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- [00:00]
Paula Pant
Hey, Joe, do you remember the calamity around the Y2K bug?
- [00:03]
Joe Salsihai
I do. You know what's weird is we were just talking about this literally a month ago. But to your point, I hadn't talked about it. Five, maybe 10 years.
- [00:12]
Paula Pant
Right. Once the threat has passed, and particularly if the outcome was not as bad as everyone thought, it's so easy to forget how scared we were in the moment.
- [00:21]
Joe Salsihai
That was a scary time.
- [00:23]
Paula Pant
That was terrifying. Like, we thought hospitals were going to shut down utility grid. Right, Exactly. With everything could have shut, shut down. Like, it could have been pandemonium.
- [00:35]
Joe Salsihai
People were buying all kinds of rations, like rational people buying rations for their basement.
- [00:40]
Paula Pant
Yeah, absolutely. We're going to talk about how to deal with the idea of this time it's different. Where there are all of these threats and all of these worries that we have. We're going to talk today about placing what's happening right now into some historical context. We're also completely changing the topic. Going to be talking about credit scores.
- [01:02]
Joe Salsihai
Wow.
- [01:04]
Paula Pant
And we're also going to be addressing a question on should you buy more rental properties or should you pay off the ones that you've got? So we're going to be covering a really wide range today.
- [01:12]
Joe Salsihai
Oh, this is going to be fun.
- [01:14]
Paula Pant
Welcome to the Afford Anything podcast, the show that knows you can afford anything. Not everything. This show covers five pillars. Financial psychology, increasing your income, investing, real estate, and entrepreneurship. It's double I fire. I'm your host, Paula Pant. I trained in economic reporting at Columbia. Every other episode, ish. I answer questions from you and I do so with my buddy, the former financial planner, Joe Salsihai. What's up, Joe?
- [01:37]
Joe Salsihai
What's up with you, Paula?
- [01:38]
Paula Pant
I am just having a great time. I'm here in my office. It's bright, it's vivid.
- [01:43]
Joe Salsihai
We were just talking about how spacious it was.
- [01:45]
Paula Pant
Yeah, well, it's Manhattan sized. We'll. We'll call it that. It's Manhattan sized. Let's jump to our first call, which comes from Leslie. Paula, I love your podcast and have been a longtime listener since back in the day of J Money and you. So anyways, I'm just wondering how you reconcile this notion of this time it's different with things like climate change and economic inequality being at unprecedented levels. I'm a nerd and curious for your perspective. Thank you, Paula and Joe. Leslie, I love this question. Love, love, love this question. Because I think this is on a lot of people's minds, the notion that this time it's different. It always does feel different. I remember having a very serious conversation at the beginning of the pandemic with a good friend who was like, no, you don't get it. This has never happened before. And I was like, thank you for getting 1917, which was the last time this happened, meaning the last time we had a major pandemic. And granted, there are many factors that made 2020 different from 1917, some of which were huge improvements. I cannot imagine going through the pandemic pre Internet.
- [03:03]
Joe Salsihai
You think we had disinformation, right?
- [03:06]
Paula Pant
Exactly. Extra Dewey defeats Truman.
- [03:09]
Joe Salsihai
Right.
- [03:11]
Paula Pant
But there were also elements that made 2020 have unique challenges that the people in 1917's pandemic didn't have. And the same echoes throughout history. Like the study of history is the study of this time. It's different. When the US Left the gold standard, there were people who were worried about a currency collapse because there were many voices that said, if our currency is no longer pegged to the gold standard, then what are we? Just fiat currency. What happens when everybody loses faith in the dollar? And there were some very genuine worries that the entire U.S. economic system would collapse.
- [03:52]
Joe Salsihai
One of my favorite charts, Paula, is what's called an Ibbotson chart. And anybody can do a Google search. Ibbotson chart shows the market over a long period of time. And it goes up and to the right, but there's all kinds of jaggedness, wigglyness to the line. My favorite Ibbotson charts, and you'll find these from time to time, are ones that highlight the reason the the market went down every time. And what I love about that chart is just how prevalent this time it's different has been throughout the last hundred years, ever since the stock market crash and actually just before the stock market crash in 1929. So this idea that it's different is 100% true. It is different. And you know what? It's going to land differently. And we're going to see things happen that we've never seen before. And what's that thing about history that it doesn't match, but it rhymes?
- [04:51]
Paula Pant
Yeah.
- [04:51]
Joe Salsihai
Or some. Something about that. It rhymes.
- [04:53]
Paula Pant
History doesn't repeat, but it rhymes.
- [04:55]
Joe Salsihai
Yes. And this time it will rhyme. It will totally rhyme. Now, does that mean that if things get bad, let's say we go into a recession, which is what I keep reading over and over and over. Right. If we go into a recession, will things get bad and then get better? And there's unicorns and rainbows? Never. You know why? Because I think part of the human condition, Paula, is That we're going to always be worried about the next thing.
- [05:21]
Paula Pant
Right.
- [05:22]
Joe Salsihai
And about how it's still different. I mean, even during the good times, nobody understands it's the good time until it's gone. And once it's gone, you're like, oh, I wish we had six months ago back. And I wish I would have identified that we had that opportunity at the time. So it's very human to feel, Leslie, the way that you feel. It's incredibly human. I feel that way all the time.
- [05:43]
Paula Pant
Morgan Housel says that the study of history is the study of surprises. Consistently, people are surprised by what happens, and yet there is continuity to the fact that we are always surprised. Remember the Cold War? Remember when people were genuinely worried about the very real threat that we might have nuclear Armageddon, which by the way, is still a threat. It's just not one that we talk about.
- [06:10]
Joe Salsihai
And it could happen at any point.
- [06:12]
Paula Pant
Right.
- [06:12]
Joe Salsihai
I mean, look at the Cuba missile crisis.
- [06:14]
Paula Pant
Exactly. So it might have happened back in 70s or the 80s. It also might happen, frankly, tomorrow. Like just the fact that we don't talk about that threat anymore does not mean it has gone away. Unfortunately, the nuclear threat is still. Sorry to be the bearer of bad news, very, very, very much there, but it's not salient because we don't hear about it when we turn on the nightly news. The threat of cybercrime, the threat of hackers stealing identities at a mass scale, or the threat of hackers wiping out billions or trillions of dollars at a mass scale, those threats are there. The threat of biological warfare, that threat is more prevalent than ever. As technology advances, the risk that technology will be used in some catastrophic manner only amplifies.
- [07:09]
Joe Salsihai
I went last night and watched the new Mission Impossible movie. And it's funny to watch themes and movies change while the critical parts stay the same. Right? You got good people, bad people. We got to take down the bad people. But it's funny to watch now, this quote, bad guy was senient AI and it was the AI now is going to take over the world and it's going to make humanity hate each other and kill each other off. And it's funny because as I was leaving the theater, I was thinking about just how much more real that feels today than it did even five years ago that that could happen. At a time when I say thank you to ChatGPT. Yeah, to my little AI friend in the computer. I wouldn't even know what the hell we were talking about five years ago that I'd actually be doing Something like that.
- [07:57]
Paula Pant
Right.
- [07:57]
Joe Salsihai
It's crazy.
- [07:59]
Paula Pant
If you look at a very broad scale of the history of humans as a species, his name is escaping me, but we did an interview with someone, I think it was in 2022 or 2023, who talked about the development of humans, what makes us who we are. We are unique among animals in that we can make use of tools. There are some members of the ape family that can pick up a stick and use it to catch ants, which is rudimentary tool usage. But we, as Homo sapiens, are unique among animal species in that we uniquely developed technology. And throughout our history, as we develop technology, we've been able to use every new piece of technology in ways that are both creative and destructive. So with the discovery of fire and the discovery of our ability to create and control fires, we were able to use that in very constructive ways, such as food preparation, particularly meat preparation. But we were also able to use it in very destructive ways, such as burning down homes of our enemies or immolation. And then beyond fire, as we developed more and more tools, we were able to use them again in ways that are both constructive and destructive. Once we mastered picking up rocks, we could either use those rocks to serve as murder weapons by bashing in the heads of our enemies, or we could pile those rocks together and use it to create rudimentary shelter. And so what we have throughout human history is a steady stream of technological innovation in which every new technology produces threats, but also produces opportunities in equal measure. And so climate change, which is accelerated by industrialization, is a negative consequence of some of our technological advancements. And we also have technology that can help us solve and address exactly that problem. Look at Aruba, which drinks desalinated water. The entire island of Aruba drinks desalinated water. At scale, that is a positive benefit of the technological advancements that we've been able to make.
- [10:17]
Joe Salsihai
I was thinking about prescription. What does Leslie do? And it's not just Leslie, it's all of us. How do we cope with this? Right? And I remember a mentor telling me a long time ago that the only constant is that there's going to be change and that there will be threats. So knowing that that is always going to be the case, it's not going to go away. No matter how much I personally wish, as a guy who's afraid of everything, how I personally wish that I wouldn't worry about threats every day, realizing that they're going to be around was step one just giving it a name, saying, you know what? This is going to continue to happen. No matter how much I worry about it or don't worry about it, it's still going to happen. And then I started to think about turbulence when I fly, which I think I've said here on the show before, Paula, that I was a very nervous flyer. And every time that there was turbulence, I imagine the pilots are screaming in the cockpit and the plane's on its way down. And yet you talk to pilots and you talk to flight attend and turbulence happens. And planes usually don't go down because of turbulence. They go down because of mechanical failures. They go down. But you know, when a plane does go down, which is almost never, even though we hear things like Newark Airport, well, look at that. I mean, even then nothing happened, right? There's these freak accidents like we had in Washington, D.C. the horrible accident at Reagan International Airport, but it's so infrequent. But that was in turbulence, and I'm very afraid of turbulence. So I had two choices. Either don't fly or make turbulence not happen, which is ridiculous, or learn how to accept the fact that turbulence was going to happen. And for that, I actually started playing some flight simulator applications on my computer. Microsoft flight simulator. So I could see that when the flaps come down, that's not the pilots panicking, going, oh, my God. It actually means we're about to make a turn or we're trying to slow the plane down. So once I knew more about the operation of the plane, then things would happen. Now, if we're worried about the news or if we're worried about climate change, we truly can't do that. Because here I can look at the science and go, okay, this is what's happening. I think that climate change being the horrible part of what happens through the advancement, we can't do. But what we can do is we can work on our relationship with changes, right? And for me, the mantra that I always have to have when I'm about to step on a stage where I'm afraid, or I'm about to even fire up the mic here to do this show and I'm afraid, or I'm writing the next chapter of a book or whatever I'm doing, I'm always afraid. So I have this mantra that was the name of a book in the 1980s. I actually saw it as a Nike ad before they said, just do it. I always have to tell myself, feel the fear, but do it anyway. And I didn't come up with that. That was again the title of a book. But it's a fantastic phrase. For me, feel the fear, but do it anyway. It's okay to feel the fear. It's always going to be there. It isn't going to change anything. And just by telling myself that I'm able to get through the day and do the things that I need to do that I frankly want to do, I'm afraid of it, but I still want to keep moving forward. But the second thing is I also have to. I had to dig into the fact that things were always going to change. And I think a great book for that and a very short book. And you and I, Paula, we both like parables, right?
- [13:41]
Paula Pant
Yeah.
- [13:42]
Joe Salsihai
This book is a parable and it was written back, I believe, in the late 1990s by a gentleman, Dr. Spencer Johnson. Very short parable. And it's just, it's called who Moved My Cheese? And who Moved My Cheese? Is a wonderful older book because it's the story of these mice that don't know that they're part of a, an experiment. And every day they go through the lab and there's cheese in the same place. Paula. Well, then, unbeknownst to them, the researchers moved the cheese. And the way the different mice react to the cheese moving is really a great parable about the human condition. So I would encourage everyone to read that. But the basic tldr is this. Some mice sat and freaked out about it all the time and didn't do anything. Some mice openly wept in the corner and just went, oh my goodness, the cheese moved. It's always going to move. It's never going to be in the same place. I don't know what I'm going to do. And the next. Another mouse just continually kept looking for where the new cheese was said. You know what, I don't have any real choice here. I understand things are changing. I don't like the fact they're changing.
- [14:54]
Paula Pant
I don't like.
- [14:54]
Joe Salsihai
There's nothing I can do. But what these other mice are doing really is not helping me continue to cope with my day to day reality. And so I just gotta keep looking for where they moved the cheese to. How did the situation change and stay on top of it, realize it changed, feel all the same things the other mice are feeling, but just keep looking for the new cheese. And while that sounds a little nihilistic, that book, Paula, really helped me personally cope with the fact that things are always going to change. The cheese is always going to move.
- [15:23]
Paula Pant
And if you think about the constant that throughout history people have always been rightfully afraid of potential calamities Afraid of nuclear war, afraid of the decoupling of the gold standard, afraid of so many things that could have gone differently, afraid of the outcome of any of a number of wars that we fought. If as a result of that fear, those people had not invested, not built businesses, not improved themselves and their goals and their path. If people had allowed those fears, which were very legitimate fears, if they had allowed those fears to sideline them, they and their descendants would simply have not done as well. Because what we have seen as a constant throughout US History is that in spite of these very, very valid worries, the chart over the long term always moves up and to the right. The growth over the long term for a patient long term investor is always there. Throughout US History, that has always been true. And I know we are a young country and particularly our public financial markets are extra young, but we are well positioned to globally for the next century. We are extremely well positioned.
- [16:46]
Joe Salsihai
And I want to make sure that Leslie and our community hear this correctly. The advice that I dislike that I want to make sure that people know that I don't think Paul is saying, and I'm certainly not saying, I'm not saying don't worry. Yeah, hey, that's a waste of time. You're going to worry. You have to be okay with the fact that you're going to worry. And it's actually good that you worry. It shows that you're actually a thoughtful human being, right? With feelings and emotions. You're not a spreadsheet. You're actually living, breathing, and being in the moment when you worry. So I don't want people to hear. Well, Paul and Joe said don't worry. No, no, no, no, no, no worry. Feel, feel, feel the worry. But you got to keep moving.
- [17:31]
Paula Pant
Yeah. So thank you, Leslie, for the question. Up next, we're going to tackle a question about credit scores. Because sometimes you think you're doing everything right and yet your score drops. What's up with that? We're going to answer that. Next summer's on its way and I'm excited to be outdoors. I live in Manhattan in an apartment, so when I go outdoors, I'm going to parks, I'm going to public spaces. But I miss the days when I had a backyard, a deck, patio, a balcony even. So if you have an outdoor space, make the most of it. And you can do that with Wayfair. Wayfair has everything you need for your outdoor space. We're talking outdoor dining tables, outdoor bar stools, chairs, umbrellas, patio cushions, outdoor fireplaces and heaters, garden Statues, rugs, Adirondack chairs. All the items that will make your outdoor space a place that you want to enjoy for the whole summer. Wayfair has a massive selection for every style and every budget. I've used Wayfair to make the most of the indoor space that I have inside of my Manhattan apartment. So I have a lot of shelving from them, shelving in the main walk in area, shelving in the bathroom. But for you, if you've got an outdoor space, I mean, everything from garden trellises to pool lounges to trampolines, it's all there. And there's free and easy delivery, even on the big stuff. Shop a huge selection of outdoor furniture online this summer. Get outside with Wayfair. Head to Wayfair.com right now. That's W-A-Y-F-A-I-R.com Wayfair Every style, every home. So I just got off of a call with our fractional coo, who's somebody who I brought in in order to help better develop the systems inside of our company. And we were talking about all of the things that need to be done, all the roles that need to be filled. It's clear we need to be doing a lot more hiring. But the thing is, hiring is time consuming and if you get it wrong, it has huge consequences. And so you need two things. You need to hire quickly, but and you also need to hire right. So you need the right people fast. So how do you do that? How do you find amazing candidates fast? Well, use Indeed because Indeed Sponsored Jobs helps you stand out. So with Sponsored Jobs, your post jumps to the top of the page for your relevant candidates. And that means that Sponsored Jobs posted directly on indeed have 45% more applications than non sponsored Jobs. And there are with Sponsored Jobs, no monthly subscriptions, no long term contracts, and you only pay for results. And when we're hiring, we're doing so because we're already overloaded. So this is incredibly helpful. In fact, in the minute I've been Talking to you, 23 hires were made on Indeed. There's no need to wait any longer. Speed up your hiring right now with Indeed and listeners of this show will get a $75 sponsored job credit to get your jobs more visibility@ Indeed.com Paula just go to Indeed.com Paula right now and support our show by saying you heard about Indeed on this podcast. Indeed.com Paula Terms and conditions apply. Hiring Indeed is all you need. What does the future hold for business? Will inflation go up or down? Will rates rise or fall? Will we go into a bull market or a bear market? We don't know. If you ask nine experts, you're going to hear 10 different answers. But over 40,000 businesses have future proofed their business with NetSuite by Oracle. It's the number one cloud ERP bringing accounting, financial management, inventory and HR into one unified business management suite so that you have the visibility and control that you need to make quick decisions with real time insights and forecasting so that you're closing the books in days rather than weeks. If we needed something this robust inside of afford anything, this is what we'd use. Because whether your company is earning millions or even hundreds of millions, NetSuite helps you respond to immediate challenges and seize your biggest opportunities. Speaking of opportunity, download the CFO's Guide to AI and Machine Learning at netsuite.com Paula this guide is free to you at netsuite.com Paula netsuite.com Paula P A U L A welcome back. Our next question comes from Melanie.
- [21:40]
Leslie
Hi Paul and Jo, this is Melanie. Thanks so much for everything you do. I have a question about credit scores. My credit score took a serious hit when I had to take out a couple of loans for a car and some unexpected home repairs. Recently, my credit score was moving up and reached 778. Then I get an alert that it decreased. This week it dropped 21 points. And the reasons listed are my total available credit went up, my total balance went down, my credit usage went down, and my age of oldest accounts went up. All those things seem to be positive in terms of building credit. So why did my credit score take such a hit? Are credit scores just a racket? Thanks.
- [22:19]
Joe Salsihai
I figured it out.
- [22:20]
Paula Pant
Ooh.
- [22:22]
Joe Salsihai
Well, initially, Melanie, when Paul and I were discussing your question earlier, I just wanted to say that credit scores are a racket and we can get into that. And I don't think they're necessarily fair and we can get into that. But also, I've seen credit scores move for weird reasons. So that was going to be my answer. But then when we were just listening to your question again, I think Paul and I figured it out.
- [22:45]
Paula Pant
Oh, should you reveal it now or should we leave it as a cliffhanger?
- [22:51]
Joe Salsihai
Oh, well, do you have a thing you think it is? You have a hypothesis?
- [22:55]
Paula Pant
Well, so here's what I want to do. I want to, for the sake of everyone listening, establish what goes into a credit score. Because there are some people who are probably hearing this who don't know what the factors are that would affect a.
- [23:07]
Joe Salsihai
Credit score, how the sausage is made.
- [23:09]
Paula Pant
Right. Okay, so why don't I do that? And then. So we're going to cliffhanger what happened with Melanie until the end. Stay tuned to find out what happened to Melanie's credit score. Credit score. All right.
- [23:27]
Joe Salsihai
Wow, you thought about that.
- [23:31]
Paula Pant
So for everyone listening, there are five factors that impact your credit score. The single most important factor is your payment history. So if you make on time payments, duh, that's going to be the single biggest, most important factor. If you are late on payments, how late you are, basically there's severity and there's frequency, right? So the number of times that you have been late on a payment will show up on your credit report. And how late you are also shows up. So, for example, are you 30 days late? Are you 60 days late? Are you 90 days late? Are you over 120 days late? That's going to show up on there as well, as did it happen on a credit card just once or has it happened five or six times over the span of the last couple of years? All of that plays a factor. So your payment history constitutes about 35% of your total FICO score. That's factor number one. Factor number two, the amount that you owe. Credit scoring companies think that, and this is, in my opinion, erroneous thinking, but they believe that if you are using the maximum amount of credit that you can use, that that reflects badly on you because it shows that you need the money. And so let's say that you have two credit cards, and let's say one credit card has a $10,000 limit and the other credit card has a $20,000 limit. So between your two credit cards, you have a total of $30,000 available to you that you could be taking out at any given point in time. And just for the sake of, we're going to assume that you have no other debts. If you are using, let's say you're a big spender and every single month you run up the balance on both of your cards, 10,000 on one and 20,000 on the other, but you pay the entire balance in full at the end of the month. So every single month you're spending 30 grand on your two cards, but you're also paying off 30 grand on your two cards. And so you're closing out the month with a zero balance. You have no month over month balance. You pay $0 in interest. Well, guess what? Unfortunately, because you are using so much of your available credit, it's still going to look bad. So this is known as your utilization ratio, and you want to keep it ideally under 20%. So in this example, you want to be spending less than $2000 on the card that has the 10,000 limit, and you want to be spending less than 6000 on the card that has the $20,000 limit.
- [25:59]
Joe Salsihai
And the way to think about this, because I kind of struggle with that, I have this credit. Why don't they like me if I use it? Like, what the hell's that about? Well, here's a great analogy. At least it was great for me to think about this, which was think about the way that investors look at stocks. The number one thing that any investor will tell you is a stock home run, Paula, is free cash fl free cash flow and the ability to take future actions is great. These companies then have done a lot of work. These credit companies have done a lot of work and showing when people start to get into trouble and people start to get into trouble when they don't have much free cash flow. So that credit line that you have, if it's open, it represents your ability, even though it isn't really your money, it's your ability to go do things in the future to maybe get out of problems today. But maybe an early warning sign that you might be having problems today is when you use most of the credit that you have or a big percentage of the credit that you have available right now. So your credit will get dinged some. But think of it like an early warning sign. Right. They're just looking for early warning signs, which, frankly, is what your credit score is, is an early warning to your creditors about what potential risk they might be getting into by loaning you more money.
- [27:22]
Paula Pant
Exactly. And the utilization ratio gets reported on one particular day of each month. So whatever your balance is on that day of the month is what feeds through to the credit reporting agencies. Again, we go back to people say, well, I pay my bill off in full at the end of every month. True. But if you've run it up throughout the month, that's the number that gets reported. There are a couple of workarounds. One is that you could call your credit card and ask for an increase in limit. The other is that you could. When I was in my 20s, I used to do this. I would pay my credit card off weekly, sometimes even daily. I'd use the credit card because it offers better consumer protections than a debit card, and it also offers better rewards than a debit card. But I would manually log into my credit card account. At the most extreme, I was logging in daily or two, three times a week. Other times I was logging in once a week and just paying off the balance. And so that way, no matter what day of the month that report hits the agencies, I know that I've got a low balance relative to my total credit limit. So those are the two ways. Increase the limit or just pay off the bill more frequently so that that limit is constantly lower. Those are the two ways to game it.
- [28:40]
Joe Salsihai
Yeah.
- [28:41]
Paula Pant
So this particular attribute that we're talking about, the amount owed or the utilization ratio, accounts for 30% of your overall score. So it is almost as important as whether or not you make on time payments. So which is kind of nuts that they attribute that level of importance to it. But there we are.
- [29:00]
Joe Salsihai
It makes total sense to me when I think about if you've used almost all of your credit up, anything bad happens, Paula. It could be bad.
- [29:09]
Paula Pant
Exactly. So those are two factors. The third of five factors is the length of your credit history. So how old is your oldest account? If you have a very, very old account, don't close it, keep it open, put a Netflix subscription on there and auto, pay that off every month and just keep it active, even if you have to do it in a very perfunctory way so that you have the age of oldest account be old. And Melanie knows this because she talked about this in her question. She said her oldest account got even older. The other factor is new credit. So have you recently applied for credit? Particularly, have you had any hard inquiries? If you have recently applied for credit, it actually adversely affects your score because it makes you look desperate. It makes you look like you need the money. Like, think about it. If a person is suddenly applying for lots of new credit, you need a new credit card, and you also need a car loan. It just. Whether or not that's true in the eyes of the credit reporting agencies, applying for a bunch of new credit lines in a short period of time makes it look like you need the money, which makes you look like a less reliable borrower. So that accounts for 10% of your score. And then the mix of credit that you have, installment loans and revolving loans, that accounts for another 10% of your score. So credit cards are revolving loans. Like, you have a line of credit similar to a heloc, but you can use it. You cannot. You can. You could have a $10,000 line of credit and only put a Netflix subscription on there if you want to, or you can use it to buy a salad and get some shoes and, you know, all those things that you do on a daily basis.
- [30:52]
Joe Salsihai
You know how Paula likes to have fun. I'm gonna go buy a salad.
- [30:56]
Paula Pant
Buy a salad.
- [30:57]
Joe Salsihai
And some shoes.
- [30:58]
Paula Pant
Yeah, well, you know, the shoes allow you to walk to the salad store.
- [31:03]
Joe Salsihai
So having a question that we always get is which one is better? They actually like to see a mix. If you've got a mix of different things that shows that you can handle installment loans, you can handle a revolving credit. If you can handle all those that will look good on your credit report because it makes you look very credit worthy, no matter what type of credit people throw at you, I can do it.
- [31:26]
Paula Pant
Right. There are also a few different credit scores that you have. So there are three major credit reporting bureaus. There's Experian, Equifax, and TransUnion. And each of them will separately give you a score. And in addition to all of that, you also have what's known as a FICO score. And so it can often be the case that you have very different scores through each of the different bureaus. You might have a 775 with Experian and a 785 with Equifax and a 790 with TransUnion. There can be some variation there. So ultimately, your FICO score is your one true score. But all three of those agencies in tandem with one another can be used as sort of a. A check and balance. It's like the three branches of the government. They're supposed to be a check and balance against one another. And one thing that you can do when you're looking at your credit score is look at all three to see if one of them is a wild outlier. Because if you do have two that are consistent and one that's a wild outlier, then you know that there might be something that got reported to that particular bureau that might be erroneous. And you can do some further digging.
- [32:35]
Joe Salsihai
And there was a report by ABC News just a few years ago, Paula, that your credit report is. Is wrong a surprising amount of the time.
- [32:42]
Paula Pant
Right.
- [32:43]
Joe Salsihai
Looking into it and taking advantage of getting that credit report and looking through it once in a while is something you should do. And also just spending the time walking through and seeing your credit and thinking, contemplating your credit. I think also Lynn's contemplating your credit.
- [32:57]
Paula Pant
Contemplating, contemplating like meditative Joe oh, 780 then Joe oh, 8:15, how I love thee contemplating.
- [33:11]
Joe Salsihai
But really thinking about did I need to take out that loan? When I was getting my act together in the late 90s, just when I would go get my credit score, I Would look through some of the mistakes that I made. And it was really cool to see that I had definitely cleaned things up and gone in the right direction. And it was good to look back and see how I had changed my habits. And by contemplating my credit score and my credit report, I think I solidified in my brain some of the positive actions I'd taken to do better, to be better. So I think contemplating making fun of me. Right.
- [33:53]
Paula Pant
For those of you who are listening via audio, what you can see on YouTube is that every single time Joe says the word contemplating, I do like a zen. Yeah.
- [34:03]
Joe Salsihai
And then I do a weird finger in the air. I don't know how that works.
- [34:08]
Paula Pant
So go on, Joe, your contemplation.
- [34:11]
Joe Salsihai
No, that was it. That was it. So I do think contemplating it. I mean, looking over it and going, what does this tell me? It's pretty cool.
- [34:19]
Paula Pant
So speaking of what this tells you, Cliffhanger, what do you think was the cause of Melanie's score drop? Because as she said, every criteria that she listed except one. Actually, let's go through them one by one.
- [34:35]
Joe Salsihai
Oh, oh, oh, oh, oh.
- [34:36]
Paula Pant
Let's hear it. In her own words.
- [34:39]
Leslie
My total available credit went up, My total balance went down, My credit usage went down, and my age of oldest accounts went up.
- [34:48]
Joe Salsihai
I got caught up the first times I heard it. In her list of four things, I believe Melanie, the credit card company did not share with you the real reason why your credit took a hit.
- [34:59]
Paula Pant
Oh, wait, wait, wait. I have a guess. Actually, I have a guess. I'm going backwards in that order of four. Here's my guess. And Joe, let's see if our guesses match. So she talked about how the length of the oldest account went up. So the oldest account got older, which was good. That's wonderful. That's exactly what we want to see. She talked about how her credit usage dropped. Excellent. Excellent. That's a lower utilization ratio. Again, exactly what we want to see. She talked about how her total balance went down. Okay. Related to the utilization ratio improving. Excellent. That's what we want to see. And then she said that her available credit went up, which makes me wonder if her available credit went up, does that mean that her credit limit on a credit card increased, which would then code as an application for new credit?
- [35:50]
Joe Salsihai
She mentions before any of those four things that she applied for a couple new loans. And that is 100%, I believe, where it is. Because when you get the new credit, as you're saying, Paula, we 100% agree, when you apply for new credit Especially if you apply for two things or three things very, very in close succession. When you do that, credit companies freak out a little bit. They're like, why is she applying for so much credit all at one time? It does mean something bad's happening. Again, their goal is to help these creditors protect themselves against you not repaying. And so common thing that people will tell you to do is do all of your homework around which loans you might want before you apply and only apply for loans that you think you're going to take. Because if they do a hard credit pull, two or three companies do a hard credit pull. Now those are all going to show up and it will hit your credit score.
- [36:50]
Paula Pant
But, Joe, I'm going to push back on you because she said that her credit score took a serious hit when she had to take out a couple of loans for a car and some unexpected home repairs.
- [36:59]
Joe Salsihai
There it is. There's the loans.
- [37:01]
Paula Pant
But the way that she phrased it made it sound like that happened way in the past.
- [37:05]
Joe Salsihai
I think it's her phrasing. I don't think so. Because when I listened to it the second time, I didn't get that. That dichotomy that I felt like the first time.
- [37:14]
Paula Pant
Because she follows it up by saying recently my credit score was moving up. So my interpretation is that the car loan and the unexpected home repair loans, those were way in the past, like 2024.
- [37:26]
Joe Salsihai
But she follows it up by saying that she had more available credit. So I think that those loans she got is the new available credit. You're saying it might be something else, but no matter what it is, I think it's on the new credit side. It's definitely on the new credit side.
- [37:42]
Paula Pant
Yeah. So my interpretation of if she has more available credit is maybe the credit limit on one of her cred cards increased and that codes as new credit. Because it just sounds to me as though the car loan and the new home loans were like Relics of. Of 2024 or prior.
- [37:58]
Joe Salsihai
Well, and this is where we're parsing stuff that she didn't say.
- [38:02]
Paula Pant
Right.
- [38:02]
Joe Salsihai
Truly don't know, because she did say she applied for loans early on, and then later on she said the credit company told her that she had new credit. So I put the two of those together. Maybe they're not together. I think it's irrelevant. I think the thing that is relevant is it's got to be the new credit piece.
- [38:21]
Paula Pant
Yeah. Okay. So, Joe, so you and I are in agreement that somehow there's a new credit coding. We're just in disagreement as to.
- [38:29]
Joe Salsihai
Yeah.
- [38:29]
Paula Pant
How. I think how and when and where that happened.
- [38:32]
Joe Salsihai
I think that reasoning, by the way, is computer generated. It cranked out some reasons, but I don't think it was thorough enough.
- [38:38]
Paula Pant
Right.
- [38:39]
Joe Salsihai
I think that if you dive in more, you're going to find that the true reason wasn't listed.
- [38:45]
Paula Pant
Yeah. All right. So is that a Sherlock Holmes semi solved mystery?
- [38:54]
Joe Salsihai
I think it very much is. It's elementary.
- [38:56]
Paula Pant
Ah, my dear Watson instead of Watson. Pant.
- [38:59]
Joe Salsihai
It's elementary. Pant.
- [39:01]
Paula Pant
It's elementary, Saul. See. Hi.
- [39:04]
Joe Salsihai
So one other thing. If Paul and I are right, Melanie, this is the cool thing. That 20 plus point credit drop is going to bounce back very quickly.
- [39:15]
Paula Pant
Yeah.
- [39:16]
Joe Salsihai
It's nothing to worry about. It'll bounce back very fast. And in fact, the fact that you have more credit available and your utilization number now will be lower because you have more credit available, you will also see your credit score go up faster.
- [39:30]
Paula Pant
Right.
- [39:31]
Joe Salsihai
Because you've more available that you're not using.
- [39:33]
Paula Pant
Right.
- [39:34]
Joe Salsihai
You're going to get a short term ding and a long term nice high five from the credit agencies.
- [39:40]
Paula Pant
Right. And I will also add one other thing which is in the personal finance world, it can be tempting to treat your credit score like this pristine treasure that must be preserved at all times, but your score is not. It's there for you to use. It's there to be used. And so if you do need new credit or you do want to take a short term hit for the sake of a long term benefit, it's there for you to do that. And so, you know, I sometimes hear from people who say, I don't want to take out a rewards credit card because opening up that credit card is going to ding my credit. And I'm like, oh, you know, are you planning on buying a home soon or a car soon? And they're like, nope, nope. No plans on using any credit at all anytime in the future. But I still don't want to dig my credit by opening up a rewards credit card. And I'm like, all right, what are you preserving it for?
- [40:33]
Joe Salsihai
We had a science experiment on Stacky Benjamin's that you took part in, Paula. It was a roundtable episode where we weren't asking what is the better move. We asked the question which makes you happier. Remember that episode?
- [40:47]
Paula Pant
Yeah, yeah.
- [40:47]
Joe Salsihai
And one of the questions I posed to you and Jesse and OG was does it make you happier to high five yourself that you have a high credit score or does it make you happier to completely ignore your credit score? And I believe it was unanimous. We wanted to not think about it at all.
- [41:07]
Paula Pant
Right.
- [41:07]
Joe Salsihai
The big goal was I want to be in a place that I don't have to think about this at all. Which, to your point, I mean, we have credit to use it. And if I have a decent credit score and I'm not getting dinged any money because of my credit score, but it's high enough that I can use it, if I get into an emergency in a spot that I need it, then use it and ignore it.
- [41:27]
Paula Pant
Yeah.
- [41:28]
Joe Salsihai
I think that's, for me, the happiest place to be to just go. Yeah. I don't even think about my credit score.
- [41:33]
Paula Pant
Right. Yeah. Again, when I was in my 20s, I used to see it as a point of personal pride. Right. It was like a flex to have a credit score over 800.
- [41:42]
Joe Salsihai
I think, though, too, there's something to be said about different things at different ages. Because even though your opinion of that has changed, where then you probably would have said, it makes me happier to gloat that I have a high score. There also is the feeling that I've got a lot of credit usage possibly in front of me. Right?
- [42:00]
Paula Pant
Yeah.
- [42:00]
Joe Salsihai
I think it's got a whole life.
- [42:02]
Paula Pant
In front of me.
- [42:03]
Joe Salsihai
Exactly. As we get older and we've used our credit more often and the threat that something might happen that I don't have enough assets to cover diminishes. As we get closer to financial freedom, we then begin to go from, I gloat over it and I love it and I want to high five myself to I really just want to ignore it.
- [42:24]
Paula Pant
That's very insightful, Joe, but don't you think that's true?
- [42:27]
Joe Salsihai
I mean, it rings true. I don't know. I haven't done any science there, but it certainly to me feels like that would be a story arc for most of our lives.
- [42:35]
Paula Pant
Yeah, absolutely. Makes sense. When you're young, you don't have a lot. You don't have assets, you don't have experience, you don't have the confidence that comes from having had experience. You don't have connections, you don't have friends who have done or achieved or purchased anything, built anything, bought anything. Right. You have big dreams, but everything in your life is just a hypothetical. So you have all of the anxieties that come with the fact that you just haven't been tested yet.
- [43:05]
Joe Salsihai
Well, and it goes back, though, to the threats and dangers. The threat that you may have to tap that credit at any point, I think is there's. There actually is even a reason real threat there.
- [43:14]
Paula Pant
Right?
- [43:14]
Joe Salsihai
Because you don't have rich friends you can borrow from to go back to. You know the connections you can leverage. The reasons you need to borrow money are many, many, many more early in your life.
- [43:25]
Paula Pant
That absolutely makes sense in in the way that the importance of credit score tracks along the human life story arc. That's the type of insight that comes from contemplation.
- [43:36]
Joe Salsihai
Contemplation.
- [43:39]
Paula Pant
Can you show that finger on YouTube?
- [43:42]
Joe Salsihai
I think people that didn't see it on YouTube even know which figure that was.
- [43:46]
Paula Pant
Yeah, Joe is pointing a very specific finger at me right now.
- [43:49]
Joe Salsihai
Paul is number one.
- [43:53]
Paula Pant
Melanie, thank you for the question. The Starbucks Summer Berry Refresher is officially back.
- [44:00]
Leslie
Bold notes of raspberry, blueberry and BlackBerry shaken with ice and poured over raspberry flavored pearls. Try it with lemonade or coconut milk. Available for a limited time. Your Summer Berry Refresher is ready at Starbucks.
- [44:14]
Joe Salsihai
You know that feeling when someone shows up for you just when you need it most? That's what Uber is all about. Not just a ride or dinner at your door. It's how Uber helps you show up for the moments that matter. Because showing up can turn a tough day around or make a good one even better. Whatever it is, big or small, Uber is on the way. So you can be on yours. Uber on Our way.
- [44:42]
Paula Pant
Your snacking routine can get a little dull. Time for an Oikos Remix or Light and Fit Remix. Like a crunchy storm of sea salt, praline pretzels, dark chocolate and butter toffee showering down into a smooth, creamy Yogurt. Yogurt enjoy. Six Remix varieties, three Epicomplete Protein Oikos Remix options or three Craveable Light and Fit Remix options. See remixyogurt.com Our final question today comes from Anonymous Hey Paul, I'm Joe.
- [45:22]
Elizabeth
My husband and I are pursuing financial independence through real estate investing and we're wondering if we should prioritize paying off one of our properties or if we should purchase our next one instead. Here's our situation. We're both 34, we have no kids and we both work full time. We earn about $200,000 combined annually. We have no debt aside from $12,000 remaining on a car loan at about 8.29% interest. We have about four years left on a six year loan and we pay roughly 250 per month. Neither of us has any plans to stop working, but we would like to make work optional within the next next 10 years or so. We currently own two rental properties and we've calculated that we'll need to acquire three more to reach financial independence. We currently have $85,000 saved in cash and we add 4,000 of of our take home pay to this account each month. We also have about $20,000 in a taxable brokerage account that we can access if needed. Here's a breakdown of our two properties. Our first one we purchased in 2018 and it rents for $1,600 per month. We have $90,000 left on the mortgage at a 4.875% interest rate. With $85,000 in cash, we could wipe out this mortgage within a month or two, significantly increasing our monthly cash flow. However, the majority of the mortgage payments are now being applied to the principal and the interest rate is lower than our second property, so we think it may be better to let this one sit. Our second property we purchased in 2022 and it rents for $1,500 per month. We have $131,000 left on the mortgage at a 7.125% interest rate. Due to a significant jump in property taxes and insurance rates at the beginning of this year. We're now paying $140 out of pocket each month to cover the mortgage. If we continued saving 4,000 per month in addition to the 85,000 we currently have, we would be able to wipe out this mortgage in about a year. Our third option would be to let both properties sit and to use our savings to purchase our third property, which would get us closer to our goal of five properties in total. So what are your thoughts? Should we wipe out a mortgage to increase cash flow and then put the extra income toward a down payment? Should we focus on acquiring our properties first and then worry about paying them off? Should we consider paying off our car loan first, given the high interest rate? Or should we be leveraging our taxable brokerage account more strategically? We would love to hear your thoughts and we appreciate your guidance in helping us think through our options.
- [47:46]
Paula Pant
Anonymous this is a really interesting question. This is a fun puzzle. And before we start looking at the rubrics cube of all sides of this, the first thing we need to do is give you a name.
- [47:58]
Joe Salsihai
We have a job to do, we.
- [47:59]
Paula Pant
Have an important job and we take it seriously. So I'd like to give a shout out to the first woman who obtained a real estate license in the United States. Guess what year it was?
- [48:09]
Joe Salsihai
It was. Hmm. I wonder when real estate licenses started. Let's say 1840.
- [48:18]
Paula Pant
It was 1903.
- [48:20]
Joe Salsihai
Wow.
- [48:20]
Paula Pant
1903. So first woman who got a real estate license. It was in 1903, and her name was Elizabeth J. McCormick.
- [48:28]
Joe Salsihai
It's amazing she could broker these properties now that most people buy using leverage. And yet it wasn't until the 1970s that she could get the leverage herself.
- [48:40]
Paula Pant
Right.
- [48:41]
Joe Salsihai
I'm laughing because it's so not fun.
- [48:43]
Paula Pant
Yeah, right. Yeah, exactly. Exactly. I was thinking 1903, she became a broker before she could vote. Yeah, right, that too.
- [48:52]
Joe Salsihai
I didn't think about the vote.
- [48:53]
Paula Pant
Right. So in honor of her anonymous. We're going to name you Elizabeth.
- [49:00]
Joe Salsihai
So what do you think?
- [49:00]
Paula Pant
For Elizabeth, I'll lay out a couple of things right off the bat. Number one, when the goal is property accumulation and when the goal is cash flow, I actually do not think about interest rate, especially if it's a single digit interest rate. I mean, if it's. If we're talking really egregious double digit interest rates. All right, different topic. But if we're anywhere in the single digits, it's not interest rate that I'm going to prioritize. It is the smallest balance that I would prioritize because wiping out a debt increases cash flow. And what if I'm in Elizabeth's shoes? What I'm optimizing for is cash flow rather than interest rate, which is total interest paid.
- [49:44]
Joe Salsihai
But there's a question even before that, Paula, which is, should she just ignore the debt and just go use that money then to buy another house? Are you headed there next?
- [49:53]
Paula Pant
Yeah. Not to give away the ending, but all of the possibilities. That's the one that I like the most.
- [50:00]
Joe Salsihai
That's funny. That's the one I like the second most.
- [50:02]
Paula Pant
Ooh. So the reason that I like it the most is because given that the ultimate goal is to buy a total of five properties and she's got two out of five, and they've run the numbers, they've done the calculations, they know that they're going to need five properties in order to reach their fi goal. My objective is for her to get these properties as soon as possible because the longer she waits, likely the more housing prices are going to rise. In the short term, there might be some volatility or some softening, but probabilistically speaking, over the long term, home prices are likely to rise. And I want to see her get into the properties as quickly as she can, amass the portfolio that she wants to build as quickly as she can, and then once she has that portfolio, then turn her attention to paying it down. And so there's going to be the question that Elizabeth is going to run into as to how much money a financial institution will allow her to borrow. Eventually she's going to tap out both the front end and back end ratio of what the banks will approve her for. In fact, based on the numbers that she's given, she might be pretty close to that. So there's a chance that the next house she buys, the third house, might be the last house that a financial institution will approve her to buy. So there's a chance that she might only be able to buy one more before she starts paying them off. But what I'd like her to do is buy as many as the financial institutions will allow her to buy. And then once she hits that ultimate limit and the banks start waving their finger and saying no more, that's the time when she should turn her attention, in my view, to the loan that has the smallest balance and therefore will free up the most cash flow, which in this case would be the car loan first, because that's going to free up 250amonth and after that turn the attention to the lower interest home because it's got a smaller balance and she'll be able to pay it off faster. But first I'd buy that third house.
- [52:05]
Joe Salsihai
Can we back up the bus for a second?
- [52:06]
Paula Pant
Yeah.
- [52:07]
Joe Salsihai
Well, my first question, Paula, is a question I think a lot of people might have that are listening, which is why five and you ran right over that. Like they've already done the work, they've done the numbers, they've done that. And I'm just very curious and I think a lot of people are curious, like what numbers are you running that? You know, that five is the number.
- [52:30]
Paula Pant
So my assumption is that she probably wants to target homes at a particular price point in a particular geographic location or a particular neighborhood because certainly, just to use some extreme examples, certainly it's the case that if you buy Taylor Swift's old home for, I don't know, $30 million, all right, one home is going to get you way past your FI goals. Right. But obviously that's unrealistic.
- [52:54]
Joe Salsihai
But here's the question. Will it? And the reason I ask that is because let's say she buys a 30 million dollar home, she buys it on a 90 year mortgage.
- [53:03]
Paula Pant
Yeah.
- [53:04]
Joe Salsihai
It's going to be very difficult to take more equity out of the house. You could buy this huge thing and if there's no cash flow and it's difficult to get at the equity, it really doesn't help you toward your goal of financial independence. Which is why my Question then, is, is she optimizing then, for cash flow as she's buying the next house? Is she optimizing to buy the house and pay off the mortgage? So then she has the equity in the house that she can then either liquidate or. Or once she has a mortgage paid off, then it cash flows and then she has the equity behind it. Like. Like, exactly. How do you think through this number of houses that gets you to financial independence?
- [53:45]
Paula Pant
Well, so my assumption of what Elizabeth has done, based on the fact that she says that she's done the calculation.
- [53:51]
Joe Salsihai
Sure. Yeah. I'm not doubting, by the way, that Elizabeth has done that. My question is much more for everybody else listening.
- [53:57]
Paula Pant
Right. What did she do?
- [53:58]
Joe Salsihai
Yeah. What exactly are we talking about here?
- [54:00]
Paula Pant
Yeah. So my assumption is that she is targeting a home at a particular price point, that she knows roughly what it's going to cost, and she knows roughly what it's going to rent for, and she knows roughly what the operating expenses are going to be, which means she knows roughly what the cash flow is going to be and what the cap rate is going to be. And so, based on that set of assumptions, which if you narrow your search to a very specific geographic area and you're targeting homes within that area, you can pretty reliably count on that same basket of numbers because you're looking at the same area.
- [54:32]
Joe Salsihai
It becomes a machine, Right?
- [54:34]
Paula Pant
Exactly. Yeah. Then it's just lather, rinse, repeat. And so my assumption is that by virtue of narrowing her search to price point X, rent, Y, operating expense, Z, cap rate, A, cash flow, B. Right. By narrowing it to that set of variables, she's done the math to find out that she needs three more in order to achieve her FI goals.
- [54:59]
Joe Salsihai
That makes a lot of sense. So it truly is, when it's all said and done, cash flow that I can live on.
- [55:05]
Paula Pant
Right. And with the Taylor Swift example, I'm using, again, the assumption that if you were to buy Taylor Swift's home, it would meet the cap rate and cash flow requirements that you would need.
- [55:16]
Joe Salsihai
It is funny, though, how that would have some unique circumstances, though, because, I mean, then you're worried about just the number of people that are going to rent that property. You know, I mean, you could do all the calculations you want. But then there's the other factor of who's going to be able to afford to rent that house.
- [55:30]
Paula Pant
In that case, it's similar to Airbnb in that you have to adjust the occupancy ratio.
- [55:34]
Joe Salsihai
Right? Yeah.
- [55:35]
Paula Pant
When you're running your Estimate on what you think vacancy slash occupancy is going to be similar to an Airbnb. You have to really make some big adjustments because you might have some strong long vacancies, but anyway, she's not buying Taylor Swift's home, so.
- [55:49]
Joe Salsihai
Agreed. Well, I think there's two interesting things in what you said, and before I get to that, I agree with everything there, except that car loan to me is at a high enough interest rate. And it's.
- [56:01]
Paula Pant
It's a small enough balance.
- [56:03]
Joe Salsihai
Yeah, it's a small enough balance. I would wipe that out. My original feeling for Elizabeth was, why? Like, like why? I, frankly, I get the properties, I don't get the car loan. So wipe out the car loan, and then everything else is great. And I think that capturing that $250 a month and then you don't have that 8.29 hanging over your head. Like, both of those things I think are fantastic. But the rest of it, then, well, let's go buy the next one.
- [56:29]
Paula Pant
Well, and you know, the thing about the 250amonth is that you can mentally, if you want to, associate the car loan with house number two if you want to mentally group those together. All right, if she frees up 250amonth and house number two is costing, like, what, ballpark, 150amonth out of pocket? She said, yeah, then cool. Then free up positive.
- [56:49]
Joe Salsihai
Yeah, positive.
- [56:50]
Paula Pant
Now, she's net positive by a ballpark, 100amonth. Right. So if you mentally bucket the car and house number two together, then the 250amonth that she frees up by paying off the car loan covers the shortcoming of house number two. And granted, that's mental gymnastics. And it's.
- [57:06]
Joe Salsihai
Sure.
- [57:07]
Paula Pant
I can hear Mir Statman, who's a behavioral economist who we interviewed at the Morningstar conference last summer. You can hear that in our archives. I can hear him in my head right now being like that. A dollar is a dollar is a dollar is a dollar, no matter where it comes from, no matter where it goes.
- [57:24]
Joe Salsihai
Let's just talk about the cost of money. Yeah, because she's going to take that money and she's going to borrow it again in the form of the new house. So let's say she gets that at 7%. She's getting it for 1.29% cheaper.
- [57:36]
Paula Pant
Right. But while that is factually true, I mean, that's just math. I go back to my biggest concern with her, and my biggest priority with her is cash flow rather than interest rate.
- [57:47]
Joe Salsihai
And I find that to be interesting because this isn't just for real estate investors. When I was a financial planner, to widen it out to the rest of the audience that really isn't looking at buying real estate. The first thing I was always interested in, Paula, was always cash flow. And if cash flow was good, then we go to interest rate. If cash flow wasn't good, the first thing was to get that heart beating much better. And it's the same thing we were talking about with Melanie when it came to your credit score, right?
- [58:15]
Paula Pant
Yeah.
- [58:16]
Joe Salsihai
When investors look at a company, they look for free cash flow because it's the number one sign of health. Number one sign of health for any individual is free cash flow. So cash flow is always in the hierarchy for me, always number one. And if we can check off that cash flow is fine, then I go to the cost of money.
- [58:35]
Paula Pant
Right.
- [58:36]
Joe Salsihai
But I think that's super important for people to get because I feel like in the popular press and I think it's always easy to beat on quote, the popular press. But I do think that we hear this messaging over and over, interest rate, interest rate, interest rate, interest rate. And it's simply, while it is true, it's not the most true. I think free cash flow is something we hear about much less, but is much more important.
- [59:03]
Paula Pant
Yeah.
- [59:03]
Joe Salsihai
Which is why I also think the snowball method works. Even though, you know, people have run numbers to show that if you go for the highest interest rate first, I think it works not just behaviorally, but it also works because when I free up up cash flow, I think getting that momentum of the ball rolling downhill gives me the ability then to tweak my strategy whenever I want. If I go debt avalanche and I'm paying off the highest interest rate first, and it's a huge number, I can't deviate from that plan. And the key to a free cash flow analysis is the fact that this is money I can deploy now to do whatever the heck I want. So from a financial planning standpoint, where we know that things might come up in the future that would make us possibly have to take out more debt, by freeing up cash flow more quickly, it reduces the chance that I may have to take out debt in the future, which I think destroys this idea of the debt avalanche, where everything has to go perfectly. And we all know as humans, there's going to be a muffler dragging behind the car. There's going to be a refrigerator that breaks down. There's going to be some reason that I need this money.
- [60:12]
Paula Pant
Right.
- [60:13]
Joe Salsihai
And, man, if I'm using this extra $250 to apply to some other loan and I could stop it for a month to fix the fridge instead. That's a loan I didn't have to take, which is great. And that alone beats the debt avalanche strategy.
- [60:27]
Paula Pant
Right? So cash flow is king. Free cash flow is, is absolutely king.
- [60:31]
Joe Salsihai
It's exciting to me to look at this and I love that you were able to break down why five? Because I think when you look at the fact she's already got two and she's only got three to go, it's pretty exciting, especially at 34 years old, to be able to know that you're almost halfway there at 34.
- [60:48]
Paula Pant
I don't disagree, Joe, with your assessment of pay off the car loan. I like the fact that it's a tiny balance. It's only $12,000. It's not going to take a huge chunk of the cash that she's got. I like the fact that it's going to free up 250amonth. But what I don't like is the fact that 250amonth over the span of 48 months equals $12,000. So if she wants to get $12,000 in cash again, it's going to take that 250amonth for four years before she gets that same $12,000 back. And I don't like that element of it because I want to see her get into this next house as soon as she can, because what are the prices of homes right now versus the prices of homes four years from now? And so again, I'll, I'll reiterate with the knowledge that institutional lending is likely going to tap her out pretty soon. And I mean, yes, she can turn to creative financing, she can turn to private lending. There are other options, but institutional lending is everybody's favorite, certainly my favorite. I want to see her use that up to its limit as fast as she can.
- [61:59]
Joe Salsihai
That just sounds so funny. For people that aren't comfortable with leverage, use all that leverage. Go get every dollar.
- [62:06]
Paula Pant
Well, when it's a healthy cap rate, absolutely.
- [62:10]
Joe Salsihai
No, it's a change in your thinking, responsible borrowing.
- [62:14]
Paula Pant
So, Elizabeth, you've got two answers, one from me and one from Joe. I say keep all of the debts that you have. Buy the third house. After that, you probably won't be able to buy anymore. So then shift your focus to paying off the debts, starting with the car. And Joe says pay off the car first and then shift your focus to buying the third house. And so you've got Two different answers, one from each of us. And honestly, I think both are valid answers. So pick whichever one resonates more with you, because even though the answers are different, they're actually not too far off.
- [62:49]
Joe Salsihai
No, truly not.
- [62:50]
Paula Pant
Yeah. The order of operations of basically step one and step two, car versus house number three. That's the only. I rank one two, and Joe ranks two one, and. But either way, notice how neither of us want you to pay off house number one. Neither of us want you to pay off house number two.
- [63:10]
Joe Salsihai
And I felt like that was definitely, definitely Elizabeth's main question. Do I put this toward the houses?
- [63:15]
Paula Pant
Yeah. Neither of us are fans of that.
- [63:18]
Joe Salsihai
No.
- [63:18]
Paula Pant
Not if the goal is to grow.
- [63:20]
Joe Salsihai
No.
- [63:21]
Paula Pant
The time for doing that is once you've tapped out of institutional lending, that's the time to pay off the houses. Thank you, Elizabeth, for the question. Joe, we've done it again.
- [63:31]
Joe Salsihai
I can't believe it. And it was. It was a potpourri episode. Yeah, we were all over the place.
- [63:36]
Paula Pant
Exactly. We talked about. This time it's different. We talked about credit scores, and we talked about buy more rentals or pay down the debt.
- [63:46]
Joe Salsihai
And I think the rubric around your thinking around when to pay off debt and when to invest.
- [63:51]
Paula Pant
Right. This time it's different. Is also the thinking rubric as well.
- [63:55]
Joe Salsihai
It completely is. Yeah, absolutely.
- [63:58]
Paula Pant
So maybe this is the thinking rubric episode.
- [64:00]
Joe Salsihai
The rubric episode. The rpersode.
- [64:03]
Paula Pant
You know what, Ruper Sode, didn't I use the analogy of a rubric's cube earlier?
- [64:08]
Joe Salsihai
No, but it's a Rubik's cube. But we could call it the Rubric's cube in the title. We should call it the Rubric's cube.
- [64:15]
Paula Pant
That's true. That's a Rubik Rubik cube.
- [64:17]
Joe Salsihai
Yeah, it's Rubik.
- [64:18]
Paula Pant
I'm pretty sure I said Rubik cube sometimes. Or Rubric probably pronounced it rubric. No, I'm pretty sure I use the analogy at some point. Well, we'll check the transcript.
- [64:27]
Joe Salsihai
We will. We'll go back to the tape.
- [64:29]
Paula Pant
Yes. Roll the tape. Well, Joe, where can people find you if they would like to contemplate their life choices?
- [64:38]
Joe Salsihai
Easy, easy. We had a very special Memorial Day Episode 2. Great interviews. We normally only do interviews most Wednesdays, every once in a while on a Monday. But the first half of the episode is the former vice chairwoman of NBC Universal, Bonnie Hammer, talking about the lies women are told at work. And you know what, Paula? If you're a dude like I am, these are lies that men are told too. These are lies we're all told. When I was early in my career, I read a great book by a guy named Henry Rogers called Rogers Rules for Success. I feel like Bonnie Hammer's new book is really the same thing. And I know a lot of people are graduating. I interview a lot of people like you do. There are very few books that I'm like, that's a book young people need to read. This is an interview young people need to hear. And I think it's also a book that she is talking about. These lies that we're told at work. They are things like follow your passion. And Bonnie turns that into follow the opportunity, which I think is frankly a better thing. And you'll hear all kinds of follow your curiosity. Right?
- [65:47]
Paula Pant
Yeah.
- [65:48]
Joe Salsihai
And I think I agree with follow the opportunity even more than your curiosity, because where curiosity meets opportunity is truly where the river's going to head. So that's one of many of the things that we talk about. It's interesting also that she says over her career she was much more likely to hire you if you had a great attitude than because of your skill set, which from a woman who was the vice chairperson of NBC Universal to say that. And she also tried to gravitate toward hard bosses, where now a lot of people are turning their hard boss in because they think that the boss is toxic. She said there are toxic bosses. Not disagreeing. But Bonnie also says there's just some people that really are in your corner, but they're going to push you ahead. And if you can't see that they're behind you trying to push you to do everything you can, it's bad for you if you don't follow them. So anyway, Bonnie Hammer in the first half, and then we're talking to people that have a lot of debt. One of my favorite psychologists, Dr. Erica Rascher from Beyond Finance, joins us and she's been on the show before. And Dr. Erica has this great holistic way to look at debt that I really like. So that's our special Memorial Day episode of the Stacky Benjamin Show.
- [67:02]
Paula Pant
Wow. Those both sound like amazing interviews.
- [67:05]
Joe Salsihai
It's a good one, too. Punch.
- [67:06]
Paula Pant
Oh, that's amazing. Well, thank you to all of you for being afforders. Thank you for being part of this community. If you have any questions that you'd like to ask, affordanything.comvoicemail is the place to go. That's affordanything.comvoicemail. thanks for tuning in. If you enjoyed the episode, please share this with your friends, family, neighbors, co workers, the people that you meet on your biking and walking trail in your local city. Joe's laughing because we were just having a conversation about that. Share this with your city manager. Share this with the people at the.
- [67:39]
Joe Salsihai
At the custard stand.
- [67:40]
Paula Pant
Oh yeah, the custard stand.
- [67:41]
Joe Salsihai
Frozen custard stand.
- [67:44]
Paula Pant
Right. Share this with all of those people. It's the single most important way that you spread the message of F I R E. Also, make sure that you are subscribed to our newsletter affordanything.com newsletter where we send loads of goodies your way. And please open up your favorite podcast playing app and leave us up to a five star review and write a few words. Tell us what you like about the show. Thank you so much for being an afforder. I'm Paula Pan. I'm Joe Salsihai and we'll meet you in the next episode.