Common Money Fears That Are Costing You BIG

Mindy:
Welcome to the BiggerPockets Money podcast, where I am joined today by J Scott and Kyle Mast to talk about your biggest money fears.

J Scott:
Owning a home is a wonderful thing, but it shouldn’t define you. You shouldn’t necessarily make the decision to own a home, just so you can say I have a house. But, for a lot of people it may be a better decision right now to rent a house, to save up money, and to actually put that money towards an investment property or put that money towards a property like a duplex or a threeplex where you can live in one unit and rent the others to supplement your income.

Mindy:
Hello, hello, hello, My name is Mindy Jensen. J Scott, welcome back to the BiggerPockets Money podcast.

J Scott:
I am thrilled to be here. Thanks for having me again Mindy.

Mindy:
Thanks for coming. And Kyle Mast joining us in the host seat for the first time. Welcome, Kyle.

Kyle:
Hey, thanks for having me back. It’s great to be here.

Mindy:
We are here to make financial independence less scary, less just for somebody else. To introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where you are starting. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate or start your own business, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams.
Okay, let’s go back to Kyle Mast for a moment. Kyle is recently unemployed. Kyle, let’s talk about that for a minute.

Kyle:
Yeah, I was at a get together the other night and people were asking each other what they did, and I thought it’d be funny to say, well, I’m kind of unemployed. And everyone felt really sorry for me. It wasn’t come off the way I wanted it to. Everyone’s like, oh, are you looking for something? So I should explain it, I had a financial planning firm. If people have listened to the podcast before, they probably know that. But I sold it earlier this year and we have some real estate investments too. So essentially I’m in the financial independence world, I guess financially independent as far as managing some of the real estate remotely. I do a little bit of that? But I’ve got a five year old boy, a wife, and a one year old twin boys so I’m just spending a bunch of time with them these days.

Mindy:
That’s a busy house.

Kyle:
It is. It is a busy house. I think my morning this morning consisted of collecting eggs with my five year old changing a diaper. That was about it. And just trying to put out the fires in the morning, it was good. It was good morning.

Mindy:
One diaper?

Kyle:
Just one for me this morning. Yeah, there’s more, I’m sure there’s something happening right now.

Mindy:
And Kyle has joined us in the past on episode 41 and on episode 200. J, you have joined us on episode 219 where you talked about the syndications. That was an epic episode, two hours long. You were also on episode 70 where you talked about… Were you on episode 70? Where you talked about preparing for real estate downturns, preparing for investing in real estate when you don’t have any money preparing for the recession that’s upcoming. I don’t know if you know this, but perhaps there is a recession coming. Does anybody believe that there isn’t a recession coming, Kyle, J?

J Scott:
Well, I mean as long as you’re willing to wait long enough, there’s always a recession coming.

Mindy:
I believe someone who shall remain nameless has predicted a recession or a market downturn what every month for the last 14 years. Someday he’ll be right. Okay.
We posted in our Facebook group, what is your biggest money fear? And holy cow, we got a lot of responses. There are actually quite a few money fears floating around in the world, in the world of our listeners. I am bringing on Kyle and J to help explain and maybe alleviate some of those fears. Kyle and J, let’s talk about your money fears. J, do you have any money fears?

J Scott:
Oh, I have a whole bunch of money fears, but my biggest is actually probably one that’s fairly common. So I grew up, we didn’t have a lot of money. I mean we had food on the table and we had a roof over our heads, but not a whole lot more than that. And then I was very fortunate I was able to put myself through college. I was able to get a good job. I was able to make a decent amount of money in the corporate world and then got into real estate. And so I’ve done pretty well over the last couple decades. But I think it’s very much my upbringing and the fact that I know what it’s like not to have money and it terrifies me of ever potentially going back to that place.
So I tend to be a lot more conservative than a lot of other people that I talk to in this industry. I’m also a little bit older, I turned 50 last year. So between my age and my background, I think I’m a little bit more or maybe even a lot more conservative than a lot of people in this industry. And that’s really the result of my money for now.
Here’s the interesting thing. My wife Carol grew up in very similar circumstances as I did, maybe even worse off than I was, and she tends to be a good bit more aggressive. And so I’m not saying that it’s necessarily my history that led to these money fears, but it’s certainly how it manifested in me and it’s made me a lot more conservative than I probably otherwise would be. I probably make some suboptimal financial decisions, but we can talk about that as we go on.

Mindy:
I think it’s interesting you said your age makes you conservative, and I wonder what people who are in their late 20s, early 30s are thinking about this market right now… I mean, I don’t really wonder. I look online and I see them sharing their fears. Oh, the sky is falling. Oh, everything is so awful. Because their history with investing has always been up and to the right. I can’t fail. Every stock that I buy is going up. Every property that I buy is worth more when I sell it in a couple of years and they haven’t experienced this downturn. My thought, I was actually talking to my husband as I was preparing for this show and I’m like, what is your biggest money fear, sweetheart? He’s like, Well, honestly, now that we have done so much preparation for our future, we have invested, we have prepared. I don’t have the money fears anymore that I used to. He grew up financially insecure and they had food on the table, but his father was a union electrician and he worked in the spring and the summer and the fall, but in the winter he was laid off, like clockwork.
But this was in the ’80s when they didn’t have the internet and they didn’t have Craigslist and you couldn’t just go out and get a side gig. And so like clockwork, he had no job over the winter, every single winter, and they didn’t prepare every single winter. It was always a surprise that they got laid off. He remembers his biggest memory as a child was his parents sitting them down and telling them that dad got laid off again and that they were probably not going to lose the house. He’s like, wait, there’s a chance. He was so shocked by this. When I was growing up, I didn’t have this. My parents, I discovered that we almost lost our house, but they never told us this. And I don’t know which way is better to share with your kids that things aren’t going great or to hide it from them. But my biggest money fears have now been alleviated because we have been preparing for so long. But I’m also really, really frugal if anybody who has listened to the show can attest.

J Scott:
Yeah. I wonder if having kids factors into it as well. Cause certainly between my history growing up and my age and having two kids that are now almost teenagers, it makes you realize that there’s not as much runway ahead of you as there is behind you. And if something catastrophic were to happen, you don’t have that time buffer. I think a lot of us that have been able to be successful in this industry recognize that if we lost everything, we could probably gain it back or much of it back or even more by making better decisions the second time around. The problem being is if you don’t have enough time to do that, obviously that time pressure can make things very difficult.

Mindy:
And Kyle, I think you are younger than J and I.

Kyle:
Yeah, I want to piggyback right off of what you said J at the end there, bringing the kids into it. I definitely think my biggest money fear is that I don’t plan well enough that my family is taken care of if something happens to me. I think I’ve always felt pretty confident if it’s just me, I can live on nothing. I can live in a van down by the river, I can find an odd job, I can do it. But when it comes to my family and making sure that they’re taken care of and that they’re comfortable, not extravagantly comfortable, but that my wife would be able to take care of our boys, if something happened to me. That’s definitely the biggest thing that I worry about.
I grew up a very similar background. I grew up on a Christmas tree farm in Oregon. We didn’t have much money and depending on how Christmas trees were doing that year, you make all of your money in a month, I mean that’s it. And you have a lot of farmers, it’s a operating loan throughout the year, unless you’re somehow able to get ahead and save up a whole load of cash to be able to fund it ahead of time, which most, 90% of farmers cannot do that. So it was tight. But I never remember our family worrying about money growing up. But again, we lived very simply and we took long road trips, cheap vacations that I loved and it’s totally impacted the fact that I have an RV now and I make my wife go on trips with me and the RV. But it definitely comes down to the family, that would be my biggest fear.
But I feel like I’ve taken care of that. I have probably way too much life insurance if I were to advise someone as a financial planner, I am over the top on a life insurance standpoint. I don’t even want it to be a thought for my wife that there isn’t enough to go if something happens to me. And at this point, being financially independent, it’s just kind of on top of what the assets that we have at this point, it’s not as necessary, but that’s where I would stand.

Mindy:
I want to make sure that my kids are taken care of and that is what we have been doing for the last, I don’t know, nine years, well for the last my whole life because we’ve always been frugal is to just put it away and make sure that they are taken care of should something happen.
Whew. Let’s lighten up and get to the money fears of our Facebook group and our listeners. I did post in the Facebook group, and we will link to this in the show notes, what are your biggest money fears? What keeps you up at night? What makes you lose sleep? And I think this first question is not just a fear of this one person. I think this is a fear for a lot of people. I make more than both of my parents did combined eight years ago, but I can’t afford a house. What do I do? How do I get a handle on this market?

J Scott:
I’ll jump in on this one. So this is unfortunately a reality back in the ’70s and ’80s the cost of living, the cost to buy a house or even to rent a house or an apartment was so much less relative to the typical median salary back then than it is now. And so I think a lot of us that are a little bit on the older side, we may not recognize how good we have it, but talking to people who are a lot younger than I am, talking to the Gen Zs, the millennials, they’re having trouble buying houses. It’s a factor of the fact that that housing prices have soared and wages haven’t necessarily soared.
So what do I tell somebody that’s in that situation? One, I have empathy. It’s a horrible situation to be in and I’m sincerely hopeful that over the next couple years things change, that we see affordability improve either because we bring more supply of housing online or wages increase. It’s a difficult problem to solve. But in terms of tactical solution, the first thing I would say is owning a home is a wonderful thing, but it shouldn’t define you. You shouldn’t necessarily make the decision to own a home just so you can say I have a house. And I would think in terms of there are other ways to put a roof over your head and some ways might actually be more financially advantageous at this point in your life. And I don’t know how old you are, but for a lot of people it may be a better decision right now to rent a house to save up money and to actually put that money towards an investment property or put that money towards a property like a duplex or a threeplex where you can live in one unit and rent the others to supplement your income.
But owning a house, the nice thing about owning a house obviously is it provides some comfort and some security. But the downside is you have an asset that’s not generating any income for you. So even if you can afford it’s not necessarily a great purchase for a lot of people. And so what I would say is hopefully things will change over the next couple years, but in the meantime, think about whether there might be a better financial decision than buying a house anyway. Whether it be buying a rental property, whether it be investing in something else to build a nest egg, whether it might be to buy a property that you can live in and you can rent another unit or a room to somebody else so that you can share in the costs, in the hopes that one of two things happens. Either the affordability issue in real estate fixes itself over the next couple years or you build up enough of a nest egg that you can build a house even though that there are affordability issues.

Kyle:
Yeah, I’m kind of glad J went first on this one. I think he was a lot more empathetic than I was when I first read the question. He was a lot nicer. So maybe I’ll try to still be nice, but I just want to be encouraging too. Anytime I see the word can’t in a question, it’s really hard for me to go forward on it. So I’m kind of put my financial planner hat on here a little bit. There’s a lot of details that we don’t know the situation. The parents’ income might have been really low, eight years ago he makes more than both of his parents combine. How do I handle this market? My first thing would be to say, just make sure you’re thinking very creatively. And J already touched on some of these, the house hacking thing that BiggerPockets talks about all the time. Waiting, you don’t have to buy right now, finding some way to rent and save up some of that money.
Life is trade offs when it comes to finances, you’re always trading something for something else. Maybe you need to trade the place where you’re living and find a place that has a lower cost of living. If buying a house is very important to you, which it sounds like from this question I’m going to make that assumption, it might not be necessarily true and you might want to think outside the box like J said for sure. But if that’s important to you, maybe you move an hour south of the metropolitan area that you’re living in, you’re not super far away. You buy a house there and there are a lot of programs, as long as you don’t get yourself too deep from a cash flow standpoint, there are a lot of even 0% down, 5% down programs depending on your income level and depending on the area.
But in rural areas there are some of these loans that can get you started. And maybe if you start an hour or two away from a metropolitan area that you want to be, in a year or two, you can then move to a house that’s 20 minutes closer and then 20 min. You can move yourself into a situation slowly where you want to be. But that my suggestion would be to just think a little bit more creatively than thinking, okay, interest rates are really high and where I live right now, everything is really expensive, those are probably very true things. But now let’s expand the possibilities here.
I hate to say this, can you live with your parents and sock away a whole bunch of money for two years for a down payment? What parent would not encourage their kids to do that? If you’re responsible and you can do that, it’s going to take a little bit of reduction of pride on your part probably. And it definitely depends if you have a family, if you’re single, there’s a lot of things here that we don’t have the information on, but just try to think outside of what everyone says you should do, especially on the news housing is so unaffordable man things right now.
If you want to try to find a deal or be able to get a place, we’re in a pretty good spot at least compared to six months ago. Things are still high from a pricing standpoint and interest rates are high, but there’s wiggle room as a buyer, you can get sellers to actually give you some concessions, maybe pay down an interest rate for you. There are some things that you can do. So I would just encourage you to know, don’t get down on yourself just because you missed buying two years ago. I think that’s the fear or sometimes that’s what people hang onto. It’s this FOMO, I think I missed out. But 5, 10 years from now. If you can make something work now that doesn’t strap you financially, and again that would be maybe moving to an area that’s a little bit more affordable. And again, we depends on what your job is, if you can take a job with you or take a job that has similar pay in another area, remote working. There’s just a lot of variables that you might want to check into.
But just be encouraged that there are things that you can always do. There’s always levers that you can pull to try to make it work if that’s something that’s really important to. But I really like what J said about don’t pigeonhole yourself to thinking that you have to buy a house. Maybe your first buy is a property in Cincinnati, Ohio that’s a rental property and it’s not going to go up a ton over time maybe, but it’s a cash flowing property and you can continue to rent in the area that you like to live.

Mindy:
I want to tag off of what Kyle said. He said, consider moving. And this is something I have lived in, I think I’m in my 29th or 30th house, so moving is super easy for me. But I can understand why people don’t necessarily want to move, it can be scary. But when the cost of living is so much less with moving to a different location, moving an hour south, moving across the country, moving to a different state, you could potentially continue working in the same company making the same income. But now you live in a different place that is so much less expensive. That could be a really great way to become a homeowner for a while.
Investing in different ways, you both touched on that, that’s great. Increase your income. If you can’t afford a house, are you doing the most that you can to increase your income? We keep hearing how there’s all these jobs, companies are struggling to hire. Can you go and get a better job? You have a better chance of increasing your income by leaving your current company and going with a new company than you do by asking for a raise at your current company.
Another couple of tips is to keep an eye on the market. Like Kyle said, there’s a lot of deals happening right now. Prices are getting lower because sellers are getting a little bit more desperate. Houses aren’t selling in five minutes, they were in the spring and people still need to sell. They’re reducing their prices. You can get concessions, like Kyle said. Another thing to do is to look at properties that are ugly that need some work. A fixer upper doesn’t mean that the whole thing is about to fall down. It could mean that the carpet is from 1972, which is really disgusting, but you can pull that up, vacuum everything out, put new carpet down, and bam you have a whole brand new looking house.

Kyle:
Maybe just add one thing on that. I want to make sure that I’m not suggesting trying to time the market in any way as far as buying. We’re talking like the market is softened a little bit. But J talked about we do have an issue of low housing, we don’t have enough housing. Most likely a lot of the builders are starting to pull back right now too because they don’t want to get stuck with properties. But I’m worried that in six months to a year, because they don’t bring things online, we’re going to be in a similar place with really low supply. So I would encourage whoever is asking this question or someone in a similar situation, look at your circumstances right now and the circumstances right now are it’s you have more leeway as a buyer than you’ve had in the last two years to try to buy a house. So maybe you take advantage of that, maybe you don’t, but that’s something to consider.
And the geographic moving thing, a lot of times people think, oh I got to move from California to Ohio and you don’t can a lot of times moving an hour and a lot of times family and friends plays into that. If you can move 30 minutes to an hour away from where you’re at, if you draw a line around where you’re at and you look at the towns and the properties that are there, you’re going to find stuff that’s a lot more affordable than where you’re at. If you’re in an expensive area and you don’t have to go that far, it requires some trade off, which would be driving more if you need to commute or driving more to see family and friends potentially. But if you look at it, Mindy’s a great example, being willing to move so much, it can be a great financial move for you and it can be a lot of adventure for your family too. It doesn’t have to be permanent. And then when the kids get to a point where you want to settle down, and maybe that’s your goal of trying to get to that point over time, but in the meantime, try to make those steps that can push you there.

J Scott:
I have a feeling that a lot of what we discuss in this episode is going to boil down to exactly what Kyle said, which is it’s trade offs. There are a lot of trade offs when it comes to making good financial decisions and you need to figure out what your priorities are. So yes, having to drive an extra half hour to work is not fun for a lot of people, but if owning a home is that important to you and it’s higher on your priority list, then that’s a trade off you may need to make. And so everybody needs to decide what they’re comfortable with personally, what their priorities are, what they’re willing to give up to get other things. And that’s going to drive a lot of these decisions. I think for most of the things we talk about in this episode, there’s not going to be a right or wrong answer. There’s going to be a right or wrong answer for each of us depending on our situation, our priorities, and the sacrifices we’re willing to make.

Mindy:
Oh, that was a good wrap up J.

Kyle:
100%

Mindy:
Okay, moving on. My biggest money fear is not having enough money saved or not making the right choices now in my mid 40s that could affect my retirement. Do I have enough money for retirement? And I think this is a question that everybody listening has had at one time or another.

Kyle:
Yeah, I’ll jump in on this. My biggest money fear is not having enough money saved or not making the right choices in my mid 40s . Making the right choices. That is, you can do the right thing to a certain extent listening to this podcast, obviously whoever put this question in is researching and listening or reading to at least some personal finance information, and that is a huge step in the right direction. That’s going to save you from 80%. That’s like the 80-20 principle. You’ve just hit the good 20% of where you’re going to get some information from what you’re bringing into your life that’s going to help you make those better decisions. Beyond that, you’re always going to look back, when you’re 50, 60 or 70 whenever you, “Retire,” if that’s what your goal is, you’re always going to look back and have some regrets and say, I wish I would’ve done this, I shouldn’t have done that. But in the meantime, you just do the best that you can do and educate yourself right now. So I think, you can give yourself a little bit of grace in that sense I guess from the decision standpoint.
Do I have enough money for retirement? And that sometimes this kind of comes down to something in a lot of the financial planning research, they talk about the 4% rule. Do you have enough saved up as a nest egg to be able to draw from that pile of funds for the rest of your life? And this question, it’s just not that easy to answer because there’s so many variables. And the good thing about it is it’s not that easy to answer. So what’s your vision of retirement? Do you want to save a pot of money, stop and travel for 30 years or just not do anything? Then you need to have enough saved in your nest egg to completely fund everything. Are you going to save and when you retire, maybe you’ll go work part-time at your local library and make 20,000 a year? That’s huge. That’s a big variable. Any part-time work that you do in your, “Retirement” makes an incredible difference in the viability of that. So sometimes people don’t put that into their plans and it’s actually a really good thing because you’re made to do something. We’re not made to just shut it down.
A lot of times people think of retirement that way. And I know in the financial independence community it’s nice because I think that the word is out there that you need to be careful that you don’t do that. I think that has come around to where you need to have something to do when you get to that financial independence point. Because if you’re motivated enough to become financial independent, you’re going to need some motivation to continue doing something and feel some purpose in your life. So, there’s some variables there that if you’re trying to calculate do you have enough saved for retirement, you can use something as simple as a 4% rule off of, say, you have a million dollar 401k, you can kick you off 40,000 a year roughly for the rest of your life. The 4% rule research is really deep. And listen to the Kitsis podcast that Mindy and Scott did with Michael Kitsis. It will blow your mind. That guy is a genius when it comes to this stuff. But that’s basically based on a 30 year retirement timeframe, kind of your general retirement thought process, not your early retirement.
But there’s so many other factors that you can… I like to have a plan A, B, C, D, several plans. Before we got on the recording Mindy asked if I was going to keep my CFP because I don’t have my firm anymore. I’m not doing financial planning for clients and I really should put a disclaimer, I don’t know people’s situation. I am a professional, usually in these podcasts they say we’re not professionals, we don’t give advice. I am a professional, but I’m not giving you advice because I don’t know your whole situation, but that I’m keeping my CFP credential, which takes a fair amount of CE, but it was a lot of work to get and it’s my plan D. I told Mindy, if I need to go back into the workplace and even do some part-time work for some reason or full-time work, it’s a huge credential that I do not want to let go. I don’t see myself doing that, but who knows? That could happen and need to happen.
I would say without knowing more of your situation, I can’t give you like, do you have enough for retirement? But those are some thought processes. You need to think through the different revenue streams. And Mindy, they just had someone on about social security. That’s something that people kind of throw out there that it’s not going to be available for you and that is not true, you need to make sure you think about that. For someone who becomes financially independent before social security, it’s kind of like icing on the cake, but it’s also something that will be there in some form. Maybe not in the high amount that it is today, but it’s not going away. There’s too much voter power to have it completely go away in some form or fashion. But it’s a good question. This is a really good question. I wish it was easier to answer specifically.

Mindy:
Well, I think there’s a lot of things that this person who’s asking this and anybody who’s thinking about this can do to plan ahead. I think that there’s a lot of people who hear the concept, financial independence, retire early. I’m going to do that. Okay, well what does that look like? Oh, I’m not sure. So I created a document called the fire planning worksheet and you can download that at biggerpockets.com/fireplan and it is an interactive worksheet for you to fill out. I don’t see any of your answers. This is between you and your computer and it just asks you questions like what is your risk tolerance and what does your financial independence life look like? What does retirement look like? Why do you want to be financially independent? Why do you want to retire early? What are you going to do when you’re retired? Where are you going to live? What kind of home are you going to live in? Are you going to own, are you going to rent? Are you going to be like nomadic travel?
I think that’s a really great way to get you started thinking about this. I don’t know if you could tell I’m a huge nerd. I loved reading Bill Begin’s original article in the Journal of Financial Nerdery or whatever about the 4% rule. It was originally published in 1996. I really wish I could remember the name of it, I can’t. But I have it. It’s a PDF that I will link to in the show notes. It’s like 12 pages long and if you listen to this show, if you like this stuff, you will love reading this.
I think that people hear the 4% rule and they’re like, okay, that’s cute. If you read this document, you’ll be like, oh, he really went deep. He really ran every single number possible. He didn’t just pull this number out of thin air. This is the safe withdrawal rate. This takes into account the Monte Carlo scenario and the Black Swan Event and all of these fancy financial terms that everybody loves to throw around but doesn’t really know what they mean. He took all of that into account. Does it sound like I’m fangirling over him? Oh my God. When he was on this show, I was like, this is Bill Begin. And I was such a nerd. But that’s a really, really great starting point.
There are several retirement calculators and fire simulators in that fire planning worksheet that I shared that are linked in there that will help you run your numbers and show you what retirement could look like for you.
Your biggest fear is not having enough money saved, do you know how much money you need in the first place people throw around like Kyle did, I’m not throwing you under the bus Kyle, because I use this number two, but people throw around a million dollars means you can spend $40,000 a year. That’s super easy math. $2 million means you can spend $80,000 a year. Are you spending $80,000 a year? Do you know how much money you’re spending? I mean, I thought that I was going to be spending $40,000 a year and then I publicly announced that I was going to track my spending. And lo and behold, I am not spending only $40,000 a year. I’m spending way more. My nest egg has grown, so it’s okay. But if it hadn’t grown and I thought I was going to be spending $40,000 a year and I’m spending 75, I’m going to run out of money.
So, if your biggest fear is not having enough money saved, step one is knowing how much you need. And that is, I’m going to send you to that fire planning worksheet.
Okay, let’s move on to losing buying power by keeping too much in cash. This sounds like a J Scott question for me. I am nervous about losing buying power by keeping too much money in cash, however, having a large cash cushion is what helps me sleep at night. So J, let’s talk about where to keep emergency funds and where to keep your need in the short term funds.

J Scott:
Sure. Before I get there, I want to kind of talk about the first part, which is the I keep cash because it helps me sleep better at night. I talk about this a lot and I think this is a super, super important concept. This goes back to what I was saying before about trade offs. It’s real easy in the financial world to say I’m good at the math, I understand the numbers and I’m making smart financial decisions every time I make a decision. But at the end of the day, there’s, again, trade offs. Making good quantitative decisions is one piece of living a smart financial life, the other piece is the qualitative decisions. The decisions to do things that might be suboptimal financially, suboptimal from a mathematical perspective, but that allows you to sleep well at night.
I talk about this all the time and we each need to figure out what our level of our risk tolerance is. And so for me, I value sleeping well at night and people are probably surprised to hear this, but I make a lot of suboptimal financial decisions purposefully. I decide to make suboptimal financial decisions because there are certain things that I need to do to allow me to sleep better at night.
So the first thing I’m going to say, and you guys feel free to disagree. Anybody out there, feel free to disagree. But I’m a big believer in that you need to decide what you need to do to sleep well at night and prioritize that over your mathematical financial decisions every single time. Now of course there’s going to be a middle ground and we shouldn’t be so conservative that we’re making really bad financial decisions, but don’t ever feel bad saying, I’m making this decision because it’s going to help me sleep better at night.
Okay, now where should people be keeping their money right now? I think this is probably a great question for Kyle because as a certified financial planner he probably deals with this every day. But as somebody who probably has more cash on hand than I should, again because I like to sleep well at night, here are some of the things I’m thinking about these days.
Number one, we all know inflation is super high and it’s unlikely that any of us is going to, with a low level of risk, be able to beat inflation with most investments. Some of us as real estate investors, maybe we can get close to that 7, 8, 9% return rate at relatively risk free. But for most of us, we’re going to have to settle for something less than inflation, which means yeah, we’re going to be losing a little bit of buying power every day. But again, if we sleep better at night, that’s okay. So what can we do to kind of straddle that fence of getting the best returns possible but not taking too much risk?
Number one, this is being recorded in October of 2022. So if you’re listening to this five years down the road, things may have changed, but as of right now, bond yields are extremely attractive. Over the last couple months bond yields have kind of gone up. And so for those who are looking for a nice safe place to keep money for 3, 6, 12 months, maybe even a little bit longer, there are things like treasury bonds, which are higher than they have been in a few years. But one thing I really like is municipal bonds. You’re going to get some tax benefits for municipal bonds and in a lot of places these bonds are returning somewhere between 4 and 5%. With the tax benefits you might be getting somewhere, I mean 2.5 to 3% returns, which again, you’re not keeping up with inflation, but that’s still a pretty good return on a 3 or 6 or 12 month investment. So municipal bonds is a good place.
For really small amounts like a $10,000 emergency fund consider I bonds. So an I bonds are these inflation adjusted bonds. They’re not as great as a lot of people think, there are some downsides. But basically the treasury provides these bonds called I bonds where you can invest up to $10,000 a year and these bonds are indexed to inflation. So right now I think they’re paying like 9% per year, they readjust every six months. So the next time it readjusts, which I think is April, maybe inflation’s down and they readjust downwards. But as long as inflation’s high, this is a great place to be keeping your money to hedge inflation.
Now the downside to I bonds is that you have to keep your money there for at least a year. If you take it out in less than five years, you’re going to lose a quarter of interest, three months of interest. So there are some downsides, but if you have short term money up to $10,000 a year that you’re looking for a place to keep it for at least a year and maybe even five years, I bonds are a great place.
There are things called TIPS which are treasury-

Kyle:
Inflation protected securities.

J Scott:
Treasury inflation protected securities, which is similar to I bonds, fewer restrictions, but you actually lose money when inflation goes down. But it’s just another way to basically hedge inflation if you need to keep some money short term that you want to hedge inflation. So look at I bonds, look at TIPS. There are also plenty of equity solutions that are inflation adjusted equity solutions. You can invest in ETFs that are indexed against things like energy and commodities that tend to do well during inflationary periods and are more likely to do well. Higher risk than bonds, obviously because they’re more like stocks, but still lower risk than a lot of things out there.
And then certainly for those of us that have some level of expertise or skill in some investing area, don’t be ashamed to put those skills to use. Maybe you’re a real estate investor and about investing in real estate, go find some good deals and find something that’s relatively low risk that you can put your money in for a couple years. I have a feeling that the market’s going to shift a good bit over the next 6, 12, 24 months. So for anybody that’s looking to keep cash right now, I’d say focus on just 6 to 12 to 24 months, focus on hedging inflation and then as the economy starts to hopefully improve again in a year or two, we can start to think about some more aggressive but still relatively lower strategies.

Kyle:
Yeah, I mean man, J covered, I mean all the instruments that I would even throw out there. It’s an interesting thing to think about your short term money and where to put it. The thing that I always tell clients is it’s supposed to be boring, you’re not supposed to make money on it. Don’t try to make money on your safety money. It’s just there to help you sleep good at night. What this person was talking about that. There’s a couple questions I would have for this person. What’s your age? How old are you? What is your other investment mix? If you have 200,000 sitting in cash and you don’t have any other investments, that’s not a good idea. If you have 200,000 sitting in cash and you have 2 million in investments, real estate, stocks, bonds, other stuff, that’s fine. That’s a large allocation to cash. But if it lets you sleep good at night and you have a good investment mix, that’s great.
Over the years I’ve become more and more of the mind of just the higher cash cushion is okay depending on what your other investment mix is. And by that I mean you can take, if you’re balancing the risk out. So say you have a large cash portion and you’re a real estate investor that likes to leverage properties at the 80-20 leverage. The max that you can do, when you’re buying a single family home investment property to rent out, you like to put as little amount of cash in that investment property as possible. It’s not going to cash a little very much, maybe it’s 100 bucks a month, but that’s like your long term investment. You get some appreciation over time, that’s fine.
It’s okay to be that way, but in that scenario, say you have several of those properties, say you have five of those properties, put a number on it. That’s a situation where it might make sense to have a good cash cushion because then you can cover mortgage payments for a year or two. Having a large cash portion is great with something like that and it’s being offset with the risk that you’re taking on those properties to leverage them out and get the long term return. You’re in turn offsetting that leverage risk with your boring cash reserves. So it just really depends on what that mix is there.
The interesting thing is too, you see these advertisements, oh it’s so great, now we can actually get some interest on our savings accounts or we can actually get CD yeah, well if inflation’s 9% and you’re getting 2.5% in your savings account, the math is 6.5% That you’re losing, which is just the way it is. But two years ago when inflation was, “2%” or maybe 3%, you’re getting nothing in your savings count, you were only losing 3% at that point. So it’s good to make some money on your money and not lose all of it, but that’s just like J was talking about, we’re not going to beat inflation on that money and that’s okay. That’s not where you take the risk at.

Mindy:
One thing I think is interesting about the way this is worded is I’m concerned about losing buying power by keeping too much in cash, but if you put that money in the stock market, going back to my comment about people in their late 20s and early 30s maybe don’t have any experience with an economic downturn. So they take this money and they put it in the stock market because the stock market only goes up and then the stock market hits March 2020 and has a big downturn. You’re losing buying power if you need those funds and you have put them into the stock market over which you have zero control and then you need to access those funds for some reason. Now, you have lost whatever buying power you had. You put in 20,000 and now it’s worth 15, well you just lost 5,000 actual dollars. As opposed to taking that $20,000 and putting it in bank, you still have $20,000. It’s worth less due to inflation. I get that it’s real, but it seems like ethereal almost, like intangible because you still have the $20,000 in your hand, it just doesn’t go as far at the grocery store, but it’s not going to go as far when it’s only 15 in the stock market.

Kyle:
We should have touched on that a little bit more, the purchasing power of it. I think that also comes back to what the other investment asset mix is. What else does this person have? It’s okay to have that boring cash position and to lose purchasing power on it if you have something else that is hedging you against inflation and purchasing power and that’s equities, stocks in the market over time, this year down 30%. But we’re talking long term investments here or real estate. Real estate that you’re holding that you have some leverage on it. It appreciates on average three to 4% a year historically if you do nothing to it. So if you have some of that other stuff that hedges your inflation risk down the road… And I should back that up, when you leverage real estate, and people probably know this, but just so we don’t lose some people. If you’re earning 4% on the real estate but you have it leveraged four to one or five to one, you’re going to make anywhere from 10 to 20% on long term appreciation. We’re not talking about playing the market one year appreciation, we’re talking about the long term of a real estate investment and that’s how you hedge inflation. That’s one of the benefits we have in the United States have these amazing 30 year mortgages that you can get on long term investment real estate in a residential space.
But it really does come down to is this all of the person’s funds losing the purchasing power? If this is a retiree who’s 65 and they moved their $500,000 in retirement funds into cash, I would be worried. If that’s all they have, that’s, that’s not going to be a sustainable thing in the long run unless they have a completely paid for house, they live super simply, they can live on his and hers social security, it’s fine, it’s totally fine. It just really depends on the situation. That’s where Mindy’s frugality is your secret weapon that you can implement whenever you need to in years like this. That’s what retirees do a lot of times, they’ll just dial it back on things for a year or two and then when the market comes back and some of the investments recover, then you can go back into it.

Mindy:
Yeah, I think that’s really important is just to be aware of what’s going on and think about it from different angles. I think we’ve given people a lot of things to think about with regards to keeping too much in cash in quotes.
Okay. I’m wondering if changing jobs and taking a pay cut was worth it for more personal time or if I should have grinded it out a little longer. And again, I think we need a little bit more information with this one, but for me personally, take the pay cut and get more personal time because we don’t get enough personal time. Especially working from home these last few years, when you work from home and you’re online, oh, it’s really easy to start as soon as you wake up and be there all day and it’s dinner time and you didn’t work nine to five, you worked like seven to eight and it’s super easy to just keep grinding it out.
The phrase grinded it out makes me think that this person had absolutely no personal time and it was 100% worth it to take a pay cut. Now I will caveat that with if you were making 100,000 and you took a pay cut to 20,000, no that wasn’t worth it at all. But if you were making 100 and you took a pay cut to 90 and now you have a whole lot more free time to enjoy your life, totally worth it.
Okay, our final question I think is something that’s on everybody’s mind. My concern is more big picture stuff like inflation, government spending and printing too much money. My personal micro economy is okay, but what’s going on in the bigger picture?

J Scott:
I get the feeling you want me to take this one Mindy?

Mindy:
Well, I want you both to answer this one.

J Scott:
Okay. Kyle, do you want to go first or do you want me to?

Kyle:
Oh man, go for it. I’ll just piggy back off of all your good answers.

J Scott:
So yeah, obviously this is the billion or trillion dollar question. Where’s the market headed? Where’s the economy headed? One thing I will say is that a lot of us, especially those of us who are younger, there’s this idea of recency bias where we tend to put more weight on things that happen more recently because they’re more ingrained in our memory, we have more visceral response to them. And so for a lot of us who are younger, the last real recession that we remember, ignoring 2020 because I don’t think of that as a real recession, is 2008. And for anybody who thinks of 2008 as kind of a prototypical recession, they’re going to have a very skewed perspective.
2008 was certainly a recession, it was the second worst recession we’ve ever seen in this country. It was probably the worst recession from a real estate perspective, and I know a lot of people listening to this are real estate investors, that this country has ever seen, but 2008 isn’t representative of what a recession typically is. We’ve had 34 recessions over the last 170 years, 35 if you want to think we’re in one right now. 32 of them have been relatively, I don’t want to call them mild, but 32 of them have been very different than 2008. The two exceptions were obviously 2008 and then the big crash in 1929. But with the exception of those two, the other 32 have been painful, people have lost their jobs, we’ve seen unemployment go up, we’ve seen the stock market go down, we’ve seen wages go down. We’ve seen a lot of not fun stuff happening. But it’s not what you think of when you think of 2008. You think of typically short term pain, typical recession in this country lasts anywhere from 6 to 18 months. So it’s not like the three or four years that we saw in 2008. Typical recession is again a relatively quick and kind of not fun, but it’s an event that we recover from pretty quickly.
And so for any of us that remember 2001 that remember back in the early ’90s or the late ’80s, those are typical recessions. And I have a feeling what we’re going to see this time around is that, historically speaking, statistically speaking, we’re most likely to see this time around is one of those typical recessions where the next 6 to 12 to 18 months are not fun. We’re going to see a spike in unemployment. We’re almost certainly going to see that due to what the Fed’s doing by raising interest rates and we’re probably going to see the stock market drop. But I have a feeling that in 12, 24 months we’re going to see things get back on track. And given again historical precedence, I think two or three years from now we’re going to be in the midst of another economic expansion.
In terms of inflation and interest rates, the Fed is indicated that they’re willing to take some pretty severe action to kind of quell inflation. I’m not going to go into the details, but I’ve predicted a lot recently that I think come November we’re going to inflation start to drop and by the middle of next year we’re going to see inflation back where it should be. I think we’re going to see mortgage interest rates start to drop. And I have a feeling that by the end of this year, interest rates are going to actually be lower than where they are today. And I know a lot of people think I’m crazy for saying that, but I have some I think sound logic behind it.
Historically what we tend to see is that this cycle of the Fed raising interest rates leading us into a recession and then dropping interest rates, that’s happened 10 times over the last 60 years. All 10 of those times from the time the Fed started to raise interest rates to the time the Fed started to lower interest rates, the average period of time was 2.2 years. The absolute longest period between the Fed hiking rates and starting to lower rates has been three years. So again, unless we’re seeing something that’s completely unprecedented, the likelihood is that in the next two years we’re going to start seeing interest rates come down again. Interest rates tend to come down a lot faster than they go up. I wouldn’t be surprised if come 2024, maybe the middle or the end of 2024, we’re right back in the next expansion and things are good again and everybody’s happy again.

Mindy:
I’ve never wanted anybody to be more right than you right now.

J Scott:
And here’s the funny thing, I mean, anybody that’s listened to me over the last 15 years knows that I’ve been pretty bearish on occasion. I mean, 2018 I was probably on this show or the other podcast talking about how I was fairly certain we were getting ready to head into recession and maybe we did in 2020. I don’t know if I can take credit for predicting that. I certainly didn’t predict COVID. But I’ve been bearish on occasion and I think for the first time in a long time, I’m probably more bullish than a lot of people going into this recession.

Mindy:
And honestly, I tend to agree with you. I’m going to agree with you because you sound so confident in all of those numbers that you’re throwing out there. But we are still something like 4 million housing units short and that’s not going to change and it’s only going to get worse. As Kyle said, the builders have stopped building, they’ve pulled back. They’re only honoring what is already under contract. It is really just going to contribute to the housing problem that we currently have by them pulling back again.
We stopped building in 2008 and didn’t start again until what, ’13, ’14, ’15? They started building again. It takes a lot of time to get these plans put into place and build the out these subdivisions. I know earlier this spring builders were having an absolute field day taking deposits and building houses for people who could not throw money at them. I don’t have any research done on interest rates like J does, But I can’t imagine that we had 20 years of three and 4% interest rates, and they will stay at 7 and 8% where they are now.

J Scott:
Yeah, here, here’s the other thing with housing. I mean, if you just want to look at the most basic data over the last 10 years, we’ve averaged about 1.1 million new housing units, single family housing units built per year. Over the last 10 years, we’ve seen about 1.7 million household formations per year. So basically new households forming, whether that’s somebody moving out of their parents’ house or somebody getting divorced or whatever. And so let’s say we have 1.7 million new household formations every year. Our home ownership rates about 66%. So two thirds of that 1.7 million people that form new households every year are going to need to or want to buy a house. So that’s about 1.2 million people, 1.1, 1.2 Million people. So just the new households that are going to be adding to housing demand each year is more than the number of new housing units we have coming online every year.
So you can talk about do we have a housing shortage? Is there going to be a lot of supply coming online? The reality is we’re forming a lot of new households in this country every single year and that adds a lot of demand every single year. It’s not just existing buyers looking to buy a second home or investors looking to buy a second home, there’s just a whole lot more demand out there. And, like you said, there’s not a ton of supply. So, while I do think we’re heading towards a recession, while I do think that stock market’s going to take a hit, while I do think unemployment has to take a big hit and spike up, I think housing’s going to be relatively resilient. I’m not saying that that prices aren’t going to drop in some places, they almost certainly will. They may even drop across the board, but it’s not going to be a 2008 thing. Maybe it’s a couple percent, maybe it’s 5%. And so yeah, I’m again pretty bullish and especially when it comes to housing.

Kyle:
Yeah. Well, I mean, J just dropped a lot of really good stuff. I think I’ve fall in the camp pretty much with J and Mindy on this one. A lot of times in situations like this, I feel like in the next year or two, maybe three years, we’re going to look back and this was the opportunity, the next six months. From a equities, stocks, retirement planning standpoint, this is the time when you convert to Roth IRAs. This is the time when the market’s down. If you’re willing to pay the tax hit depend on your financial situation, you take the opportunity that a potential recession gives you and go with it.
As far as interest rates, I’m not going to reiterate all the good housing data that J is talking about, but millennials are not going anywhere. Demographics don’t change on a whim like interest rates do. I’m a millennial, I’m on the older end of the millennials, we’re still here. And there’s more younger ones that are going to keep forming those households and that pressure is going to keep pushing on that housing demand, whether interest rates go down or not. There could come a point, even where 6 to 7% gets normalized again for interest rates, which it has totally been that in the past. We just aren’t normalized to it because of how we grew up in the last 10 years as millennials. So that could be something that changes. People are going to want to buy a house and they will figure out a way to do it. There’s that 66% that J was talking about is not going to go anywhere and wanting to buy their houses. They’re going to take a pause with the greatest and fastest increase of interest rates in our history, but that’s going to change. People are still having kids, they’re still having twins, still changing diapers. It’s going to keep happening.
The other thing too, and this is not political, but we will be coming up on a presidential election cycle. And when the Fed is pushing interest rates up and it pushes towards a recession, whether you actually get into one or not, and if unemployment ticks up and if the stock market continues to do bad. Even if your opinion is that the Fed acts completely independently of politics, I think you’re wrong. You can disagree with me, but there’s supposed to be an independent entity by either party. There is pressure that is put, and when a presidential election cycle comes around, they want the economy to do a certain thing and there will be pressure for the Fed to reduce interest rates at some point, and they are pushing up against that.
Part of this question, I think, was the government spending money, And that’s kind of a loaded question, and that can mean different things. But when the Fed raises interest rates, it actually makes it more expensive for the government to reborrow its own debt. The other thing that we have going for us though too, is that a lot of the rest of the world is in worse shape than we are. Our currency has gone up in relation to a lot of other currencies. So we have some leeway as far as the US goes. I agree with J. I feel like this is definitely not a 2008 thing. The equity that people have in their homes is not, and the credit worthiness of home buyers is so different than it was back then. And that was a big cause of the crisis.
The other thing that I’ve been looking at is this, the idea of the rate… What do they call it? Rate lockdown. Where people are going to stay in their homes longer because you have a 2.95% rate. And originally that wasn’t really thought of as such a big thing, but now rates are more than double that. And I think that’s going to be… If you think yourself personally, anyone listening to this podcast, think if you have a 3% mortgage and you are looking to maybe buy another property, property, and the property you have is okay, it’s not your ideal, but to buy another property you either have to pay a lot more in your mortgage payment or to get the same mortgage payment, you got to downsize by 20 to 30% of land or property that you’re moving into, you’re going to stay where you’re at. And that’s going to hold on longer.
J, you might know this, the typical average that people stay in their homes is somewhere from five to seven years. But I think that’s going to get stretched out because of this rate lockdown. And that’s going to push demand even more where you’re not going to get this turnover for current housing availability, not to mention new builds that you already talked about. I don’t have a crystal ball, but I do think this recession is maybe more typical of historical ones where real estate is something that helps pull out of it. It’s not going to look like 2008, it just doesn’t seem like there’s has any of the indicators of that.

Mindy:
I completely agree. I think that 2008 is way different than 2022. I think that people who say, oh, this is just like 2008, I’m going to wait until the housing market crashes and then I’m going to buy houses. I think that that is wishful thinking. I think people are going to find themselves on the other end of whatever we’re in right now and say to themselves, oh man, I should have bought in 2022 when prices were down and then refinanced.
I got a tip from my favorite local lender in Colorado. He said, ask if your loan can be recast. Ask if you can do a rate and term refinance and get into a loan now. Take advantage of the lower prices now. And then when rates change, refinance, or rate and term refinance, lock in a new interest rate in two years on the same house that you’re in now that you got the lower purchase price on. So something to think about if you are in the position where you have to buy a house right now. Your current payment won’t last forever.
Okay. Well, I hope that it’s completely obvious why I brought on J and Kyle today. I wanted rock solid commentary and advice from very knowledgeable people, but I’d also like to hear from you. Please take a moment to join our Facebook group. If you have not, you can find it at facebook.com/groups/bpmoney. And I would like to talk about your biggest money, fears, and the specific fears that we discussed today. We are going to have a thread in the group starting today, when the episode is released to discuss this particular episode, and I would love to hear from you.
That wraps up this episode of the BiggerPockets Money Podcast. J Scott and Kyle Mast, thank you so much for joining me today. Kyle, tell people where they can find out more about you.

Kyle:
kylemast.com. If I’m doing anything, it goes up on there. So I’m not doing a ton these days, but that’s where it goes if I am.

Mindy:
That’s the right way to do retirement. And J Scott, tell people where they can find out more about you.

J Scott:
I’m doing it the wrong way. www.connectwithJscott.com will link you out to everything you need to know.

Mindy:
Okay, I am Mindy Jensen saying, I hope you stay a dreamer.