districts. And I understand that you’re about to be fully vested in your pension, but we’re talking about $250 a month when you retire. So it’s not… I don’t want to dog your pension because a pension can be a really great thing, but you’re not sitting on a huge pile of cash that you’re about to walk away from if you change jobs. And accounting jobs, I don’t have an accounting job, but I know that some can pay really, really well. What sort of, outside the school district jobs, are available? What kind of income could you make in that scenario? And when you get your degree, you’ll probably have a bump up in salary opportunities outside in the private sector. I also imagine that you will have a lot more free time after you graduate.

Mindy:
You’re probably… I’ve heard that getting an accounting degree is really, really intense. So after you graduate, you’ll have time to do side jobs. And I know a lot of accountants and they can never find a good bookkeeper. And I don’t know what bookkeepers make, but I know that there’s always a demand for good bookkeepers. And that’s a remote job. You could do bookkeeping work for people in California who pay more or people in New York who pay more. If you’re a good bookkeeper, you’re going to make great money and have way more clients than you could possibly handle simply because finding a good bookkeeper is so hard and having accounting principles is going to help you become a really great bookkeeper. Even now, you could start that, although you’ve got your schoolwork. So that may not be the best use of your time right now.

Amanda:
Yeah. I’m very open to anything. The reason that I kind of have thought about staying with the school district is just because that’s where all my experience is at. And I already know. It’s public what salaries are so you can go on the website and find out what everyone makes, and I know what those jobs pay. And I actually have looked a lot in the last couple years at different accounting jobs and it’s a huge range, so I’m definitely open to work anywhere. I mean, yeah, once I have that degree, I will definitely be looking at whatever field I can make the most money at. I mean, accounting is not my passion. It’s just to make some money so.

Scott:
All right. So what I’m kind of gathering here is we’re kind of just accepting the current situation is the status quo right now. We’re not really ready to make a big change on the income front and that change is predicated and finishing the degree. And you’re not willing to move to another location.

Amanda:
I have a lease, so I can’t.

Scott:
Yeah. That is far away to change the housing cost. So that leaves us with the reality is you’re going to save $18,000 over the next year, and that’s going to be the wealth accumulation here. And coming into 2023, we’re going to be in roughly the same position, but with the added option of being able to at least expand the search radius for a new line of work.

Amanda:
Right.

Scott:
So I think we have to zoom out from our timeline here, if we’re going to accept that and say, “Okay, what do we want to be in three years? What’s a realistic position from that?” So with the 18, or let’s call it $36,000, 18 times two, that you’re going to save over the next two years, where do we want to put that, I think, is the next question.

Scott:
And right now you’ve got a very sizable cash position that seems super reasonable, plenty of cash. You’re not going to run out of cash or have any emergencies anytime soon. You’ve got your brokerage account and your Roth IRA. I like the idea of just kind of contributing to the Roth and maxing that out in this situation and then contributing the rest to brokerage accounts at that point. Mindy, do you have anything that you would add on that?

Mindy:
No. I like the opportunity that we have here to grow the after-tax investments, because that’s what’s going to give you the optionality. If all of your investments and net worth is in your pre-tax accounts, then you are going to find yourself in a conundrum. I’m super rich, but I can’t do anything with it unless I access those retirement funds early. And the Mad Scientist has a really great article called How to Access Your Retirement Funds Early, including the Roth conversion ladder, the 72T separate but equal payments and just taking the hit and paying the fee and withdrawing early. But why do that when you can make a more conscious decision when you’re starting from basically the beginning because do you know what your FI number is?

Amanda:
That’s the thing that’s hard is it’s hard to say in 10 years where I’m going to be, if I will still be single, if I will still be living here, if my whole family moves somewhere low cost. I mean, to me, it’s such an up in the air scenario. Kind of living life that it could go in any direction. So I know that the million dollars is kind of the single person target, and then the 4% rule gives you $40,000 to live off of. But it’s hard to say. The bigger, the better, but I don’t really know other than that.

Mindy:
Well, sure. We’d all love to win the lottery. Let’s see. So expenses of $3270 a month. Ooh, that’d be really great to get them.

Amanda:
That includes helping my son with his rent, but he did the Running Start program. I don’t know if that’s nationwide, but basically you finish your last two years of high school at community college. So you graduate high school with an AA degree and a high school diploma, so.

Mindy:
Oh!

Amanda:
So he did that and it’s free. And so he is now in college. He’s a junior, about to finish his junior year. And so he’ll graduate with his four-year degree next June. And so I won’t be helping him with this much once he graduates. So then he’ll have a job, can take care of himself a little more. So that will change, too, in about a year.

Mindy:
So I think you are thinking about it in great terms. The million dollars is a good starting point because you are spending around $40,000 a year. So a million dollars is a great place to aim for, and then as your life circumstances change, you can alter your plan, but you have to have something that you’re working towards. So work towards the scenario that you have right now, the situation that you’re in right now.

Scott:
I think, at the highest level, when I’m looking at your situation, you have a tight budget. Your expenses that you could potentially move are going to be your son’s rent assistance, which will end next year. You got puts and takes to the alimony and the degree. It doesn’t seem like… I imagine you’re working crazy hours between your job and the undergraduate degree most of the year. Is that right?

Amanda:
Yeah. I mean, I have a regular eight to four job and do school as I can every night. It’s online, so it’s pretty flexible, but it takes up a big chunk of my time right now. It’s a lot of work.

Scott:
Okay. So, I mean, we have four levers in personal finance. We can earn more, we can spend less, we can invest and we can create assets. So right now what I’m hearing is there’s not really any leverage to earn more because you already work a full-time job and are getting your bachelor’s degree, which is your path to earning more money. And from the spending less side, you already have a really tight budget and the expenses you do have are really helping your kids out to get a start in life. And those will go away in a year, but we don’t really have much leverage.

Scott:
You spend essentially, excluding that, $2,800 per month to live. And the only leverage we’d have there in a practical sense would be gas and rent, but we’re not ready or able to make a move right now because of the income sacrifices that would create. On the investing side, we’ve got real estate, stocks, other businesses, but you can’t really do a very actively managed investment right now if you’re working and you are getting your degree and real estate’s out of the question because you can’t afford to find a place that you want to buy in Seattle until, perhaps, you earn the higher income after you complete your bachelor’s degree.

Scott:
And then that leads this a starting a business, which is also impractical if you’re working a job and getting a full-time degree at the same time. So I think, at the end of the day, we can acknowledge you’re doing great. You’re saving as much as you can in your situation. I think you plowed into index funds and you look up at the end of 2023 and say, “Okay. Now I can begin playing the game a little bit by buying this next property or making these other moves.” So I’d still encourage you. I’d challenge you and say, throw out that assumption that you can’t house hack or make a move right now with this, that there are games you could play by moving school districts or moving into different suburbs or doing those types of things.

Scott:
If you want to build wealth and have more optionality in three to five years, those are levers I would reconsider and come back to. But I think that’s, for my position, I think that’s the reality of your situation. You’re doing great. You’re going to save a really healthy amount of your income and build wealth over the next 5, 10, 15 years with what you’re doing. And it’s just a matter of accelerating it year by year as these milestones pass and your son’s rent payment goes away, your bachelor degree is completed, you’re getting your raises and promotions.

Amanda:
So one thing I was wondering is… So I can start a 403B at my job, but I don’t know if that’s something I should bother doing. I mean, I do think that the $1000 in after-tax is what I should continue and just in the $500 in the Roth?

Mindy:
I think that your investment allocations right now, you had mentioned that you were… Everybody talks about, “Open a Roth IRA” but they don’t tell you that you have to actually allocate them into index funds. You’re not the first person I heard say that. So I’m glad that you brought that up. We need to continue to share with people that you do have to pick which index funds you’re going into. I’m guessing that there’s people who are listening who don’t know that there are multiple different index funds. It isn’t just one index fund and say, “Oh, I want this in index funds” and that’s it. There’s a ton of different options to choose from based on what your goals are, what you’re comfortable with, et cetera. Jim Collins, J.L. Collins, goes with VTSAX, and he’s been quoted as saying, “Buy as much of it as you can, as often as you can. That’s the simple path to wealth.”

Mindy:
My husband is in tech. Tech stocks, VTI, because that’s his big passion, he has the opportunity to do the research. You had mentioned, “Oh, I’m not sure if index funds is the right place to be.” I think index funds are a great place to be when you don’t have the time, the history, the research, the information about a specific stock. This is going to be, I’m sure you’ve heard me talking about Tesla and how my husband is completely obsessed. He listens to three Tesla podcasts every day. He reads all the Tesla news. That’s his number one news alert. Anything that comes up about Tesla, he is consuming with the burning passion of 10,000 suns. He’s so excited about this. I’m not. I’m excited that he’s excited, so I don’t have to do the work, but he is, I think, educated enough to choose to invest in Tesla because he understands what’s going on.

Mindy:
And just because he’s investing in it doesn’t mean you should. You don’t have the same goals that he does. You don’t have the same circumstances that he does. You need to be able to do your own research and be able to do that. And if this isn’t something you want to do, and most people don’t, I’m not saying that you’re a bad person for not wanting to listen to 27 Tesla podcasts a day, but if this isn’t something that you have time for, then an index fund is a great choice. And VTSAX is the Vanguard Total Stock Market Index Fund. Fidelity has a version, if you want to go with Fidelity instead of Vanguard. But I think an index fund is a great place to put your money. You mentioned a target date fund, so here’s a bit of research opportunity for you.

Mindy:
What is a target date fund and why did you put your money in there? Do you feel comfortable once you really research what a target date fund is, do you feel comfortable still having your money in there? You are 44 years old. They are going to start decreasing your risky investments and increasing your bond safe investments in this target date fund. The great thing about this is that you’re not going to be at risk of losing a lot of money. The bad thing is you’re not at risk of gaining a lot in these target date funds.

Mindy:
They pull away the risk. So since you’re essentially just getting started, maybe a target date fund isn’t the best place for your money, or maybe not all of it should be in a target date fund. Maybe there should be some sort of allocation separation where you’ve got some of it in a target date fund so you feel a little comfortable with. And I’m sure that a target date fund, it’s an actively managed fund. So I’m sure that gives you a sense of security that somebody who knows what they’re doing is looking at these funds, but index funds are so set it and forget it, you don’t really have to do any research. It’s every stock.

Amanda:
Yeah. The target date fund, that was from a rollover IRA. And so I got that in the divorce and they just asked me, “What do you want to do with it? How about a target date fund?” And I was like, “Sure, that’s great.” And then I just left it there. So that’s the oldest investment that I have. And I only am in that because that’s where they put it. So when I knew nothing. Yeah. So that’s good advice to rethink that.

Mindy:
Yeah. And that’s rethink it. It might be the best place for your money for you and your goals and your comfort level, but know what you’re investing in. So go and research not only target date funds in general, but the specific one that you’re in and is this really where I want this money to be in, based on my comfort level, based on my goals, based on how much more I’m going to continue to contribute to this and to my retirement funds in general, is this really where I want this money to be?

Scott:
I think your investing approach makes a lot of sense. You could shift more towards index funds, the target date funds. Those are good. You’re obviously very well researched on this and have a good foundational opinion of this. When we take your position and zoom out based on what we just discussed, you’re going to save $18,000, $1500 times 12, over the next 12 months, and likely continue that perhaps slowly increasing that amount of savings in the years 3, 4, 5, 6, 7, 10. So let’s round that up and say we’re going to save between $250,000 and $300,000 over the next decade. And we’re going to invest that the entire time in these items that are generating, ideally, a 10% average return. That’s going to put your net worth in the ballpark of $500,000 farther ahead 10 years from now than it is today, if we carry that plan out and extrapolate to that point.

Scott:
The question is, what does that portfolio look like in 10 years that gives you options and makes you feel good? What would you do? You have $80,000ish right now? If you were to say, “Here’s $580,000. How do I want that allocated in 10 years? Do I want that all in my retirement accounts and pensions? Do I want it in an emergency reserve? Do I want it after tax?” There are trade offs with all of those things. And remember, in 10 years, we’re 54. So we want to make sure that we’re keeping in mind that, Hey, that’s not a very long bridge to 59 and a half, 65, where I’ll be able to make use of those retirement accounts. So I think there’s some nuance that we need to plan for there and think through about a balancing act. There’s enough flexibility in there to keep your options open to life flexibility, but we’re also playing a really smart tax advantage game.

Amanda:
Yeah, because I mean, I feel like in about 10 years, I said I wanted to scale back working. I feel like it would be reasonable for me to make enough through those years to live off of so that I’m not touching anything that I’ve saved. That’s kind of how I was thinking about it is that, if I just covered my living expenses and nothing else, then I’d let everything that I’d invested grow. But I don’t know if that’s a reasonable tactic. I’m not really sure about my plan.

Scott:
Well, if you keep your living expenses the same right now, they’re $3,200 a month. So if you’re earning 40, 50, $60,000 more per year at that point in time and your expenses are holding relatively flat, moving up slightly with inflation, then you’ll be easily able to work part time and cover your living expenses while allowing that investment nest egg we just discussed to begin to compound. That would give you some flexibility because you at least have the investment nest egg that’s compounding and you don’t need to keep adding aggressively to that pile necessarily. So that would be one way to think about it.

Mindy:
Are you going to school during the summers, too, or is it just a traditional school year?

Amanda:
No, it’s self-paced. It’s WGU. So you just take one class at a time and it’s competency based and you just never stop until you have your degree. So yeah, at the pace of about one class a month, but that’s when I’m figuring my graduation date. So it doesn’t really end.

Scott:
Does your work ebb and flow with the summers like a traditional school district or is yours year round?

Amanda:
My job is year round, so our hours don’t fluctuate at all. So one thing I’ve been doing is I have worked some overtime and so I’ve saved that overtime into a vacation fund. So that’s kind of how I’m paying for vacations and travel that I’d like to do. And so I think there’s more opportunity for overtime during the school year than there is in the summer, but that’s pretty much the only fluctuation of workload that we have.

Scott:
Okay. Well, got it. What else can we help you with today?

Amanda:
Well, another question I have is I have a high-deductible health insurance plan, but I didn’t really know that I had that. And so I just have an FSA account, but I could get an HSA account next year, but I don’t really know how much I should put into that. And I hear people talk about it a lot, but I’m not fully educated on how it works and if that’s something that I should be putting more money into?

Mindy:
Okay, well, The Mad Scientist says that the HSA is the hidden retirement account or the best retirement account or something. I probably should have looked that up. But he’s a super huge fan of it and I’m a super huge fan of him and it’s a great account. Because you are allowed to put money in there tax free. And there’s a max of, I think, $3,500 if you’re single and $7,000 or $7,100 or whatever if you’re married, basically, or a family. It’s just doubled. So you can put this in tax free. It grows tax free. You can withdraw it tax free for qualified medical expenses, which is pretty much anything on the FSA list.

Mindy:
Doctor’s visits, prescriptions, any of your out-of-pocket expenses or you can cash flow your out-of-pocket expenses, if you’re able to, and just let this money continue to grow while saving receipts for all of these things. So then you can withdraw this money at a later date. So let’s say that you have… You’re cash flowing all of these, you’re saving all of your receipts. You’re contributing to the max of your HSA. And at the end of the year you have, or at the end of 10 years, let’s say, you have $40,000 there. You can take your $5,000 worth of receipts and withdraw it and pay no taxes on that. You’ve already paid those bills, so that money just goes in your pocket. Very oversimplification of the way that it works. You have to make the decision based on your finances and your health.

Mindy:
Are you a generally healthy person? Do you have a lot of medical bills or are you do you have a lot of medical bills? You mentioned an FSA plan. If you have an HSA, you can have a… It’s like dental and vision FSA. So if you need contacts, you should put some money into the FSA. If you have ongoing dental work or even just regular dental check-ups that aren’t completely covered by your dental insurance, or you have no dental insurance, you should put some money into the FSA for that.

Mindy:
If you don’t have those options… I have terrible eyes and need contact, so I put money into FSA. My FSA plan, and it may not be the same as yours so you need to read your plan documents, but my FSA plan has $500 that rolls over every year. So I make sure that I look at my balance and I know, okay, contacts are going to be $150 so I need to have at least $650 in that account. And then I will take out the $150 for my contacts. And then I still have the $500 that’ll roll over. If it’s dropped below that, because I’ve had some other random things like two kids going through the braces plan at $6,000 a pop, then I’ve put more in my FSA. But make sure that… FSA is a it or lose it plan.

Amanda:
Right. I’ve been really conservative with it because of that. And I don’t think that my plan rolls over because I got all these emails about spend your money or lose it so.

Mindy:
You’ll get those emails even if it is a rollover, if there’s any amount that rolls over. Talk to your HR department, read the plan documents and make sure if there’s any rollover that roll it over, see what happens. But the FSA, the HSA plan, is a really great way to save additional money tax-free that grows tax-free. And then I think at, I want to say, 65, 75, 80, whatever, you can start pulling it out just for random expenses.

Scott:
Yeah. I think the HSA is a powerful tax-deferred wealth building vehicle that you can put the money in tax deferred, you can withdraw any contributions and gains tax free for qualified health expenses, and you can treat it like a traditional 401k after a certain age limit is reached. So it’s a really powerful wealth building tool if you have good investment options available inside of your plan, in particular. So I think those would all be things to research. Your challenge will be, okay, the HSA maximum contribution is $3650 per year. So that’s a lot for you. That’s that’s going to be two and a half months of your savings are going to go just to filling out your HSA. Then if you want to do your Roth, that’s another what, $6,600. What’s the limit this year, Mindy?

Mindy:
Oh, Roth.

Scott:
Limits this year are $66,000. Sorry. So now you’re at $9,650. That is more than half of your annual savings. That leaves you with the $9,000 left to either put into these tax deferred retirement accounts or begin putting into after-tax things. So there’s a trade off that you’ll have to get clear on and say, “What does that ideal portfolio look like in 10 years from now when I want that optionality in my life and what are the trade offs I’m going to make? Am I going to max out the HSA, the Roth?” In an ideal world, we can do all of the above and still have lots of liquidity, but we’re going to have to make trade offs in your situation.

Amanda:
Right. So I guess that’s kind of what I’m wondering. Is it worth doing it all or should I just leave it as an FSA for now and keep investing as I am? Because it’s not something I can change until January, but I don’t know if it makes that much difference or if that’s something to save for when I have a higher income.

Scott:
Yeah. I guess, from my standpoint personally, how I’d approach it, I’d be like, okay, I need to crush this bachelor’s degree and get this raise. I need that as soon as possible. That’s the biggest lever in my financial position right now. If I can speed that up to two classes a month or one class every three weeks, I’m going to figure out how to do that and advance that graduation date because that’s the biggest lever in my financial position. After I get that, I’m going to get the wage increase and leverage that to either be able to find a house hack in the local market or get a new job in a different market where that is conducive and begin adding real estate or at least offsetting my housing expense to some degree with that.

Scott:
And then I’m going to look up in 2024 and be like, okay, I don’t have that $1,400 a month in rent and I don’t have the $200 in gas every month. I brought those down and now my net is just $200 to live. So I’m now saving another 1500, 1400, 1500 per month on top of my Now my savings rate’s 3000 a month, plus I have a raise from my job, which is another $1000, $2,000 a month. Okay, now I’m saving $4,000 a month. That’s 50 grand a year. Now over the next eight years, I’m going to generate $400,000 in investible liquidity. And I’m going to place that into stocks and/or real estate investments, either by continuing to buy live-in flips or house hacks or by just buying rental properties in some location, in addition to my investing in index funds, which may go on in after tax brokerage accounts or these retirement accounts.

Scott:
So that’s kind of how I would be trying to think about the situation is how do I leap forward to those inflection points where I actually have some of these options. If you’re going to go down that route, if you like what I just said, then the after tax liquidity is going to be relatively important because in the next year, right now you have $23,000 in cash. In the next year you could save up another 20. That gives you $40,000. That’s a reasonable position to buy, I think, a property with. That would be one way to think about is, “I’m going to forego the HSA contributions and being really heavy in the Roth or my tax deferred plans and I’m going to, instead, focus on after tax liquidity to pursue that plan.”

Scott:
But if I’m thinking I’m just going to be at the school district for the next 10 years, kind of doing what I’m doing, maybe working some side jobs, okay, and I just really don’t think that the house hack or live-in flip options are realistic for me, then I think you leave your cash position the way it is and start going down this ladder from an HSA Roth IRA and tax-deferred account investing perspective.

Amanda:
So if I were to do that, to try to buy real estate after I graduate and get a better job, in the meantime, would I put my money in just a savings account or in index funds still?

Scott:
Yeah, I think it’s a savings account at this point because your time horizon is too short, right? If you decide the needle mover is going to be one of these, this real estate investment, then you can’t save up your down payment in an index fund because it’s too volatile. If you were saving $3,000, $4,000 a month and were able to easily qualify for property in your area, I’d have a different opinion because you’d be able to invest it in the index fund or whatever. And you’re still saving so much that the down payment is not a two-year, three-year, huge high stakes decision, but I think, in your case, it’s a high-stakes decision because it’s going to require essentially all of one year’s savings to put down for that property and you’re going to want some reserves to handle things. So does that make sense?

Amanda:
Yeah, that makes perfect sense. I hadn’t thought about that as an option and it’s… Yeah, thank you for helping me think differently.

Scott:
Awesome. Well, what else can we help you with today?

Amanda:
Those were really my biggest things. I like to plan what’s going to happen 20 years from now because I like to overthink. So I just kind of wanted an idea in my head of, as I make more, what should I be doing with it? Should I keep the percentages I have invested the same way? Should I invest more heavily in just retirement accounts and that kind of thing? So I just kind of wanted this overall picture of, in the next 10 years, what direction do I go with each thing? But I hadn’t really thought about real estate a whole lot. So that is kind of just a different option. But if I didn’t do that, if I just invested in retirement and after-tax brokerage accounts, then what would your advice be for the next 10 years, as to how much to invest in each of those, percentage wise?

Scott:
Well, So I think you say, “At 55, what do I want my portfolio to look like?” And so if you carry out the plan as it kind of looks like it’s prescribed here, I get the bachelor’s degree and I go into the job and I get my raise and these raises over time, by 10 years from now, you’re earning $140 a year, hopefully, and you’re saving, what is the difference there, that’s going to be $40,000, $50,000 a year. So, cumulatively, we’ll have saved $300,000 to $400,000 and your portfolio be worth $500,000 to $600,000 in a strong scenario. So that brings you to $600,000, $700,000 in total net worth at 55.

Scott:
Given that scenario, I would go really heavy into the retirement accounts because I think that you’re close enough to retirement age at that point where you’re going to want to be building that wealth tax efficiently so that you have, you got to plan for the next 50 years following that because you’re going to live to be 105. And so we got a lot. Yeah. So I would actually be really biasing towards the retirement accounts at that point. I’d figure out what’s my ladder look like. You might say, “HSA is the first thing I’m going to max. Then I’m going to do the Roth IRA. I’m going to do that until I get begin approaching the income limit and I’m going to begin shifting that more towards the 401k at that point, as I move into higher and higher tax brackets.” Or not the four 401k. What’s the tax deferred version that you guys have?

Amanda:
403B?

Scott:
The 403B. Yes. So I’m going to have the 403B in there. I’m going to be vesting into my pension. I’m going to be 10 years further along with my pension at that point. And that’s going to be a more meaningful part of my net worth. And I’m going to begin building wealth in that more traditional way. So that won’t give you the optionality to really preserve income at that same, but if you’re able to go part-time and earn half the income, you’ll still be able to easily cover your expenses and still invest to some degree. So that would be the way I would think about it, if you’re going into the more traditional route without making kind of those bigger changes to accelerate income or cut back on the lifestyle expenses with real estate.

Amanda:
That makes sense. I was definitely looking for some direction there because I had no idea. Like I said, I never thought I would be in this spot that I could have these conversations. I just thought I’d work forever. So it’s fun to talk about, for sure.

Scott:
You’ve got the savings because you’re in such clear command of where your money is going. So you’ve got the defense down in such a strong way right now, and that’s going to give you the option to build lots of wealth here. So it’s a matter of where you build it and how you want to do it. And, in case one, I’d go all-out on trying to build an accessible, controllable, after-tax position. And that’s if I’m going to use real estate and side businesses or whatever to aggressively build wealth on the side. If I’m not going to do that, then I’d go down the more traditional path of thinking about maxing these retirement accounts and investing and building that pension benefit.

Amanda:
Okay. Yeah, that makes a lot of sense.

Scott:
Awesome. Mindy, you have anything to add?

Mindy:
I don’t. I think we’ve covered it. I think we’ve got some things to work on and some research opportunities and I think we’re in kind of a waiting game right now with the college degree and the helping the son with his rent. And those are going to free up space in your budget and increase income down the road. So I think 2022 and 2023, I’d just keep on the same track and think about where you want your funds to go and research some of these things, the target date funds, the specific index funds that you want to be involved in. I would also say read the book A Simple Path to Wealth by J.L. Collins. That’s a great, easy to understand, he doesn’t get really deep in technical mumbo jumbo. It’s really easy to understand path to index fund investing and the whys behind it.

Amanda:
Okay. We’ll do that.

Mindy:
Okay. Great. Well, Amanda, thank you so much for your time today. This was a lot of fun and we’ll talk to you soon.

Scott:
Yeah. Thank you so much.

Amanda:
All right. Thank you.

Mindy:
Okay, Scott, that was Amanda with an interesting and unique story that we haven’t heard before on this show, where she’s got about 10 years on her financial independence journey.

Scott:
Yeah, I think it just depends on what action she’s willing to take. Right? You have to… There’s four levers, as I stated earlier in the show. You can spend less, you can earn more, you can invest and you can create. And right now, Amanda does not have a large amount of assets with which to invest. Starting a business or creating seems a little bit out of reach while she’s working a full-time job and pursuing her bachelor’s degree.

Scott:
And so it’s really about focus on what she can control and working step by step to finish this bachelor’s degree, open up options, and then decide. Does she want to be aggressive and creative as an investor and go more risky and potentially more scalable route of real estate investing or side businesses or those types of things? Or does she want to go all-in on the career with the school district? And that will provide stability, the ability to build wealth, a pension that will grow over time and can be a really good option for her over the next couple of years. So I’ll be interested to see kind of how that unfolds for her over the next couple of years and which path she goes down.

Mindy:
Yeah, that’ll be very interesting. Should we get out of here, Scott?

Scott:
Let’s do it.

Mindy:
From episode 318 of the Bigger Pockets Money podcast, he is Scott Trench and I am Mindy Jensen saying, in the immortal words of Darth Vader, live long and prosper.

Scott:
What? I know. Yeah. That was Spock.

Mindy:
I know.

Scott:
Okay.