BiggerPockets Money Podcast 208: Finance Friday: 23 Years Old, Steady Pay, Low Income, Should I Invest?

BiggerPockets Money Podcast 208: Finance Friday: 23 Years Old, Steady Pay, Low Income, Should I Invest?

44 min read
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We’ve said it before and we’ll say it again: it’s never too early to start your journey to financial independence. Today we talk to Mackenzie, a 23-year-old college graduate, working a government job and paying for only minor expenses. She has a serious emergency fund she’s managed to save up and has questions on house hacking, setting up retirement accounts, and the fastest way to get to FI.

When you start your financial journey at such a young age, you have many different opportunities. Even just maxing out your Roth every year may be enough to make you a tax-free millionaire, but what about more aggressive strategies like owning rental properties or even shooting for a far higher-paying job? These are all questions that Mackenzie wants answers to, so we have Scott and Mindy here to help!

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Listen to the Podcast Here

Read the Transcript Here

Mindy:
Welcome to the BiggerPockets Money Podcast show number 208, finance Friday edition, where we interview Mackenzie and talk about the steps you should take when you’re just starting out on your journey to financial independence.

Mackenzie:
I did a full deep dive into all of my current benefits. And given that this is a government job, what sort of salary I am going to get into the future. So in my current position, it will take me 20 years from my start date, and I’ve only put in one so far, to get to a salary of 53,000. I do not like that number. And so I am trying my best to figure out other career paths within the government job or if I can find another job entirely.

Mindy:
Hello, hello, hello. My name is Mindy Jensen, and with me as always is my rock loving co-host Scott Trench.

Scott:
You know Mindy, I know it can be really difficult sometimes to come up with a new adjective to describe me every single week or multiple times a week, I guess. But this one is really… well, it seems like this one was not very taxing. Zing. All right.

Mindy:
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 that 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 out to make big time investments in assets like real estate, start your own business, or simply get started on the journey to financial freedom, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Okay Scott. I’m so excited to talk to Mackenzie today because she is in a very enviable position that I think a lot of young people find themselves in, just starting out curious, FI curious, but not really knowing which way to go. She’s done some research. We’ve given her some things to think about. And I think if you’re listening to this show right now, and you are, just graduating from high school, just graduating from college, this is going to really give you some things to think about in your own personal financial situation when you are thinking, “Where should I put my money as I’m trying to grow it for retirement?”

Scott:
Yeah. So I think she’s doing wonderful thing. She’s got wonderful parents. And her parents are a big part of why she’s in such a great strong position right now. And that’s awesome. And I think there’s a lot of people out there that are in that position. She’s thinking about all the right ways to propel her career and get to FI quickly while living a great life. And I think this is going to be a very helpful show for anybody that’s getting started or thinking about the beginnings of the FI journey.

Mindy:
Yes. And if you are not in the beginning of your FI journey, think about who is in your life that could use this information. And after you’re done listening to it, if you think it’ll be helpful for them, share it with them too. Recent college grads, recent high school grads. I think there’s a lot of opportunity for some really serious learning in this episode. Before we bring in Mackenzie, let’s do that, disclaimer, that our attorneys make us say.
The contents of this podcast are informational in nature and are not legal or tax advice. And neither Scott, nor I, nor BiggerPockets is engaged in the provision of legal tax or any other advice. You should seek your own financial advisors. Oops. 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.
Okay, Scott, let’s go give Mackenzie some financial decisions to contemplate. McKenzie is a college grad who is working for the government and knows that she should be saving for the future, but she isn’t quite sure how to go about that. She’s got some pretty low expenses right now, and isn’t really sure what her financial independence number is going to be because her expenses will for sure be a lot higher in the future, or will they? Smart decisions about college allowed her to graduate debt-free, which is a huge leg up on adulthood. Even smarter savings decisions provide her with a bit of a nest egg. McKenzie, welcome to the BiggerPockets Money Podcast. I’m so excited to run through your numbers.

Mackenzie:
Thank you. It’s great to be here. I’ve been listening to a lot of your episodes, so it’s kind of a surreal experience.

Mindy:
Well, thanks for listening. Let’s start off with a little bit of background. What part of the world do you live in and what is your job?

Mackenzie:
I am in Montana, United States, and my job is working for the government, an office job.

Mindy:
And let’s look at your income and expenses.

Mackenzie:
Yeah. So currently, my salary is $39,311. Stability of the government allows an exact number, so that’s fun. And my expenses usually average about 400 a month, although I’ve only been tracking it for the last six months.

Mindy:
Okay. And how are they only $400 a month?

Mackenzie:
Yeah. So I am living at home with my mom and she doesn’t charge me rent and she pays for most of the food. I try to stick in there a little bit, but mostly she has time to go to grocery stores. So that’s how it works out.

Mindy:
How does the rest of that $400 shake out?

Mackenzie:
Yeah. So given that I don’t have to pay for rent or food, the rest of it usually goes to gas. I live across town from work, so that is quite a bit of money, but it’s only gas. And then other miscellaneous stuff, I usually spend about $10 each month going out. And my regular subscriptions are around $15 to $20 each month. The other stuff is miscellaneous. Looking back on the months I’ve tracked, it seems a whole bunch of my yearly subscriptions hit. So that might be bringing my number up a little bit. But yeah, it’s just miscellaneous stuff as in paying my phone bill for the year, birthday gifts, maintenance on my vehicle, that sort of thing.

Scott:
All right. So how much are you able to save each month net then? Is that 39,000 take home or is that… Oh, I think we have it here. As it’s 2000 per month take ups, so are you saving $1,600 per month most months in accumulation.

Mackenzie:
Yeah, basically.

Scott:
Yeah. What are you doing with that? What are your assets and debts and what are you doing with the excess savings right now?

Mackenzie:
Yeah. So in terms of assets, I have a Vanguard… words escape me currently. A Vanguard index fund, yes. The VTSAX. And I recently put basically the sum of what we got for the COVID payments into that. So started off with 5,000. And then I have a government 401k. So that’s the thrift savings plan or TSP, and I take the complete match on that every month. So that is 5% I think. And then in terms of debts, I don’t have any. My parents have been very generous in helping me out, and then just combined with working a little bit to pay for stuff. I cashflow college and my vehicle is paid off. And I can’t think of anything else that would have accrued debt. Yeah.

Mindy:
Okay. Well, I’m hearing $1,600 a month in extra money every month. And where is that going? You’ve got some in a Vanguard, VTSAX. Is any of that going into a Roth IRA?

Mackenzie:
No. So originally before I found all the financial independence podcasts and got on this train, hoot-hoot, I was just putting it right into my checking accounts that had a debit card connected to it. And that’s all I did with it. Just sat in there. So that’s what I did the entire last year. But recently, I’ve been transferring it over to a savings account that I have that is getting around 0.8% in dividends. So yay. That’s a lot. And that’s really the only place that it sits. Yeah.

Scott:
So what’s your goal here?

Mackenzie:
Short-term or long-term?

Scott:
Let’s do both. What’s your short and long-term goals here with your finances?

Mackenzie:
Yeah. So within the next year, I would like to begin my first house hack. Listening to all the ways to achieve financial independence, that seems like the best way to do it. Credit to Scott. I’ve read Set for Life and that hooked me. And a year timeline is, I want to stop. I know I’m not a burden and I help out around the house with my mom and taking care of my little sister, but I would like to stop living here just to be free of that mindset of I can live here and have no consequences. I want to take on my own responsibilities. And I guess long-term goals is ultimately I want to make my job non essential. Not that I wouldn’t work, but I don’t like not having the flexibility to decide whether I want to.

Scott:
All right. And can I ask how old you are and how fast you’d like to get to that later point?

Mackenzie:
Yeah. I’m currently 23. I’m going to turn 24 this year. And I would be fine with any timeline, but 10 years sounds like a good spot to shoot for.

Scott:
Cool. So we need a strategy to get you to FI in 10 years. And assuming a little bit of salary growth, but not like explosion there, at least not with the government career, most likely, but a willingness to house hack. And it sounds like try some other creative things. Is that about right?

Mackenzie:
Yeah.

Mindy:
I think we can get there a little bit sooner than 10 years, Scott, based on her lack of spending, her nice nest egg and a little bit of foreshadowing, she’s going to get some help with the purchase of her house. So why don’t we talk about that for a little bit, and then I’m going to start giving you a whole lot of things to think about.

Mackenzie:
Sounds good to me. So as I said before, I’m very grateful for my parents. They’ve helped me out a lot. And my dad has decided to put down a $100,000 for my first house.

Scott:
Wonderful. Love it.

Mindy:
Wow.

Scott:
That’s a great gift and I think a fantastic boost. So awesome, awesome, awesome. Awesome for you, and great dad.

Mackenzie:
Yeah.

Scott:
Shout out to Mackenzie’s dad. Yeah.

Mindy:
So several questions around that. I am not in the Montana real estate market, but I do know that it’s not nearly as expensive as a New York city real estate market. Could you take the entire 100K and put it into an entire house? Could that be the entire purchase price of the house? And is that a better choice than taking it and making that the down payment on like a four unit property where you can have your own space, you have your own unit, while you’re renting out the other three? In a lot of cases, that scenario has the other three tenants paying your entire mortgage. So then your living expenses are none, which is the same as a $100,000 house that is completely paid for. Which one of those options sounds better? And do they even have fourplexes in your area? I guess that’s a good question too.

Mackenzie:
Yeah. So the thing about Montana is if you want to live in the middle of nowhere, I suppose you could probably get a house for a 100,000 or a one bed, one bath. But in the town that I currently live in, I’ve been looking at the market ever since I started to getting on this stuff, just seeing what I could afford in the future. And yeah, nothing reasonable less than 150,000. So I would probably have to get a mortgage on anything that I get. And in terms of the fourplex, you said, right?

Mindy:
Mm-hmm (affirmative).

Mackenzie:
Yeah. So there are mostly single family houses around here. There’s a couple duplexes that I’ve seen, but they’re getting out of my price range. Believe it or not, even with a 100,000 down, I’m skeptical that the bank would fund me with my salary. So…

Mindy:
Okay. That’s fair.

Scott:
Have you gotten pre-qualified?

Mackenzie:
I haven’t looked into that. No. ‘Cause my timeline is a year out, so I figured I would keep researching until then.

Scott:
That might be a good thing to talk about with a lender and see challenge from those assumptions. I’d imagine with a $40,000 salary, I would guess that’s a ballpark of 150 to $200,000 mortgage. Does that smell about right Mindy?

Mindy:
Yeah, I would think you’d be able to get qualified for something like that at your salary, because we’ve got such low interest rates right now.

Scott:
Mackenzie, I believe that if you have a $100,000 down and you can qualify for 150 to $200,000 mortgage, that puts you into the price range of qualifying for something between 250 and $300,000. Is that bigger than what you’ve been thinking previous to this call? Or is that about the range that you’ve been hunting in?

Mackenzie:
Yeah, I’ve been looking at rough mortgage calculators. I’m putting in my salary and the down payment and figuring how that would change it. And that’s about what they have been spitting out around 275,000. But with anything, I was figuring a good target size. If I was going single family for the house hacking would be a three-two, and recently those have skyrocketed in my area. So…

Mindy:
You said that your timeline was a year out. And when you applied to be on the show, you said that you needed a minimum of two years of tax returns to be qualifying for a loan. And I reached out to my lender and said, “Hey John, does she need two years of tax returns? I thought it was only six months, especially with the government job.” And he said, “No, she only needs the six months as long as you got a degree and you’re working within that degree.”

Mackenzie:
Okay. So if I have a degree in photography and I work for the government doing an office job, does that still apply? I used the degree to get a higher pay.

Mindy:
Oh, I’m sorry. I made a mistake. As long as she got her degree and the job is full-time W-2 right away.

Scott:
It sounds like you should go and reach out to a couple of lenders and see if that timeline can be moved up. But let’s think about this at the strategic level. Like right now, you’re not paying anything and you’re living at home. And so when you buy a house hack, most likely you’re actually gonna assume some sort of cost for living here, right? Actually, let’s walk through that. What does a 3:2 to look like in terms of rent per room from the other roommates and total mortgage cost for you in this scenario?

Mackenzie:
Yeah. Can I ask a quick question?

Scott:
Absolutely.

Mackenzie:
What would be, I guess, in terms of… because I’m a total beginner, how would one walk up to a lender? Do I just go into any bank in my town and say, “Hey, I’d like to have a conversation with you about getting a house.”

Mindy:
You should reach out to multiple lenders. And I like to do it sitting at my desk, picking up the phone or sending emails and just call your local bank, call credit unions, call big national chains, call mortgage brokers and ask them for what they can approve you at? What is your rate? What are your closing costs? As you start to ask these questions, they’ll have answers and more questions for you. And if you do all of this within a really tight time window, 30 days, I like to do it within the same week just to get it all done at once, because then I’m comparing apples to apples. The market isn’t going to change like this within a week, but it could change really drastically within a month. So you’re comparing somebody’s rates today to somebodies rates three weeks ago.
So I like to do it in a tight time window and just write it down ‘this is what this lender quoted me. This lender quoted me’ in a big spreadsheet. You’re a finance geek, right? Everybody loves spreadsheets. Make a spreadsheet of all the quotes that you’re getting. And think about who you’re talking to. “Oh, I really like this person. They were very forthcoming” or, “Hey, this person made it seem like I was bothering them.” there’s a lot to be said for how they treat you as well. But just reach out to a bunch of different types of lenders and get quotes from them for your particular situation.

Scott:
Yeah. You can phone them or after you build a relationship… When I need a loan, I just email a couple of the lenders that I already know and I say, “All right guys, nothing’s changed, but here’s my income. Here’s my credit score. Here’s these types of things. Can I get a quote for a four unit in Denver with this much down and this this projected rent roll.” That kind of stuff. And they’ll typically give me a quote back via email without a credit poll for that assuming those things are correct. And then they will verify all of that before I actually transact our offer on it.
But the process of reaching out to a lender is not very high stakes at first. There’s no consequence for calling the lender and asking them, “Hey, here’s my income. Here’s my credit. Here’s what I have down.” These types of things. “And what would a rate be? Can I get a quote, a pre-qualification without pulling my credit or anything like that around the rates.” I think this intimidates a lot of people, Mackenzie, and it’s a great question. And one that Mindy and I looked past ’cause we’ve done it so many times and it’s not a big deal to us, but it is intimidating to reach out to the lender. It shouldn’t be. Don’t worry about it. You can just call up and ask and you can try a few people.

Mackenzie:
Yeah. I’m the one with the power, right? Because I’m the one signing up for it.

Scott:
You are the customer.

Mackenzie:
Yeah.

Mindy:
Have you spoken to a real estate agent yet? Or do you know real estate agents in your town?

Mackenzie:
I know of one because it just so happens that my mom has a few rental properties, so I know who she uses and she’s a family friend, so she’ll be honest with me.

Scott:
Perfect.

Mindy:
Perfect. I would reach out to her and ask her to just send you listings that are in the two… What did we say, Scott? 250 to 300 range.

Scott:
Mm-hmm (affirmative). And look at the properties that are selling.

Mindy:
To see what’s out there.

Scott:
Yeah. Look at the properties that are selling and see what what’s out there and see what’s going on with that. Do you have any specific properties? You mentioned a 3:2. How confident are you that a 3:2 is kind of like what you’re looking for, for a house?

Mackenzie:
Well, I was thinking it because of just the ability to get roommates. And then if only having one roommate was enough for me, then we would have one extra room to put any of our stuff in because the problem that I’m running up with is that I have pets and I have a whole gaming rig. So I take up a lot of space and I don’t know how that would fit in any house with the roommate. I’d like to be considerate to what the other person would take up at the same time.

Scott:
Okay. Well, let’s zoom out a couple of years here and think about it more broadly because it sounds like you still have a lot of research and thoughts to do about what you want and what you can qualify for with that. So let’s zoom out a little bit from the tactics here, because I think tactically, you need to do some homework and figure out what’s selling. What are the options? Are there duplexes, triplexes, and quadplexes in your town that you can buy? Can you do a 4:2? Are there properties that have one huge master bedroom and a living space for the gaming rig and then three other bedrooms. Those types of things are all tactical things. I think you’ll figure out as you study the market a little bit more and look at those options with that.
But let’s think about strategy here. You want to get to 10 years to FI and you’re willing to house hack. So to me, what that says is this first one, it really is a stepping stone. It’s not a permanent residence. You’re probably only going to be there for a year or two. Well, do you plan to have the government job, let’s start there, for a long time? [inaudible 00:20:47] be doing this job for the most of the career?

Mackenzie:
I’m trying my best to figure out other solutions because the curse of running into this path, because there are many blessings, but of course there’s got to be a curse in there, is that I did a full deep dive into all of my current benefits. And given that it is a government job, what sort of salary I am going to get into the future. So in my current position, it will take me 20 years from my start date, and I’ve only put in one so far, to get to a salary of 53,000. I do not like that number. And so I am trying my best to figure out other career paths within the government job or if I can find another job entirely.

Scott:
Okay, perfect. So you’re not really in love with your job, it sounds like, and you’re willing to think about other creative career opportunities.

Mackenzie:
Yes. Currently, it allows me a lot of free time. So that is what… when you listed out the benefits and set for life, you talked about any of the government matching or any of the employer matches for the retirement accounts, the health insurance, that sort of stuff. But what I’m currently getting out of my job is that I have a stable schedule with weekends off and government holidays. So it allows me a lot of time to pursue other things. So that’s the struggle that I’m having with. If I got another job, would it eat up all that time for the money returned? And is that worth it if I could work on other things with this one?

Scott:
I love this question and here’s my reaction to that. You’re not in love with this. This is not a high paying job. It has no upside downstream. And I think that in general, you are in a great position. You’ve got 33,000 in savings. You are thinking about buying a property. You’ve got all that. I think that this is a perfect position to think about… you are working full-time and you have weekends and government holidays off, but you’re not going to start a business or generate meaningful income in most cases. People can do that, but it’s a rare exception in my experience, the folks who make a ton of money on the side without some sort of specific skill set with that.
And to me, it seems like a better strategy if you’re not in love with the job and those types of things is to really think about that career and say like, “Hey, how do I get to a place where I can actually get a salary that could scale, maybe like a real estate agent or a notary or something like that, as some sort of work, I put myself in a position to test that out and move into something that’s much higher paying” or can I put myself in position to get a much higher paying salary? And I want to go back and learn how to code and become a software engineer or those types of things.”
With a 10 year horizon and a willingness to rethink and zero base everything, there are lots of options, I think, that can get you to a $100,000 in annual income within a three to five-year period with much higher probability of success here. Or you can try the entrepreneurial route. But I think you’re thinking about things the right way. How hard are you willing to look for these opportunities? Or what have you thought about with this kind of stuff?

Mackenzie:
So, given that I flew through all of you guys’s episodes and now I’m up to dates and just look for the Monday and Friday releases, I have moved on to other podcasts to spend my time listening to, and one of them is ChooseFI. And one of the things that they talk about a lot on there is the certificate program specifically with Salesforce. Yeah that’s right. Isn’t it Salesforce? So I have just started their five day challenge where you get basically all the information about that. And I’m going to see if it’s a good fit. It’s a six month certificate program that these projected a 60 to 80,000 beginning salary.

Scott:
Perfect. That’s awesome. So within six to eight months, if you put your heads down and go after it, you can double your salary effectively, or at least increase it by 50%, and probably with good career prospects in the five years following that change. Is that right?

Mackenzie:
Yeah. And it kind of looks like a [inaudible 00:25:05] mind there for a second. Yeah. Yeah, I think with all of the information-

Mindy:
Yeah. I don’t know what this is.

Mackenzie:
Oh yeah. She’s looking up right now. All right, here we go.

Mindy:
I was looking it up.

Mackenzie:
Yeah, just the lowest salary I’ve seen with that job starting out is 53. So it would still be a couple of years ahead of my current pay grade raise. So I don’t really see many downsides unless I get through the training and it’s not a good fit in terms of enjoying the job at least a little bit.

Scott:
Love it. I think it’s fantastic. Look, the four levers in finance are earn more, spend less, invest or create. And my belief right now, based on what you’re telling me, is that earn more is the number one place to begin thinking about this? You’ve got no debt, you’ve got the savings account. This is a perfect move. I think that taking a risk in your career or at least exploring some new options makes a ton of sense if you’re not in love with your job and know that the game you’re currently playing will not maximize that upside. You’re not far enough along to have any meaningful vesting interest in the pension or anything like that, or those types of perks that come with government jobs in many cases.
So this to me is a perfect way of strategically thinking in very high probability with that. You’re not spending anything, so there’s no budget to cut with $400 a month for this. So to me, that suggests that the areas of opportunity are going to be in earning more income and then creating or investing. But I don’t think right now, based on what I’ve heard, do you feel like you’ve got an entrepreneurial skillset? Do you feel like you’ve invested a lot of time learning about entrepreneurship or that you would be willing to or wanting to take a crack at a business or a serious side hustle?

Mackenzie:
Yeah. I go back and forth on that because I have a lot of hobbies that could be turned into a side hustle, but none of them seem scalable. I knit and I thought about… for a time, I was like, “Oh, I make these hand knit blankets, really soft. People seem to like those so I could sell those, but it’s a lot of time put in.” I game, so there’s a big opportunity for doing gaming YouTube videos or streaming. And I play music. I actually just yesterday released my first album. That was kind of more for myself. So there’s a lot of those options where I could make money with it, but I don’t know if that would sour my love for the hobby. And I’m not sure if I want to take that chance.

Mindy:
The gaming YouTube videos was my first thought after you said that you’re a gamer. Are there currently… and I’m not a gamer at all, everybody knows that. Are there currently female game YouTubers out there? Because I just hear about the guys. I mean, gaming is, “It’s really male dominated.” And I don’t know why that is, but I mean, I know that I don’t like video games. My daughters both love them. So I would much rather have them watch a female game YouTuber to see that it can be done. I’m really stumbling over all of this, but you know what I’m saying? Like, if that’s an opportunity, that could be a really interesting opportunity. And you already like playing the game. Isn’t there a thing where people just watch you play video games.

Mackenzie:
Yeah. That would be an option if I got into a house that had better internet. That really is the limiting factor here. But my old place, I was on satellite internet. So this is a great step up from that. At least I can play online. But yeah, it is dominated by males, the gaming sphere. And there’s a lot of different barriers to entry for women and young girls. And I don’t know if you want to get into that. It’s kind of a whole another section. But yeah, I think I could do it. It just takes the time put in.

Scott:
I think this is a low probability approach. It’s hard for me to see a high probability path to financial freedom through making videos for gaming on YouTube. I imagine that’s a very crowded space with a lot of people who are attempting to do that and are willing to lose a large amount of money in the process of doing that or make no money for that. So to me, that doesn’t smell like a good option here. It doesn’t sound like your entrepreneurial pursuits are very serious at the moment. Is that going to too far with that or is that…

Mindy:
She made an album.

Mackenzie:
Yeah.

Scott:
She made an album but-

Mindy:
Yeah. Come on Scott, she made an album.

Scott:
…. it sounds like that was for her.

Mindy:
She released an album. How many albums did you release Scott?

Scott:
We will link your album on the show notes at biggerpockets.com/moneyshow208. But you weren’t sounding like this was like a big commercial project. That sounded more like it was for your own personal interests. Is that right?

Mackenzie:
yeah. Yeah. The album was… See, the problem is, I’m still changing my mindset from before I discovered this fear because I was never the type of person who set goals. When I went to college, I was undecided. I did the first semester and took a photography class and I was like, “Yup, that’s it.” It just clicked in my head. And then I chose that and just went with it for the rest of the time that I was there. So I’ve never been a person who approaches a starting line with an end goal in mind. And I don’t know what you can attribute that specifically. But since discovering this space, it has made me a lot more determined to do stuff. And along with listening to BP Money and ChooseFI and all those, I’ve also dabbled in the real estate podcast by BiggerPockets.
And one of the first episodes I listened to was the 12 week year goal-setting episode. And they talked about close to how Brandon Turner does it is the 90 day goal challenge where you set out a goal that you want to finish in the 90 days, and then you break it down week by week and day by day until you can accomplish it. And I had been trying to complete my album for about half of last year. And in January, I found FI and started the 12 week year that first Monday that I started listening to financial podcasts ’cause I figured if I already know about it, why not start it now?
And almost made it. I didn’t have one song recorded by the end of the 12 weeks, but it works. And now I’m looking at all these different goals that can accomplish. And it’s just crazy to see how financial independence and wanting that monetary goal has made me re-look at all of my other personal goals.

Scott:
I love it. This is awesome. This is perfect with this. So here’s how I would think about this situation with this. The strategy for achieving FI I would suggest that you put together a formulaic approach. Boring, doesn’t have to do with gaming on YouTube or selling a million copies of your album. Okay. But I’ll get back to that, I promise, in one second here with this. I love the approach to take this course and try to upgrade your income by 50% to a 100% over the next six months with that thing. I would make that the top priority. And I continue to think about that house hack with this. I think those are great fundamentals. They’re going to move you. You’re not going to get rich real quick with that, but that is a really good one, two punch in moving towards your 10 step target or your 10 year target of FI. And you keep doing that and you keep saving at this rate. You’re going to be able to dump a lot of money into index funds and build a solid real estate portfolio if your house sack a few times and get your numbers right.
In addition to that, if you are very driven like this, I love that. That’s the perfect way to approach it. With these businesses that you’re suggesting, they’re long shots. It doesn’t mean that they’re bad, but nine out of 10 businesses fail. And so to me, the answer to nine out of 10 businesses failing is start 10 businesses. So this is perfect with that. So what I would do then is I would say, “Okay, every 12 weeks…” perfect, like you’re doing, “… I’m going to either double down on one of my things that seems to be working.”
Maybe I’m just being mean and a little silly with this, and your album is going to sell a million copies with that. In which case, you need to double down with the music. I’ve listened to, perhaps she’s really wonderful with that, right? And so you would know after you release it, whether that’s the time to go and double down and move on from that or pursue another angle. Or maybe it’s not even like, “Hey, I don’t really care about the money on this one. I’m just doing it because I love it, and I think it’s fun. It’s part of something I want to develop with that.” But if it’s a financial and a business outcome, maybe that’s a good framework for approaching it with 10 businesses over the next two and a half years, one every 90 days. What do you think about that?

Mackenzie:
Yeah, I think that’s great way to look at it because with the house hacking and increasing my W-2 income hopefully with the certificate program, those are, how you two put it, tried and true ways that I can improve it. And any of my hobbies that I try throughout the 90 day goals, if it gives me returns, great, if it doesn’t, I accomplished something that I wanted to do anyways. So it’s a good deal.

Scott:
That’s right. Yep. And I have video game goals every once in a while inside of those 90 day goals as well. I’m a little bit of a gamer as well. So sometimes I’m like, “I want to get my rank in this game up to this level,” or whatever, “… in the next 90 days.” So you can put those in there. That’s perfectly legit. You got to have a hobby, and I love those things. And if it has the opportunity to make money, all the better with that.

Mackenzie:
That’s actually one right now.

Scott:
Perfect.

Mindy:
What is Salesforce?

Mackenzie:
Salesforce? I actually just heard about it… what is it? Thursday today, and heard about it on Sunday, I think is when I listened to that ChooseFI podcasts. So I’m still in the beginning of research, but it’s a CRM, customer relations manager I think is what that stands for. And what you would basically do is you manage a business’s means of communicating to customers, managing their data what they collect on customers, that sort of thing, sales that they have, relationships and when people buy stuff, how they buy stuff, that sort of thing. And you’re the behind the scenes person who fixes all the problems magically, taking spreadsheets in and putting answers out, from what I can understand so far.

Mindy:
Okay. So this would require a change of employment?

Mackenzie:
Yes. I’m positive, the government is not on top of it to employ something like that. However, all of our systems, there’s a few of them I open and it’s like, “I am traveling back to 2002.” But yeah. It would be change of employment.

Mindy:
My husband work for the government too. So… Okay.

Mackenzie:
It’s an interesting experience.

Mindy:
So, is this a work from home type of job or is this a ‘I’m going to have to move someplace’ kind of job?

Mackenzie:
I think it depends on who you hire with, because some of the positions are remote and some of them, you go into the company that you are hired onto.

Mindy:
Okay.That might change my-

Mackenzie:
So that basically what it is, is taking a person, say I’m the employee, and the business uses Salesforce, their products, to manage customer relations. And then people see that I got the Salesforce certificate, businesses do, and they pull me in specifically to their company to help work with them on that specific customer relation.

Mindy:
Okay. So this is going to change my advice a little bit then. If you don’t know if you’re going to be living in the same city in the next three years, I may not want you to buy a house right now. On the other hand, if you bought a house now and you were able to comfortably afford the mortgage payment on the current salary, you could get your one-year owner occupancy requirement that most loans have out of the way while you’re doing your Salesforce stuff. You can keep it as a rental, move out to wherever you’re going to be hired at, or live there and work remotely. But if you need to move, then you’ve already got your owner occupancy requirement. You move, you buy another house and repeat, repeat, repeat, and create Mackenzie’s real estate empire.

Scott:
Yeah. I think I love that Mindy. I think if you’re going to do this what you just described it maybe move, then that ups the stakes for making this next property, if you purchase one in your town, really an investment property, even if it’s not really meeting all your lifestyle goals necessarily with that, because you’re going to be moving in a year, if that’s the option and you’re going to need it to be cash flowing more than you’re going to want it to be your perfect house.

Mackenzie:
Right. So then on that, I guess, given that I can improve in both of the areas, getting the house hack and getting the job with higher paying salary, if those deadlines butt up against each other, would you suggest one way or the other, prioritize the house hack on my current salary or try to pursue the higher salary and move.

Mindy:
I would pursue the higher salary and move and keep an eye out on the real estate market in case something amazing pops up. But with you making twice as much potentially on the low end, that’s the better play in my opinion. Because you can’t… I mean, you’re saving 99% of your salary now, you could save 199% of your current salary if you doubled your salary and we’re still living at home. You’re probably not going to save 199% of your salary, but it’s a better play to generate more income in my opinion.

Mackenzie:
Okay. That’s good to know.

Scott:
Yeah. I completely agree. I think that the strategy here is income and career. You’re saving plenty. You’ve got a good approach for the investment approach with this. I think you’re thinking about all these things the right way. You’re clearly educated on the subject, thanks to BP Money. You’ve got some entrepreneurial stuff. You’re setting goals with all this kind of stuff. Go take some shots there, I think, and think about on the real estate side, if you’re going to be in a place for a little bit of time, then the house hacking is the perfect opportunity. But right now, it’s not really that much bigger…
House hack is great. I think that’s the best way to start. But it’s not really that much more advantageous than living for free with that. So it could actually cost you more money to house hack in the short run, if you’re not careful. But if you move away, then it’s almost certainly going to be the best option for that as well. And so that timeline, I think, does change the house hacking strategy part of that.

Mindy:
Yeah. I would definitely keep an eye on the real estate market. Especially do some research and see what our house is selling for currently. And then you know when a good deal comes on the market, if you already know what everything’s going for, when a good deal comes on, you’re able to recognize it and act quickly. Maybe some smoking hot deal comes on that makes sense to stay there for a couple more months before you transfer out. Also the owner occupancy agreement or the owner occupancy requirement has some leeway in it. If you get a new job, that’s more than a 100 miles away, you can leave and not be penalized.

Scott:
I think it’s all about intent and you can intend to want to move within a year. I don’t know the nuance of the law, but I imagine it covers like, you can’t just get the property and then move immediately afterwards, if that was your plan all along. I think that’s getting dangerous to close to mortgage fraud. So if your intent is not to live there for a full year and not have that commitment, then I’d be careful about that one. I don’t know, but that’d be my reaction there.

Mindy:
No, that’s true. And I’m thinking of her buying the house right now. She’s just starting to look right now. And if she finds a house in three months, then three more months later, she’s got a new job, that might not work out. You’re right, Scott. Thank you for bringing that one up. We have not talked about the big R yet. The Roth. The Roth IRA, the Roth. You said that your TSP is split about 50-50 between traditional and Roth.

Mackenzie:
So I actually had to do a lot of research into the TSP because believe it or not, it’s funky, like anything else government related. So they match 5% of which I have taken since I switched to a permanent position and they automatically contribute 1% whether you want it or not. And that is subject to a vesting period of three years. So if I leave before I hit the three-year period, I don’t get to take that 1% with me, but I get to take my other four. So that was a nice little thing. And it is set up so that I have 4% going towards the Roth currently and 1% to traditional.
I did that because I’ve heard that Roth is better, and I didn’t know anything else when I set it up. But I didn’t want to be all into one. But one of the big questions I had for you guys is if it would be better for me to open up an individual Roth IRA and just fully switch my TSP over to traditional sense, what I take out anyways has to be an equal balance of the both accounts when I withdraw whenever that happens.

Mindy:
Ooh, that’s a really good question. Okay. I’m going to answer this in a bunch of different ways. So yes, I think you should open up a Roth IRA. I think you should work on maxing that out for as many years as you can. As we said with Kyle Mast on episode 200, he, in almost all instances, recommends the Roth over the traditional because we have been giving out a lot of stimulus checks and pumping a lot of money into the economy and there is almost assuredly a period of inflation coming our way. And one of the easiest things to cut is a Roth program. Of course we can’t predict the future, but he believes that the Roth program could see some cuts or even some pullbacks. And that’s a pretty easy thing to do.
So as long as you can contribute to a Roth, that’s a really great plan. After listening to him on episode 200, I’ve actually changed the way that I contribute. And I am all Roth right now as well. So I would love to see you get a Roth IRA right now where you can max out up to $6,000 a year. I like the way that you’re thinking about the split between the TSP and the Roth. So Scott, what do you think about transitioning her TSP contributions to 100% traditional instead of Roth to even it out a little bit?

Scott:
I think I’m in the Roth camp here. I think that the Roth has so many advantages for someone starting young with this kind of stuff. You don’t earn a lot of income. You can’t be in a high tax bracket with this kind of stuff. So saving money on the taxes with the pretax stuff just doesn’t make sense right now. And it probably still won’t even make sense when you make 60 to 80 at the big raise that you’re going to give yourself coming up here shortly with that. So to me, I think the Roth is… I think that the balance can make some common sense when you’re trying to think about it with those kinds of things.
I think if you zoom out and think about 30 year or the 10 year plan, I like the Roth. I put a 100% of my contributions into the Roth, and I’m in a higher income tax bracket with this stuff today just because I think inflation is going to occur. I think taxes are going to be higher in the future and all that kind of stuff. So I like the Roth. I’m all in on the Roth for personally.

Mindy:
I just opened up the show notes on Kyle’s episode ’cause I wanted to get his quote right. He said, “Think of paying the taxes on your Roth contributions as an investment in self.” And I just thought that was so brilliant. I am paying… I mean, you’re in probably one of the lowest tax brackets. You’re paying taxes on that money now and it’s growing tax free until you’re… when can you access it? 55 or 59 and a half or something. So you’ve got 30 years of tax free growth potentially. I wanted to see what Scott said and I should have just known that he’s Roth cause he’s Roth right now. Yeah, I wouldn’t alter your contributions except to maybe put it all into a Roth if that’s possible.

Mackenzie:
Yeah, I think that’s entirely possible. Yeah. The main thing was funky. I guess it hasn’t been seen in regular 401ks. But yeah, when you hit the retirement age and you’re drawing from it, no matter what you’re paying taxes, because you either have the employer contribution [inaudible 00:48:09] or if you had put in a mix of traditional and Roth, they pull out a proportional amount from what the balances are. So I guess that was my main [inaudible 00:48:26].

Scott:
Do you have to put it in the pre-tax one in order to get the match?

Mackenzie:
Not that I know of. I looked at my balances and it looks like the employer matches is based off of both of them.

Scott:
Yeah. To me, I think that the fact that the employer… you’re saying the employer contribution piece. Even if it’s going into a Roth is going to be taxed upon distribution at the end state whenever you withdraw from the account. Right?

Mackenzie:
Correct.

Scott:
But the gains are not going to be taxed. Or they shouldn’t. That’s the point of the Roth is that the gains shouldn’t be taxed. So let’s say that your employer is contributing 5% to your account here. And that’s going to be $400. No, it’s going to be $200. What am I doing? I’m doing terrible math here. 10% is 4000, 5% is 2000. There we go. Wow. All right. So they’re contributing $2,000 to this plan. All right. In 30 years you put in that 2000, it’s going to double every seven years if it’s like the rule of 72. So you’ve got two, four, eight, 16…

Mindy:
32, 64.

Scott:
I have four compounding periods. So two, four, after seven, 14, eight, then 16, add, 21.

Mindy:
32.

Scott:
32. So you have 32,000. You’re going to withdraw that all tax free. And then you’re going to pay tax on $2,000 in income. So at the end state, it’s just like it’s inconsequential from the income tax perspective relative to the benefit there, versus you save, in this case, you put it into the pre-tax. So now you’re putting in 2000 pre-tax, you’re saving 200 bucks in taxes right now. And that’s going to grow to 32,000 over the years, and then you’re going to pay tax at 40% of that 32,000, right? To me, there is… I’m probably doing something here. I’m trying to get the mental math right. But the example there, it seems like so much more tax advantage to put it into the Roth for me in this circumstance.

Mindy:
Yes. I agree that you’re doing some sort of weird mental math, but I can see where you’re headed. And paying the taxes up front is a better choice. So I would like you to consider going fully into the Roth, or as much as you can into the Roth. If they insist on putting it in the traditional, then put their part of the traditional and your part in the Roth. Do you have access to a 457 plan?

Mackenzie:
[inaudible 00:51:28].

Mindy:
It’s kind of like a 401k light or a TSP light. Government employees can contribute to it if it’s part of their retirement package. But when you separate from service, you can withdraw the money from that account immediately. And you’re not paying any penalties, you’re just paying taxes on it. So you can reduce your taxable income, which isn’t a huge deal for you right now, but then you have access to it right away.
So you could, if it was an option for you, contribute as a government employee, and then when you separate from service, maybe you separate from service and you go travel a little bit and you can pull some of that money out or leave it in there and let it grow. It doesn’t grow tax free. You pay taxes on the other end of it, but it’s another way to contribute to the retirement accounts. So if you were married to a computer programmer who was making $150,000 a year, it’s a great way to reduce your marital taxable income by contributing to that as well. And I don’t know, is there a Roth 457 plan as well, Scott? Are we really getting into the weeds here? I think we are.

Scott:
I have no idea if there’s a Roth 457.

Mindy:
I think somebody said there was. So that’s an assignment for you Mackenzie. Read through and see if a 457 plan is an option for you. If it is, listen to the millionaire educator episode that we released recently… I guess not that recently. And he talks about the 457 plan. He also has a really great article about the 457 plan. And we’ll link to that in the show notes for this episode, which can be found at biggerpockets.com/moneyshow208. Scott, do you have any other suggestions or assignments for Mackenzie to look into before we let her go?

Scott:
Yeah, I think the last thing here is, look, the game is you got to increase that income. If you want to retire in 10 years, you got to increase the income. You probably need to do a couple of house hacks on the way, and you need to invest consistently. And maybe you can shorten that period considerably if one of these side bets takes off that you’re doing with that. I love the goal setting. I think you’re doing everything right here. The last thing I think is some sort of strategy of what to do with all of that cash and savings. You’ve got a really strong emergency reserve. Right now, it is 10 years of expenses in savings. Even if you move out and start spending 2,500 a month, you’ve got over a year in savings.
So I think it’s time to think about like, “Hey, I got some excess here. Probably don’t need to be dumping more cash into that. I can probably begin thinking about investing that, even if it’s after tax or something and maybe begin sliding a few of those chips in at a time.” No big moves, but thinking about how to either use that to fund or accelerate one of your 12 week goals, putting that into an investment or dumping it into stocks or whatever. But I think you’ve got a lot of cash and it’s time to figure out… you got more cash coming in than what you know what to do with, is what that signals. So I think that would be a good thing to write down what you want to do with cash going forward as well. That’s a good problem. That’s a sign that you’re doing all the right things. Yeah.

Mackenzie:
Approved. That’s great.

Scott:
I love it.

Mackenzie:
Yeah.

Scott:
Mindy has a sticky note. Yeah. I’m with that. So yeah. I think a Roth would be a great option.

Mindy:
Invest in your Roth. I do think that given your age, having the Roth and all of the years of tax-free growth that you have ahead of you is just a no brainer. I really love the Roth plan. And you have to have earned income in order to contribute to the Roth. Let’s say in 10 years, you decide, “Oh okay, I don’t want to work anymore,” you can no longer contribute to it, assuming that it’s still available. So that’s another reason to contribute to the Roth right now. So, okay. Sorry, go ahead.

Mackenzie:
The risk of sounding [inaudible 00:55:44]. To open a Roth, you just go to a brokerage firm, right, on your own? Or Fidelity.

Mindy:
Yes. You can call up Fidelity, or go to Fidelity and open up an account on their website.

Scott:
Yeah. You can do this through Vanguard. You can do it through Fidelity. You can do it through E-Trade. You can do it through… I forget what I had. I used to have Scottrade because I liked… that was Scottrade, but then they sold to some other firm. And now I have to work. So I don’t remember the name of it, but yeah, they’ve got one there. I think Mindy and I would probably be agnostic about the brokerage there. Well, you guys can call us to sponsor us and then we’ll be your favorite. But I think in general, you can just Google any one of those and they’re all going to be good choices, I think, for the Roth.
And it will be as simple as you Google it, you choose one of the big names that’s got a good brand and all that kind of stuff. And then all you’re gonna do is you’re gonna go through some paperwork and some signup flows, and then you’re gonna connect your bank account and transfer the money and invest it in your index fund or whatever it is that you would like to invest through that account, just like you would through like a Robinhood app or one of their after-tax brokerage accounts. So mechanically, you will not find it too difficult if you set it up through any one of those things.

Mindy:
And Mindy does have a favorite, it rhymes with Fidelity.

Mackenzie:
Fair enough. Fair enough. So would it be… for me, since I already have the [inaudible 00:57:19] brokerage account in index fund [inaudible 00:57:24] or is there a benefit to [inaudible 00:57:27].

Mindy:
That is a really good question. And I don’t know that I have an answer for it. Scott…

Scott:
The question is, do you go with Vanguard? What was it? Can you repeat it one more time?

Mindy:
She already has a Vanguard index fund. Is it better to just keep everything in one pot or should she split them between the two providers?

Scott:
I think if you go with Fidelity, they’re going to have an equivalent to Vanguard. The expense ratio is going to be like 0.06 versus 0.07. It’s going to be almost indistinguishable, I think, between some of these things. And Mindy likes Fidelity because she thinks that has better customer service, I believe. I have not experienced that yet, but I’ve heard that to be the case in some cases. But I think it doesn’t really… the index fund is so inherently diversified that the provider Fidelity versus Vanguard diversifying amongst them to me has no real advantage.
So you could just stick with what you know or whatever. It’s an index fund. It’s matching the market with those types of things. If you’re thinking about diversification among index funds, I would really think instead of… Hey, VTSAX is what you have, right? That is the entire market. All big and small stocks, right? Another alternative… and this is not investment advice. We would never give a specific one. But another alternative would be VOO, which is basically the S&P 500 version of it with larger companies. They’re going to perform almost exactly the same over a long period of time where they have historically, who knows what the future will bring. But if you’re thinking about you want to diversify amongst index funds, you could pick a small cap, small companies index fund, and a large company index fund, or the whole market index fund. But you’re about as diversified as you ever going to get with VTSAX, at least among stocks. So I don’t think there’s any reason to think about more diversification amongst that personally.

Mackenzie:
Okay. Sorry for jumping around. I know we have moved on from the TSP, but another one of my questions was they automatically invest you [inaudible 00:59:38] but you can get to a specific area on international stock market, that sort of thing. So would it be worthwhile [inaudible 00:59:48] for switching it over [inaudible 00:59:52] or leave it as a lifestyle?

Scott:
So I would look at the expense ratios in there. Your plan should provide like, hey, this… are you familiar with what an expense ratio is in these index funds or these funds?

Mackenzie:
Vaguely. Sure. They charge you to trade everything, right? To keep it balanced and invest.

Scott:
Close. What it is, is let’s say you have 10,000 invested. The fund will charge you, let’s call it 1% of that every year to manage those funds for you within a plan. And inside of retirement account funds, those fees can get really high, and that’s taking away real wealth from you. A $100,000, that’s a $1000 every year. $10,000, it’s a $100 every year. That’s a meaningful expense. And the reason we like index funds or a lot of us like index funds is because the expense ratio instead of being 1% is 0.06%. So instead of spending a $100 on $10,000, I’m spending 60 cents on $10,000. Right? And so that’s the big advantage of an index fund over those types of things.
And so inside of these 401ks, or I don’t know about the TSP, but typically even the index funds have like 1% or whatever, and there’s a fee for the retirement account management or whatever it is. And so I hunt for the index fund inside of these accounts when I have them through my employer. And I look for the one that has the lowest active fee. So if I can get the index… I used to have one that was called like a Great-West index fund and one of our former providers simply because it was the closest thing to an index fund with the lowest management fees. And those tend to outperform actively managed funds.
That’s how I go hunting in there. And that target date funds often can have a little bit more fees or whatever it is. So that’d be a framework to begin thinking through, but to get specific, we’d have to look at all of the funds inside the plan and think about what’s in there. But is that helpful?

Mackenzie:
Yeah, that was very helpful. Yeah. All of your advice so far has been extremely helpful.

Scott:
Oh, great.

Mindy:
Fantastic. Well, Mackenzie, this has been a super fun talk. I love when people are just starting out. You’re asking all the right questions. And honestly, you’re going to be a millionaire in a minute. Actually, this is not going to be so much fun. It’s going to be the slug. Now you start your slug where you’re like, “Okay, I put in a $1000, I put it in $500 and now I’ve got $1,500 more.” It’s the slow March. But then once the snowball hits, it just starts going and going and going. Moving up, snowballs go downhill. But it’s just going to… your net worth is going to go up into the right rapidly.
And I’m super excited for what the world has in store for you. I’m going to make a note to check back in with you in about eight months and see how that Salesforce thing went. See what’s going on with your real estate journey and see how your completely Roth retirement accounts are going.

Mackenzie:
Good to meet you. I look forward to talking to you.

Mindy:
Okay. Wonderful. Well, we will talk to you soon. Thank you so much for your time.

Mackenzie:
Yeah. Thank you.

Mindy:
Okay, Scott, that was Mackenzie. What did you think of her story?

Scott:
I think she’s off to a great start. And she’s thinking about lots of the right things. I mean, this is always the fun part of the journey, right? Like she’s discovered FI, she’s gone down the rabbit hole. She’s reading the books. She’s setting a bunch of goals. She’s got no debt. She’s got a big savings account. She’s got a path to making more money and all the options are on the table. It’s just exciting to be in that position, I think. And I’m really excited to see how things progress for her. I hope some of the advice was… my advice is stay aggressive. So exploit some opportunities while you’re in this position and increase that income. Take a shot at a house hack, try some businesses with that. Right? She’s got every option available to her in the world. And I think it’s awesome.

Mindy:
Yeah. Exploit some opportunities, especially while you have this safety net of ‘your parents can catch you if you fall.’ You’re not in such massive debt that you can go ahead and try a different job and see what happens, if that’s what you want to do. So yeah, I’m super excited for her. I would like to ask the listeners if they know anything about… we mentioned Salesforce, and that seems to be an opportunity for a high paying job with very little… I don’t want to say education, but very little training and you could be making a very decent salary.
Do you know of any other jobs like this? Minimal input, maximum advantage. And if you do, please share in our Facebook group, I’m going to go and start a thread at the top of the group, asking for these really great opportunities for people who are looking for ways to increase their income. So that can be found at facebook.com/groups/bpmoney.
Okay. Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
From episode 208 of the BiggerPockets Money Podcast, he is Scott Trench, and I am Mindy Jensen saying hasta la vista, baby. Oh, I should’ve done that in an Arnold accent. Hasta la vista, baby.

Scott:
Nice. I like it.

Mindy:
Was that good?

Scott:
Yeah.

Mindy:
Did I sound like a robot?

Scott:
I was going to do something about TSP reports. That was way better. TPS, TSP, whatever. Okay. Moving on.

Mindy:
Oh, I don’t get that. TSP-

Scott:
I thought it was going to work because she has a TSP, but there’s TP… Okay. We’re moving on. Goodbye, everyone. Yeah.

Mindy:
Thank you for listening.

 

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In This Episode We Cover

  • Living at home when you’re young to save money on rent and food
  • Graduating debt-free so you can come out of college ready to build wealth
  • TSP accounts, Roth accounts, and the 457 plan
  • House hacking as a way to fund future investments
  • Looking for other jobs or side income that can help you increase your investing rate
  • And So Much More!

Links from the Show

Book Mentioned from the Show