Q&A: Breaking Up with Total Market Funds After 10 Years

Summary

Afford Anything Podcast Summary: “Q&A: Breaking Up with Total Market Funds After 10 Years”

Hosted by Paula Pant on the Cumulus Podcast Network

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Introduction

In this episode of the Afford Anything podcast, host Paula Pant teams up with Joe Saul-Sehy to address listener questions centered around investment diversification, handling inheritances, and prioritizing financial goals. The discussion delves into practical strategies for managing multiple financial objectives, optimizing investment portfolios, and making informed decisions to align with personal priorities.

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Listener Question 1: Diversifying Beyond Total Market Funds

Time Stamp: [00:00] - [10:54]

Questioner: Jackie

Background: Jackie and her husband, both in their late 30s, have nearly a million dollars invested across various accounts, all primarily in total stock market index funds or S&P 500 funds. They are seeking guidance on diversifying their investments by adopting Paul Merriman's four-fund approach.

Key Discussion Points:

1. Simplicity vs. Diversification:

   • Joe Saul-Sehy emphasizes the importance of starting simple: "The first thing, Jackie, is I want to clarify what I said... keep things simple." ([04:14])
   • He recommends maintaining broad diversification initially by sticking with index funds before gradually adopting a more analytical approach as the investment portfolio grows.

2. Paul Merriman’s Four-Fund Strategy:

   • Joe explains the strategy: "If you use four indexes instead of one that follow four subsets of the market, you will get closer to the efficient frontier." ([07:09])
   • He reassures that transitioning to four funds across multiple accounts is manageable and not as time-consuming as Jackie fears. “[Joe] … you’re doing one thing. You’re just doing it nine times.” ([10:22])

3. Tax Implications and Asset Location:

   • Paula Pant introduces the concept of asset location, highlighting the importance of placing different types of funds in tax-advantaged accounts appropriately. ([10:54])
   • Joe Saul-Sehy advises assessing the tax impact before rebalancing and suggests strategies like splitting sales across tax years to manage tax liabilities effectively. “Maybe Jackie, maybe you keep it simple and don't change your allocation away from the simple path in your brokerage account.” ([13:17])

4. Rebalancing Made Easy:

   • Joe outlines a straightforward rebalancing process: “Once you have those funds and you know what percentage go in each fund now... set a 15 minute date for yourself on your calendar and all you do is this.” ([10:22])

5. Behavioral Considerations:

   • The duo discusses common behavioral pitfalls, such as the temptation to let high-performing sectors dominate the portfolio, and the importance of sticking to the established plan despite market fluctuations. ([18:10] - [21:02])

Notable Quotes:

• Joe Saul-Sehy: “Don’t make perfect the enemy of good.” ([09:15])
• Paula Pant: “When an asset class is doing well, it’s natural human behavior to find a reason to justify reallocating to a larger portion of it.” ([19:06])

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Listener Question 2: Managing an Inheritance Annuity

Time Stamp: [33:33] - [45:00]

Questioner: Heidi

Background: Heidi has received an annuity inheritance of approximately $500,000. The advisor recommended a 10-year distribution plan, but Heidi is considering extending it to 15 years to minimize tax impacts. She and her husband are in their early 30s with a combined income of around $160,000 and are in the 22% tax bracket.

Key Discussion Points:

1. Understanding Goals Before Actions:

   • Paula Pant emphasizes starting with identifying the purpose of the inheritance: "What do you want to do with this money?" ([34:12])
   • She suggests aligning the use of funds with personal goals, such as retirement, planned travel, or supporting passions like fostering animals. ([34:12] - [37:31])

2. Tax Implications of Annuity Distributions:

   • Joe Saul-Sehy breaks down how annuities are taxed using the LIFO (Last-In-First-Out) method, where interest is taxed first. ([40:21] - [41:03])
   • He advises assessing the tax liability before withdrawing large sums and considering strategies like splitting withdrawals across tax years to manage tax brackets effectively. ([41:08] - [45:00])

3. Behavioral Approaches to Spending:

   • Paula discusses the difference between conscious and unconscious spending, highlighting the importance of deliberate allocation to prevent lifestyle creep and ensure the inheritance is used purposefully. ([45:00] - [47:20])
   • Joe reinforces spending in alignment with goals and honoring the legacy, emphasizing emotional attachment to how money is utilized. ([47:20] - [48:17])

Notable Quotes:

• Paula Pant: “What do you want to do with this money? What legacy or imprint do you want it to leave?” ([34:18])
• Joe Saul-Sehi: “Money has no emotion... It’s about honoring the person.” ([47:28])

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Listener Question 3: Prioritizing Multiple Financial Goals

Time Stamp: [33:33] - [84:09]

Questioner: Grace

Background: Grace and her husband, aged 34 and 40 respectively, have multiple financial goals including retiring well by age 60 with a combined $3 to $4 million, purchasing a larger home in the next 5-10 years while potentially renting out their current townhome, buying their next car with cash, funding their children’s 529 college plans, and affording two annual family vacations. They are seeking advice on how to prioritize these goals and visualize their savings strategy.

Key Discussion Points:

1. Timelining Financial Goals:

   • Joe Saul-Sehy introduces the concept of timelining goals to visualize and prioritize them effectively. “With a limited pool of resources and an unlimited life, how do I make these limited resources fit this big, wide, beautiful unlimited life?” ([56:50])
   • He suggests mapping out each goal on a timeline to understand their interdependencies and potential conflicts. ([57:11] - [60:25])

2. Visualizing and Prioritizing:

   • Paula recommends using sub-accounts or labeled savings goals to segregate funds for different objectives, enhancing behavioral commitment to each goal. (“Labeling your accounts is phenomenal for better behavior.”) ([60:25] - [61:06])
   • Both discuss the importance of knowing the purpose behind each financial target to stay motivated and organized. ([61:06] - [65:21])

3. Balancing Risks and Flexibility:

   • Joe emphasizes adjusting investment strategies based on the flexibility and time horizon of each goal, advocating for higher risk in flexible timelines and lower risk in fixed timelines like college funding. ([65:27] - [70:21])
   • They discuss the need for periodic reassessment of goals and allocations as circumstances evolve. ([72:01] - [77:00])

4. Prioritization Strategies:

   • Joe introduces the concept of an MMA match analogy, where goals vie for limited resources, and stronger priorities should win funding. ([75:43] - [77:07])
   • Paula adds that some goals have fixed timelines (e.g., children's college) while others (e.g., retirement, home purchase) are more flexible, requiring different strategic approaches. ([78:30] - [80:02])

5. Practical Tools and Resources:

   • Joe promotes his book and financial planning services, offering structured guidance for listeners seeking in-depth assistance. ([80:00] - [83:20])

Notable Quotes:

• Paula Pant: “This is the heart of what money management is all about.” ([56:50])
• Joe Saul-Sehi: “It's the difference between conscious versus unconscious spending.” ([61:35])
• Paula Pant: “Celebrating the fact that you got to $2,000 is a big celebration.” ([72:01])

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Conclusion

In this comprehensive Q&A episode, Paula Pant and Joe Saul-Sehy provide actionable insights into sophisticated financial planning topics. They stress the importance of simplicity in the early stages of investing, the benefits of diversification via proven strategies like Paul Merriman’s approach, and the necessity of aligning financial actions with personal goals to maintain motivation and achieve financial well-being. Their blend of practical advice, behavioral psychology, and strategic planning offers listeners a robust framework to navigate complex financial landscapes.

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For more detailed discussions and resources, listeners are encouraged to visit affordanything.com and explore additional episodes featuring expert interviews and decision-making frameworks.

Transcript

[Paula Pant]

Joe, you've probably talked to a lot of clients who have a bunch of different goals and they're not quite sure how to set priorities when you've got so many things you want to do and only a limited basket of money.

[Joe Saul Sehi]

And there might be a solution for that. Is that what you're implying?

[Paula Pant]

Yeah. Yeah. Well, I mean, you were a financial planner for many years. You've met with literally hundreds of people who have all had this problem, but the details of the problem have differed.

[Joe Saul Sehi]

It's so hard, right? Because what do I prioritize? How do I make sure the money doesn't get commingled? It's like, I don't want my meat and potatoes to top. Like, that's gross.

[Paula Pant]

Mm. Right, because you mentally bucket money for one thing versus another. But then circumstances change.

[Joe Saul Sehi]

Absolutely.

[Paula Pant]

Well, we're going to talk at the end of today's episode to a listener who has a question that is very much in this vein. How do you juggle between all of these competing priorities? Prior to that, we're going to talk to a listener who has an inheritance and has received some advice about how to handle that and is wondering if they got good advice.

[Joe Saul Sehi]

All that in one episode?

[Paula Pant]

All of that in one episode. Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. Every choice carries a trade off, and that applies not just to your money, but to your time, your focus, your energy, your attention to any limited resource you need to manage. So what matters most and how do you make choices accordingly? 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, I answer your questions, and I do so with my buddy, the former financial planner Joe Saul Sehi. What's up, Joe?

[Joe Saul Sehi]

How are you, Paula?

[Paula Pant]

I am doing great. How are you doing?

[Joe Saul Sehi]

I'm fantastic. I've got my coffee ready. My Zion mug.

[Paula Pant]

Ah, Zion National Park. One of the most beautiful national parks in the nation, in my opinion.

[Joe Saul Sehi]

Isn't it gorgeous?

[Paula Pant]

Southern Utah? I think southern Utah is one of the most underrated parts of the country.

[Joe Saul Sehi]

Let's go. We'll record this later. Let's just go now.

[Paula Pant]

Yeah. All right. Trip to Southern Utah. We're there. But before we board a plane, our first question comes from Jackie.

[Jackie]

Hi, Paula. My name is Jackie. Thank you for the recent episodes in which you and Joel try to talk people like me out of our VT SA X and chills strategy. You have Me convinced that we need to diversify based on the Paul Merriman four funds approach. However, I could use some more information on the logistics of exactly how to go about doing this. My husband and I are in our late 30s and have just under a million dollars in investments. We each have a 401k through our current employers and each have a Roth IRA and a traditional IRA with Vanguard. In addition, we also have a brokerage account with Vanguard and two different HSA accounts. All of these are invested in a total stock market index fund, or S&P 500. So how do we go about diversifying? Do we need to go into each of our nine accounts and choose four funds that seem to match what Paul Merriman is suggesting? Since they are all with different investment firms, this seems more than a little daunting. And certainly beyond the 45 minutes a year or whatever Joel suggests this should take. We don't have much experience with choosing investments beyond basically just picking the S&P 500 fund when we opened each account. Are there tax implications involved in selling one fund and buying a different fund? In addition, we need to rebalance each year, I believe. So if we need to do this for all nine accounts now, do we need to do this again each year? So can you help us out with what approach to take to do this? I must be making this too complicated, so I could really use some hand holding here. Thank you and I appreciate all you do.

[Joe Saul Sehi]

Oh, man, oh, man, oh, man. Jackie, I feel for you, but don't.

[Paula Pant]

Worry, it's not as complicated as you might fear it is.

[Joe Saul Sehi]

Not even remotely. And by the way, Jackie, I didn't say 45 minutes. I said 15. And in the next 10 minutes.

[Paula Pant]

Ooh.

[Joe Saul Sehi]

We're going to show you how it's 15 minutes.

[Paula Pant]

Wow. All right. With a one minute warmup. That's great.

[Joe Saul Sehi]

That's right. We going to get into this, Paula?

[Paula Pant]

Let's do it.

[Joe Saul Sehi]

All right. The first thing, Jackie, is I want to clarify what I said. And there were a bunch of people, Paula, that maybe didn't hear this episode. And what I was talking about is this. When you start out, it makes sense to keep things simple. People freak out about all the different investment options that are out there, and you shouldn't do that. The reason you shouldn't do that is because what matters the most when you begin, as you know, Paula, is just shoveling money in, get as much money invested as possible. Over time, though, what's going to happen is your investments are going to reach a point, a tipping point where being more analytical about your diversification matters even more than you shoveling money in. So at that point, we want to be less simple. So we want to start off with. Exactly, Jackie, what you're doing, which is the s and P500 or the total stock market index. Love both of those choices. You get wide diversification. You're buying. Let's just take the S&P 500, Paula. You're buying 500 different companies. You've got Nvidia in there, you've got Microsoft in there. Heck, you've got companies that aren't tech like Coca Cola or Nike in there. So you get broad diversification across a bunch of different asset classes. And it's even more diversification if you use the total stock market index instead. But stick with an index, don't pick a manager. What that will do is you will go where the economy goes, which means if over long periods of time, our economy continues, it has to expand. People have to make money. If people have to make money, the representation of that is the stock market. So stick with that broad index. Don't hire a manager. That's going to keep your fees low and you're just going to go where the economy goes and life is going to be really good once you get to $100,000. I want to clarify between what I said and what Jackie heard. Because, Jackie, you weren't the only one that heard this. A lot of people heard me going, look at Paul Merriman. You need to go do more. Like, let me clarify. I don't think Paul Merriman is the Harry Potter of investments. When you get to 100,000 buc. And I've heard a lot of people think about it that way. Oh, there's a different guru. And I gotta. Don't follow a guru. What I like about Paul Merriman is that Paul Merriman has done the research I would have done if Paul hadn't already done it. Paul's amazing. You've had him on the show, Paula. Yeah, he's an incredible man. He's a great thinker, but a heck of a human being.

[Paula Pant]

Right. And we'll link in the show notes to the episode with Paul Merriman. He is absolutely incredible. So for anyone who missed that episode, if you haven't heard it, we'll drop a link in the show notes to it.

[Joe Saul Sehi]

The reason I reference Merriman was not to say, go follow this. And by Harry Potter, I mean this magician that can do it. Don't follow magician because you.

[Paula Pant]

I believe Harry was A wizard.

[Joe Saul Sehi]

So there's a difference. Joe, back away. Somebody knows they're Harry Potter, some other stock market wizard. Right. Well, what happens then, Paula, is that you get into then this cult of personality. Well, Paul Merriman said it, you don't want to do that. I want to know what's behind what the wizard is doing. Which is really why I like the magician analogy differently. Right. Harry Potter did have, quote, magic, but a magician is using sleight of hand. They're doing things that if you pull the veil back and you learn exactly what they're doing, you've got so much more power when it comes to your investing strategy. All Merriman's doing is getting closer to something called the efficient frontier than these broad indexes are. All he's doing is getting more analytical with it. So if you can take one more step and actually learn how the efficient frontier works, you're going to be better off. Now, Merriman has these different portfolios that are much closer. So for today, Paula, let's not make perfect the enemy of good. If you follow one of Merriman's portfolios, you will be closer to the efficient frontier. I'd much rather you kind of learned how to do it. We're not going to do that today. But let's talk about just going to one of Paul's four fund approaches. What Paul talks about is if you use four indexes instead of one that follow four subsets of the market, you will get closer to the efficient frontier than you are if you just use one. That's all that he's doing. And Paul, like you said, we can link to the websites, people can see there's a few different combinations. Moving from where you're at with one index to four indexes is far more simple than you think that it is.

[Paula Pant]

Right.

[Joe Saul Sehi]

Paul points out what the indexes are. You can just buy those and they can be the same exact index in every single brokerage. I hear you freaking out, going, oh, my God, I gotta find these. On all things, let's say that one of your indexes is large Cap Value. You'll find, let's say the iShares large cap value Fund. You'll find the ticker symbol for that fund and you'll buy that same exact ticker symbol in all these different places. Even though you have nine different accounts, you're doing one thing. You're just doing it nine times. Last night, I was snapping green beans to put in a steamer for dinner. I was doing the same exact motion, probably 100 times as I'm snapping off the ends of the green beans for the steamer, that's all that you're doing. It's not going to take a lot of time. You need to know the four funds. That's the hard thing. Guess how many times you got to figure out what those four funds are? Once. Because once you figure that out, when you go to rebalance a year from now, you're going to use the exact same funds. And I'll tell you how to do that in a second.

[Paula Pant]

I have a question, Joe. So I know there are going to be some people in the audience who are going, wait a second, what about the importance of asset location? So the concept of asset location for people who aren't familiar with it, is the notion that based on the tax treatment of a given account, different types of funds should be held in different accounts. So if an account is tax deferred, then there are different funds that should be held there than an account that is tax exempt or an account that's taxable. What do you think about that in relation to Jackie's question?

[Joe Saul Sehi]

This is why I struggle with going, hey, I just want to do what Paul Merriman says. Because if I get on this four fund roller coaster, Paula, just in general, to broaden out your question, if I get on that, then the question is if I'm going to spend this money, at some point I need to get off that train. And we don't know what volatility is going to be like. So once again, I would rather that you learned how to do this and it's not that hard. We had a 90 minute session a couple weeks ago with a nice big group of people from the Afford Anything community. We took people through. Maybe we'll do it again next year.

[Paula Pant]

Yeah, yeah, you're efficient. Frontier training session.

[Joe Saul Sehi]

Yeah. The idea here is it should be a little bit different, but it's based on your goals, right. And based on when you're going to spend that money. I do like the idea of, okay, if I'm not going to spend the money in the brokerage account right away, let's make it pretty tax efficient. All of these funds in Merriman's approach are going to be pretty tax efficient. Let's put it this way, I don't think they're going to be less tax efficient than what you're doing with VTS X or vti. People that are using the simple approach, Right. This is not going to be any more. There's not going to be any more tax accountability than you have right now. But let's take a look at this because Jackie asked specifically about taxes. She is a 401k Roth, a traditional IRA, an HSA in a brokerage account. She needs to worry about taxes in one of those accounts, the brokerage account. So maybe Jackie, maybe you keep it simple and don't change your allocation away from the simple path in your brokerage account. Maybe you leave that the same and you just make the change in the other accounts. Once again, let's not make perfect the enemy of good. I think by getting eight of your nine accounts in the right spot is going to be far better than where you're at right now. So in all those other accounts, you don't have to worry about taxes. Now, the one that you do have to worry about taxes, I still. And you don't either. Paula. I don't like taxes wagging the let's make more money dog. So what I want to know are two things. Number one is what's the tax actually going to be? So I look at long term capital gains tax rates, I figure out how much I've made in this account and I just do some very simple quick math and go, oh, this is what my tax bill is going to be if I sell right now.

[Paula Pant]

Yeah. And I can tell you from experience, I have in many years the tax bill. When I've made transactions in my taxable brokerage account, the tax bill has been so small that the most annoying part was simply filling out the stupid form. The tax form, right. That is actually the worst piece of it. You're like, why am I filling this form out for like $1.50, $17? Come on.

[Joe Saul Sehi]

Well, let's go the opposite direction. Let's say, Paula, it is, let's say she's been doing this for a long time and it is a big tax bill. And listen, that index is done. And this is why there's been so much vitriol handed to me going, this index has done really well. It has done really well. I'm not saying you're not doing well. I'm just saying you can do a hell of a lot better than you're doing with almost no more work. So let's say she's done really well. Paula, the cool thing is this is a perfect time. If you're worried about this big lump sum of money and you just don't have it or you don't want to pay that in April, well then guess what? You do figure out how much you want to pay this year and make A sale right now, and then on January 2nd, make another sale.

[Paula Pant]

Yeah.

[Joe Saul Sehi]

Divide that into two. And now you don't have the big huge tax bill all at once, right?

[Paula Pant]

Yeah, that's a great point. December is a perfect time to play some tax games, to make some money moves.

[Joe Saul Sehi]

Absolutely. Yeah. So that's just a great strategy that works right now for the afford anything community. Jackie, there's one more thing that I inferred in your question, which was this. It's okay. Do I make these all at once? Do I divide them up and do them slowly? Here's the deal. Your money's already invested in the stock market. Your money, so it's on the stock market swing, Right. Goes up, goes down. The places that I'm suggesting you move toward are on the same swing. They're just more efficient on the swing. So this portfolio is going to be down. When your VTS X is down, it just isn't going to be down as much. This portfolio will be up. When VTS X is up, it's just going to be up a little bit more. So they're going to be these little hairs better over short periods of time, which add up to a lot of money over long periods of time. For that reason, I would do it all at once because all you're doing, you're staying on the same swing, but it's a more efficient swing that gets you there more quickly. If we were changing swings, if I was going from stocks to bonds or I was going to cash, or I was I a bunch of cash and I want to put it in the stock market, I might suggest not doing that all at once. Sometimes for psychological reasons, other times because it can truly hurt your returns. But in this case, Paula, all we're doing is we're staying on the swing. We're just jumping to another swing that's more efficient. So, Jackie, I would do this one time, just do it, do it once. And once you know what those four funds are, it's snapping those green beans like I was doing last night. You're just boom, boom, boom, boom, boom, boom, boom, boom. Last point, Paula, which is why is this only going to take 15 minutes? Because once you have those funds and you know what percentage go in each fund now, let's say, and this isn't going to be your allocation, but let's say it's 25, 25, 25, 25. Once a year you set a 15 minute date for yourself on your calendar and all you do is this. You look to see what the drift is, has been over the last 12 months on those positions. So let's say your large company company value has gone from 25% to 35% of your portfolio and your small company value has gone from 25 to 15. It's never going to happen like that, but let's say that it does. All that you're going to do is get those allocations that you started with the year before and you're going to go back to that same allocation. So you are going to sell off the excess that's above 25%. Once again, really simple math. Figure out what that amount is. You're going to sell it out of that large cap value fund and you're going to buy back into that small cap value. Now that sounds really cool. And you will see that that helps your success over long periods of time. Here's Paula. What people really see when they go to do it, and this is where it takes longer than 15 minutes, is because you start doubting your own system and you mess up everything for yourself because you don't follow the rule of just do it. What you do is you go, oh, my God. But large cap value has done so well. Oh, it's done so good. Maybe I should just let that run longer. Small cap value, man, that really sucks.

[Paula Pant]

Yeah.

[Joe Saul Sehi]

And by the way, there's a big blogger who's been on your show who's a friend of mine, big urn. Who wrote that I'm a small cap value fanboy and small cap value sucked. Earn. I'm not a small cap value fanboy. I'm a fanboy of using the efficient frontier and broadening out things. And big Earn made this big, huge thing going. Small cap value suck. Why would you do what Joe says, Earn? I didn't say do that. And by the way, small cap value would have saved your bacon from 2000 to 2010 while all the stuff that you're talking about is rocking now. Sucked so bad. I would have written a piece about you and how you're a fanboy about large cap Earn.

[Paula Pant]

Oh, man.

[Joe Saul Sehi]

So stay. So stay off me, Carson.

[Paula Pant]

He's not here to defend himself, but I should bring him on so the two of you can go. Like this is. I'm getting Jake Paul, Mike Tyson vibes right now.

[Joe Saul Sehi]

Oh, you know, and people that know me and I love Carsten and I've even said out loud. I think I even said it on your show, Paula. He'd be my financial planner.

[Paula Pant]

Yeah. Yeah.

[Joe Saul Sehi]

Because I love somebody that argues with me and he and I argue and it's great. It is fantastic.

[Paula Pant]

Thousand percent.

[Joe Saul Sehi]

So he knows I'm teasing for people that don't know that I'm teasing, but I'm not a small cap value fanboy, and he does like to stir the pot. So that's what we do.

[Paula Pant]

Well, and to your point, Joe, when this year, large cap has really boomed, like the Magnificent Seven Nvidia. Like all, you know, all of these really big companies have carried the S P500. And of course, this was the year when we heard people over and over and over say, well, why would I ever own anything other than large cap?

[Joe Saul Sehi]

Yeah.

[Paula Pant]

To your point, it's when an asset class is doing well, it's natural human behavior to find a reason to justify reallocating to a larger position of it. And so the argument this year was, oh, well, the world has changed. We live in the AI era now. And in the AI era, the gains go to the largest companies. So we need to fundamentally rethink. By the way, I don't believe this, but this is what people are saying. Oh, so we need to fundamentally rethink our asset positions because the world. Yeah, because the world has changed and we're going into AI. And in the era of AI, it is the era of large cap. Right. So you would hear people say this, and I asked Michael Kitsis about this in the interview that we did. He had a great answer, which I'll. We'll link to that episode in the show Notes as well.

[Joe Saul Sehi]

They're all related.

[Paula Pant]

Yeah, yeah, yeah, exactly. But it was a perfect example of when an asset class is outperforming. People will find ways to rationalize reallocating to a bigger portion of it. So watch your own behavior to make sure that you're not doing that.

[Joe Saul Sehi]

In 1999, I was a financial planner, and I think I've told this story. In 2000, I got fired by a client because his portfolio did 45% and all of his friends were doubling their money. And it was the time of Web 2.0. Right. And Web 2.0 was this. It was company profits don't matter anymore. It doesn't matter. It's just about growth. You don't get it, Joe. It's just about growth. But then it turned out in 2002, Paula, profits mattered like they always have and they always will. Like everything changed. And then we saw that again in 2007. Right. All kinds of people. They're not making more land. Land is the only thing that you need to own. If you own a bunch of land, why would you own anything other than real estate. And by the way, they're giving away mortgages. So let's just pile on the real estate bandwagon with every dollar you have into an illiquid asset. And by the way, large cap growth. You know, Apollo's a great place to be. Real estate's a great. I'm not saying these are bad asset classes. I'm just saying I'm going to go with history for the win because historically when you load up on one asset class, it has never ever ended well. It's never ended well, Right. So when it comes to asset allocation, the reason Jackie, it may take more than 15 minutes is because you're not pulling the trigger. If you're trusting the process, you're trusting the fact that your process has worked historically over and over and over and over again through all different economic cycles. Trust the process, take only 15 minutes, make the change, don't worry about it for another year, then 15 minutes again next year. Make the change. That's all it's going to take.

[Paula Pant]

Joe, one final follow up question which is when you make new contributions into the account. So I'll tell you how I do it. When I'm making new contributions, I sort of eyeball the drift from my ideal asset allocation. When I'm making a lump sum contribution, which is typically going to be somewhere mid year, I will eyeball the drift and then just make the contribution into the underperforming asset class. Do you think that's a viable way of. A little bit imprecise, but a viable eyeball. Ish. Rough way of rebalancing mid year.

[Joe Saul Sehi]

I've talked to a hundred different really smart people about this. Nick Majuli comes to mind. I remember the discussion I had with him about, about this. So many great financial managers. I'm sure Carsten, our friend Big Earn would agree with this. Filling in the potholes is always the way to go because then what you're doing is your dollar cost averaging into the part of your portfolio that's low. And so we don't know when that's going to come back. We just know that it will come back and when it comes back. I hate gold as an example, but gold has sometimes rallied and if you just keep loading up on gold, you know what's going to happen at some point. Paula, Gold will go up now over long periods of time. Still a crappy asset, which is why the efficient frontier rarely shows gold being more than a couple percent of your portfolio, if in your portfolio at all. But it will go Up. And so if the asset class is going to go up and you know that it's a part of your core strategy, then filling in the pothole means if it happens before you rebalance time, you're actually going to add a little more, what they call alpha. You're going to add in a little more return because you were filling in the potholes ahead of time. So I love that strategy. And it takes my 15 minutes that Jackie said was 45 minutes. That's only 15, and it turns it into like seven and maybe even nothing. Because if you filled in all the potholes not to do anything, that you just sit back and have coffee and go, oh, my goodness, this is so much easier than I thought it was. Which, Jackie, it is. It truly is perfect. There is one caveat, which is, as you learn over time, by the way, take your time learning how the efficient frontier works. Even in our lesson, I gave people the basics, and I think that's what people should start with. Just the training wheels. How does this work? How do the tools work? How do I dive into this? A little bit like going toward Paul Merriman, I think is a great first step, which is why I mentioned him. And he's done so much research already. If you gravitate that way, but realizing that's not the end, I'm gonna have to figure out how to extricate money from these. As I withdraw money for my goals, I'm gonna learn how that efficient frontier works. The efficient frontier drifts over time. Because to your point, Paula, is actually, everybody says the whole world has changed because of AI. The world has changed, but the economy is going to move slowly in a way that's going to be affected by AI, not all at once. And so as we see the efficient frontier drift over time, as we have new information, you are going to tweak those percentages. Maybe it's not 25, 25, 25, 25. Maybe now it's 30, 15, 25, 25. As the market drifts slightly and as your goals get closer, you're going to move down the efficient frontier, meaning you're going to get more safe, which is going to change your allocation. And by the same token, things are going to change in the world, which is going to change your allocation. But you only need to do that maybe once every five years where you go, is this allocation still really working for me?

[Paula Pant]

Perfect. Well, Jackie, I think that answered your question.

[Joe Saul Sehi]

God, I hope so, Jackie. If it doesn't, feel free to call back in, because as you may know, Paula, I'm a little bit excited about this topic.

[Paula Pant]

Yeah.

[Joe Saul Sehi]

Let me clarify it for you. We can do better. And based on all the people talking online that I'm seeing about this, whether they mentioned you and I, Paula, or not, I know where this argument started, and I'm very happy that we started it right here. So.

[Paula Pant]

Oh, yeah. Causing chaos since 2024.

[Joe Saul Sehi]

Can we talk about this a little bit? Why? I want to cause the chaos. Why? Okay, this is not so that you have more money. Don't get me wrong. If you have more money, you're going to be financially able to take care of yourself. And that's what Paula, you and I are after.

[Paula Pant]

Right.

[Joe Saul Sehi]

But there are a lot of people in the personal finance community who say this BS of, I have enough for me. And that's good. We live in these awesome communities that we want to be better and in whatever way we choose because we have this gift that we know how this stuff works. We can take this compounding interest that we create and make compounding interest for the community in the world around us. And that's what I'm interested in. So while I'm happy for the afford anything community to have more money, let's be clear. I want our communities to have more. And it's so easy. It's so much easier than we all think. And that's what gets me really excited about this.

[Paula Pant]

Yeah. Investing is so much simpler. Many people understand. And I think that's because there's a. There are a huge number of people out there. There are whole industries out there who get paid to make you think that it's complicated, that they are a wizard. Yeah, exactly. There are huge industries that make their money by convincing you that investing is complicated. And therefore they intimidate you and make you kind of throw up your hands and say, here, just take my money. You handle it.

[Joe Saul Sehi]

There's the analogy, Paula, right there. They want you to think they're a wizard. We know they're a magician.

[Paula Pant]

Right.

[Joe Saul Sehi]

We know there's sleight of hand going on. And if you know what the sleight of hand is, how much more powerful are you? You're not a wizard.

[Paula Pant]

Yeah. You're not Harry Potter. You're just a. Yeah, you're a Muggle. Muggles are great, too. No one here is anti Muggle, but.

[Joe Saul Sehi]

If you're pretending to be Harry Potter and you're a Muggle.

[Paula Pant]

Yeah, yeah, yeah, yeah. You're not truly Harry Potter. You're just someone who's learned a couple of card tricks.

[Joe Saul Sehi]

Yeah. There it is.

[Paula Pant]

Well, thank you Jackie for the question. We're gonna take a break to hear from the sponsors who make this show possible. And when we return, we will hear from a listener who just received an inheritance and is wondering if the advice that they got is sound. And we will also hear from a listener who has questions about how to juggle a whole bunch of different priorities. See you in a moment.

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[Paula Pant]

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[Paula Pant]

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[Paula Pant]

Like to do it, but you can.

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[Paula Pant]

Welcome back. Our next question comes from Heidi.

[Heidi]

Hi Paula, I'm a longtime listener and truly appreciate your thoughtful guidance. Sadly, my mother recently passed leaving an annuity of about $500,000. The advisor suggested a 10 year distribution at around $5,000 monthly, but I'm considering a 15 year option to reduce the tax impact. My husband and I are in early 30s and in the 22% tax bracket with a combined income around $160,000. I love your insight on which approach might be beneficial as well as investing this money. Thank you so much for your time.

[Paula Pant]

Heidi thank you for your question and first of all, I'm very sorry to hear about your loss with regard to how you handle this annuity. What I heard you talk about were the numbers and also a concern about the tax implications. What I didn't hear and what I'm curious to know is what are your goals? What do you want to do with this money? What legacy or imprint do you want it to leave? You and your husband have a combined income of 160,000. And I don't want to make any assumptions about your bills or your spending, but in the absence of any other information, I'm going to assume that you're perfectly able to maintain your current quality of life to pay your bills. I'm going to assume that you don't have any significant financial stress. The assumption that I'm working from is that this money is purely discretionary and it's not going to pay any outstanding medical bills that you have or anything like of that nature. If that's the case, if this is discretionary money, then what you don't want to do is get into a situation where you have a couple thousand extra dollars every month or a few thousand extra. And as can so easily happen when you have just a few thousand extra in your budget, it starts to get lost quickly. It goes to like an extra Uber here, an extra Uber there. It goes to ordering on doordash just a couple extra times. It goes to buying a few more sweaters in the winter than you otherwise would. What I don't want to happen is that 10 years passes and you look back and you're not quite sure where that money went. And it all went to Uber and doordash and clothing. I'm not finger pointing at that type of spending if it's conscious, but more times than not, it's unconscious lifestyle creep that allows money to flow away. So where I would start is by asking yourself specifically, what do you want to do with this money? If you want to invest it for retirement? I think that would be a beautiful use of the money because then the legacy that your mom has created can remain with you into your senior years. If you want to use it to take a couple of very well planned trips. I'm not just talking weekend on the beach. I'm talking core life memory. I don't know what interests or passions or hobbies your mom had, but if you want to use it to do something in that vein, maybe your mom was really passionate about animals and you want to spend it on the added costs that it would take to foster dogs from the local shelter. That's where I would start. What use of the money are you looking for? I would start with that. And then once you've determined that use, then pull out that money in the most tax efficient manner possible. But start with the use first.

[Joe Saul Sehi]

I love that approach too. Not just for tax consequences, which I think we can dive into even more, Paula, but I also like it because if that money's invested in a way that meets those goals, then why move it quickly? And then you can worry much more about tax efficiency. But if it's not meeting those goals, or if, like a lot of annuities, it's a high expense account and you can do it much more cheaply and that offsets a lot of the tax bill, you're going to have to move it more quickly then. Hell yeah. Let's get it out of there quickly. So starting with the goal, I think, to your point, solves all that stuff. Yeah, I think the first tax question that I had, which is a really important one, is this. A lot of annuities, Heidi, have been sold inside IRAs or inside retirement plans. And if it's inside an IRA or a retirement plan, that's going to have a different tax strategy than if it's just an annuity that's on its own. Annuities, for many different reasons, get sold inside of IRAs. Most of them aren't very good reasons. There's only a couple good reasons. But if it's inside of an IRA, then we're filing IRS rules on beneficial IRAs. If it's just an annuity, which is what you said it was. So again, Paula, in the absence of other information, that's what I'm going to assume is this is just an annuity. Here's how annuities get taxed when the money comes out. So in the absence of any other information, we'll assume that this is an annuity outside of a retirement plan or an ira. Paula, if that's the case, annuities do not get what's called a step up in basis, meaning that the tax treatment of your mom taking the money out is the same exact tax treatment for the beneficiary. So how does the tax work? Annuities are taxed in what's called a LIFO manner. LIFO is just short for last money in, first out. So what's the last money in? The last money in is the interest that the annuity makes. This is another reason a lot of people don't like annuities is because annuities become a big tax trap. The longer you have it, the more interest that accumulates. That's the first thing that comes out. And so because of that people often leave annuities and take money from other places because of the same question we're answering here, Paula. They don't want to pay the tax. I don't want to pay the tax.

[Paula Pant]

So, yeah, by the way, for people. So I just want to clarify. With lifo, I took an accounting class, and I had some classmates who were struggling with FIFO and lifo. They called it F my lifo.

[Joe Saul Sehi]

So good. And that's how everybody feels, right? They're like, oh, crap.

[Paula Pant]

And yeah. And so I was actually kind of. Because I've been doing this show for so many years, I was actually able to explain that concept to them. And so I wanted to share that with this audience. So the way to think about FIFO and lifo is, all right, you've got three chipmunks. You've got Alvin, Simon, and Theodore.

[Joe Saul Sehi]

Never. Never heard of them.

[Paula Pant]

You get Alvin in October, you get Simon in November, and you get Theodore in December. Right. In the new year, if it's fifo, you're taking Alvin out. And if it's lifo, you're taking Theodore out. That's how you think through it.

[Joe Saul Sehi]

There it is. Beautiful. Now I've got that song in my head, too.

[Paula Pant]

The chipmunk song.

[Joe Saul Sehi]

Earworm. Yeah, the Christmas chipmunk song.

[Paula Pant]

I can't even think of what that sounds like. I guess that's for the best.

[Joe Saul Sehi]

Christmas, Christmas time of year. Time for joy.

[Paula Pant]

Oh, no.

[Joe Saul Sehi]

Yeah, yeah. Anyway. Oh, yeah.

[Paula Pant]

Back on lifo, Back to the show, back to life.

[Joe Saul Sehi]

Oh, the first money out is going to be the interest. So the first thing that I want to know, Heidi, first thing you want to know how much interest is there? Because you might be worried in your head about a lot, lot, lot of money that's going to come out of this thing. That's going to be a big tax when maybe it's one time if I just rip out $10,000 at once and it's all in my same tax bracket I'm in today. It doesn't matter if I take it out now or if I take it out 10 years from now. Because really, if we're playing the tax bracket game, Paula, what we're doing is we're figuring out how much income I have right now, which Heidi already said she's done. And then I look at where the top of that tax bracket is, and I can take out the rest of that tax bracket without any additional tax penalty above what I'm already paying. Like, I would consider going into another tax bracket to be something I probably don't want to do. But heck, if I can take out all the interest and still be in my same tax bracket, then let's do it. And I would also then make the plan around that tax bracket situation too. I wouldn't make it set 5, 10, 15. We can't predict the future that much. Let's just see how much I can take out without it costing me more than what I'm normally doing would cost me. Unless you know for certain that three or four years from now, let's say you're going to have a significant decrease in income. If that's going to happen, well then maybe we wait for then, but then I'm still not doing 15 years. Paula, if I have a year where I have a heck of a smaller income coming in, is that the only case when you say hallelujah, by the way, oh, good news, I didn't make any money this year. Here's what I could do in that case. Then I still take out as much as I possibly can at that lower tax bracket. So I think that's the way I design the tax game. Let me tell you, if the person you're talking to, because you were talking about the advisor, if the advisor is the person who sold the annuity, they may be being paid based on that asset staying where it is. And if they think you're moving it from them, well then they may be all about let's leave that money for 10 years. Now the good news is it sounds like the advisor's telling you to take it out quicker and you want to maybe go longer. So that may not be the case. But I always want to know how's the person being paid that's giving me that advice? I think that's the most important thing though is is the money invested in a way right now that meets my goal? If so, then I feel comfortable slow playing it. If not, and it's invested in a way that is not going to be part of my asset allocation, well then I want to get it there faster because I think I can make up for this short term tax bill over the long term by having it in the right place. When I look at the taxes, is it inside an IRA or outside an ira? If it's inside an ira, I'm going to play by those rules. It's a whole different thing with an accountant or if it's lifo, then I need to look at how much interest has this actually made and what's the tax bill going to be and then how much room do I have until I hit the next tax bracket. But all of that, Paula, wrapped up in specifically where you started, which is see how all of what I just said is around what you said, which is what's the money for? Really starting off with what the goal is.

[Paula Pant]

Right.

[Joe Saul Sehi]

Is what's the money for? And we're going to get back to that with our next question too, so.

[Unnamed Sponsor]

Right.

[Paula Pant]

That's true. Yeah. So that core question, what's the money for? It's fundamentally the question of conscious spending. Jo, you and I yesterday we had a conversation about regret. The often when it comes to financial regrets, people tend to regret money that they have spent unconsciously that they've spent without a plan. When people say, I don't know where that money went, somehow it just slipped through my fingers. People often tend to regret money that was spent in that absent minded, unconscious, non thoughtful way. It's very rare that a person is thoughtful and deliberate about the use of money and that they later end up regretting that. Even if your priorities shift. Right. I know people who maybe at one phase of their life they were really into scuba diving and later in their life they lose interest in it and they're not into scuba anymore. But they never regret the money that they spent scuba diving, even when their interests shift because they recognize that that was deliberate, thoughtful money that they spent at a specific stage of their life when that was their passion at that stage. So even after that fades, even after they're like, I'm done, I never want a scuba again. I don't even want to look at the ocean. And sometimes that happens, they still don't regret it. That's the difference between conscious versus unconscious spending. And particularly when it comes to an inheritance, spending that money on very specific, discrete things that you can point to. So you can say, I spent the inheritance that I got from my mom on X, whether that X is your own retirement, whether it's a house that you pay for in cash, whether it's a setting up a charity that addresses some type of issue that both you and your mom are passionate about, like whatever that might be, having a very, very discreet and specific X answer to what that money was spent on that often can give people the psychological. I know that I honored that legacy.

[Joe Saul Sehi]

I love the idea of spending the money in a way that not only is prioritized based on your goals, but also honors the person.

[Paula Pant]

Right.

[Joe Saul Sehi]

It's just amazing. Even as you're talking, Paula, I'm just reliving this idea that money has money itself, has no emotion it's this green and white bill with a bunch of funky pyramid and eye on it and some president.

[Paula Pant]

Yeah.

[Joe Saul Sehi]

It has no emotion and yet we bring so much emotion to it.

[Paula Pant]

Yeah, because it represents life, it represents time, it represents energy. So honoring somebody's money is honoring their life. Well, thank you, Heidi, for the question. We're going to take one final break to hear from the sponsors who make this show possible. And when we return, we will continue this conversation with a question about how to set priorities when there are a lot of things that you want to spend on. Stay tuned.

[Unnamed Sponsor]

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[Paula Pant]

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[Paula Pant]

And one of the things that I.

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[Paula Pant]

Right.

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[Paula Pant]

Well, that's incredibly difficult to track. So you need a very, very secure.

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[Paula Pant]

Welcome back. Our final question today comes from an anonymous caller. Oh, Joe, what should we name this anonymous caller?

[Joe Saul Sehi]

I know not all of our audience is into all of these Hallmark Channel movies this time of year. Ooh, the Christmas movies. But for people who are, there is a movie that has kind of defied the odds. In fact, there's been a lot of media about this film. It's called the Best Christmas Pageant Ever. It's after a book that a lot of people have really liked. It's a community that has the same Christmas pageant every year. And this year, the worst kids in the world, the Holdmans, somehow become the main people involved with this and try to ruin and take down the Christmas pageant. It's hilarious. It's funny. It makes you realize for people that celebrate Christmas, what the season maybe should be about versus all this stuff. But the woman who's the mom in this wonderful movie, she is. Her character's name is Grace and she's just trying to hold it all together while everything is coming down. And so as you're going to hear from our caller, she's trying to hold a lot together. Paula. And so I think we should call her Grace.

[Paula Pant]

Oh, Grace is such a beautiful name. I've always loved that name. Nice. Joe. Never. You never struck me as a Christmas movie guy.

[Joe Saul Sehi]

I prefer to talk about my love of Die Hard and, you know, manly man movies.

[Paula Pant]

Yeah.

[Joe Saul Sehi]

But yeah, this one I looked at Cheryl at one point, I'm like, I'm not crying. You're crying. Shut up.

[Paula Pant]

I just recently learned that Die Hard is a Christmas movie. I had no idea.

[Joe Saul Sehi]

Oh, those are fight words. Paula.

[Paula Pant]

You just opened up a. Oh, I've never seen it.

[Joe Saul Sehi]

That is a wound I made the mistake of showing my kids when they were maybe 8 years old. I'm like, oh yeah, this is a Christmas movie. They're having a Christmas that we. Oh, and there's a little bit of action. I totally forgot. The main line in the movie is yippee ki yay.

[Paula Pant]

Bleep. Yeah. How old were your kids at the time?

[Joe Saul Sehi]

Eight years old. Oh yeah, my twins are eight and Cheryl's looking at me going what the hell are you doing, Joe? What are you doing? Showing our 8 year olds yippee ki yay. Oh yeah, I forgot how violent that movie was too. So lesson learned. Do not show your 8 year old's die hard.

[Paula Pant]

They turned out okay.

[Joe Saul Sehi]

They're doing all right. Not scarred for life.

[Paula Pant]

All right, well, our final question today comes from Grace.

[Grace]

Hi, Paula and Jo. I'm calling with a question about how to prioritize financial goals. A little bit about me. I'm 34. My husband is 40 and we have two kids, one and a half and five years old. We make about $265,000 pre tax. I have 200,000 in a traditional retirement account and my husband has 100,000 in a traditional retirement account. We both have 5% match and we would both be eligible for pensions when we retire. But we're not sure how much we would make in our pension. We have $8,000 in a taxable brokerage account, 9,000 in a 529 for the five year old and a thousand in a 529 for the one and a half year old. We also have 12,000 in savings and we own a townhome which is worth about $600,000 with 415 left on the mortgage. Now here are our priorities. We'd like to retire well and have enough for travel and to live an enjoyable retirement without having to worry at all about finances. We've calculated that out to be about 3 to 4 million dollars between the two of us by the time we're 60. We'd also like to buy a new home in the next five to 10 years. That would be bigger than our townhome, but we have a very nice interest rate of 2.5%. So if possible we'd like to keep the townhome and rent it out because we live in an area with a lot of college students. The other priority we have is we'd like to buy our next car with cash. We'd also like to fund our children's 529 so that we can pay for their college tuition. And then lastly, we'd like to travel and have at least two vacations each year. One in the summer and one in the winter for Christmas to visit family. We're really struggling right now with trying to figure out how to prioritize these different financial goals. I understand that we need to be saving more and building up our savings for multiple goals, but I'm not really sure how to visualize how to save. Should we just be dumping as much money as possible into a general savings account? Should we be focusing on one goal over another? Is it based on time horizons or is it based on the amount of money we need? Any help you could give would be really beneficial to us. We're considering looking into a fee only financial planner to help us prioritize and build out a plan. But I figured I'd ask you guys first. Thank you.

[Paula Pant]

Grace, I love this question. This is the heart and soul of financial planning. Here's a limited pool of resources and here's an unlimited life. And how do I make these limited resources fit this big, wide, beautiful unlimited life? Right. This is really the heart of what money management is all about.

[Joe Saul Sehi]

I just wish Paula, we knew somebody who wrote a book about this topic.

[Paula Pant]

Joe is not so subtly pimping his own book right now.

[Joe Saul Sehi]

If only there were a book that addressed this. Oh man. Because this is. This is my favorite question too, Grace. It's my favorite question, Paula. You know it's my favorite question.

[Paula Pant]

Yes, absolutely.

[Joe Saul Sehi]

People think I get excited about the efficient frontier. This is awesome. Grace.

[Paula Pant]

I'm going to say a couple of things right off the bat because I can tell that Joe is. He's about to go wild.

[Joe Saul Sehi]

Joe gone wild.

[Paula Pant]

I can see it in his eyes. Before I unleash Joe upon this microphone, few things I'll say right away. One is this is very kind of tactical, but if you can, for your shorter term goals for money that you're saving, use a bank that lets you put that money into different savings sub accounts. Basically, if everything is co mingled together into one big giant savings account, it doesn't feel like money that's being used for X and Y and Z. If XYZ is all comingled together in the same account, it just feels like a giant big pile of money that you haven't mentally bucketed and assigned emotional weight to. So any bank that has sub accounts, I know, I don't know what the current ones are. Ally bank I think did that for a while. They may still do, they may not.

[Joe Saul Sehi]

Ally does it. That's what I use.

[Paula Pant]

Okay, perfect.

[Joe Saul Sehi]

I know my credit union. A lot of credit union accounts will do it. All of those are either FDIC insured or the similar insurance that the credit union equivalent.

[Paula Pant]

Yeah.

[Joe Saul Sehi]

That credit unions have. Yeah.

[Paula Pant]

There was a bank. I don't know if they even still exist. Smarty Pigs and their whole bread and butter was that the whole concept of Smarty Pig was the user interface was like a giant piggy bank. And they would have these separate sub accounts and you could label every single one and you could get really granular with it. You could be like, these are the funds that I'm setting aside to pay to go to my best friend's wedding. You could be as granular as these little 700 goals or you could have bigger goals. Whatever it was. And what was great about that is by virtue of putting a label, putting a name on every single one of those buckets, it really allows you to mentally see what pools of money are being saved for what goal. So it avoids that. That jumble.

[Joe Saul Sehi]

Smarty Pig not only Paula, is still a thing.

[Paula Pant]

Yeah.

[Joe Saul Sehi]

It's a product of Sallie Mae.

[Paula Pant]

Oh, look at that.

[Joe Saul Sehi]

So big name, big name agency, Big name acquisition.

[Paula Pant]

Yeah, yeah. Oh, good for them for getting acquired. I knew them back when I remember. I remember when they were young.

[Joe Saul Sehi]

How my kids growing up.

[Paula Pant]

The other thing that I will say.

[Joe Saul Sehi]

Before you do this, Paula, let me expand upon what you said because it's not about Ally, which is what I use, or Smarty Pig or your credit union, whatever.

[Paula Pant]

Yeah.

[Joe Saul Sehi]

It's actually about when you give your fund a name. All of the behavioral studies show that that makes the money stickier. If I don't say this is my Smarty pig account, I say this is my sub account. That is for my next car fund. I love this. For the next car fund, Right?

[Paula Pant]

Yeah, I love that next car fund.

[Joe Saul Sehi]

This is my next car fund account. I don't think of it as Smartie pig anymore. I'm going to not only leave that money there when the next thing happens. So I'm not going to touch it. I'm also going to continue to put money in it more aggressively because it's the car fund and not just a savings account. So labeling your accounts is phenomenal for better behavior, Right?

[Paula Pant]

Yeah, exactly. And with the car fund, the way that I like to reframe it is making a car payment to myself. Right. It's like, well, I just have a car payment every month. And so you just make that car payment, but you make it it to yourself.

[Joe Saul Sehi]

That's what Cheryl and I do.

[Paula Pant]

Yeah, yeah, yeah, exactly. And so by virtue of doing that, it by calling it a car Payment, it feels more like a bill. And so you're less likely to skip out on it because you're like, I gotta make my car payment this month.

[Joe Saul Sehi]

So good.

[Paula Pant]

Yeah, it's money that you're sending straight into a savings account. The other thing I would say, and this is where there's some difference in opinion about tactics. Dave Ramsey has this debt payoff method called the debt snowball, in which he makes a minimum payment on the majority. If a person has five debts, you make the minimum required payment on four out of the five, and then you throw every spare penny that you have into the smallest of those five debts. And by virtue of doing that, you wipe one of those five debts off of the board really quickly. And that creates a psychological victory that keeps you going. I like to take that model and apply it to savings and turn it into a savings snowball in which you make the quote unquote, minimum payment. And so that's you get the employer match on your retirement accounts. Maybe you have a certain minimum threshold of the amount of money that you want to put into a kid's college fund. Like you never want to go under $200 a month per child. Right. So you have a certain like, quote unquote minimum that you give yourself. You make that minimum payment to all of these different goals, and then every spare penny gets concentrated towards one goal. And that could be the goal that either has the smallest amount of money, similar to the Dave Ramsey debt snowball, or it could be the goal that has the shortest timeframe. But either way, you get the psychological victory of maxing out a goal and then just checking that off your list and being done with it. And I think there's a lot of power to that.

[Joe Saul Sehi]

Yeah, I think it's really interesting to see how often behavior trumps science. Right. I mean, especially you talked about debt pay down. Look at all the smart people out there that had a mortgage at less than 3% and still paid it off early anyway.

[Paula Pant]

Yeah, me.

[Joe Saul Sehi]

Yeah. I mean, just sounds like the dumbest, dumbest thing when it comes to math. But it's not all about math. It's about mind share.

[Paula Pant]

Yeah, exactly. I had a lot of very, very, very low interest mortgages. I paid them all off and I do not regret it for a second.

[Joe Saul Sehi]

It's fabulous when you get to the point that it's no longer about math and it can be about mind chair. I think for people really, really close to the goal, it has to be about the math. Right. But when you get to the point that you don't have to worry about the math. And instead I can just do the thing that makes my heart sing. That's the ultimate place to be.

[Paula Pant]

Yeah.

[Joe Saul Sehi]

There were times that I'm like, hey, listen, I don't want to slow play this thing, but if we don't, you're not going to make it to the big goal.

[Paula Pant]

Yeah, well, and not to talk about myself too much, but the reason that I just to clarify this for everyone, the reason that I specifically made the decision to pay off all of the mortgages on my seven rentals was because I'm an entrepreneur. I run a small business. So not only am I self employed, but I also employ others, a small team. And that is inherently a risky way to earn a living.

[Joe Saul Sehi]

If I'm not mistaken too, it was also the time that you decided to move to Manhattan, which was going to be adding a bunch of new expenses. That would also be because you're in Manhattan, you're closer to opportunities.

[Paula Pant]

Honestly, Manhattan hasn't actually added expenses. It shrank the square footage that I got for the same amount of money. My housing payment in Manhattan is pretty similar to my housing payment in Las Vegas.

[Joe Saul Sehi]

Okay.

[Paula Pant]

I just have a fraction of the square footage for that.

[Joe Saul Sehi]

Right. Like a friend of mine says, it's really spacious. I can fit a water bottle and a pencil.

[Paula Pant]

Yeah, exactly. So, yeah. And in Manhattan, I don't have a car. So if you look at the amount of money that I was spending when I lived in Las Vegas, if you look at my mortgage plus the amount that I spent and my car, I bought in cash. But there's still insurance, there's still gasoline, there's still maintenance and repairs. I don't have any of those expenses anymore. And so if you look at the amount of money when I lived in Las Vegas that I spent on my mortgage plus my car related expenses, if you add those two up, that's crazy. That's the rent that I'm paying in New York right now. So actually it moving to Manhattan did not increase my costs. It definitely shrank the square footage. Thousand percent. It shrank the square footage. I had to learn how to live in a much tinier footprint.

[Joe Saul Sehi]

What freaks me out is always looking at. Heck, even hearing Grace Paula go through all these goals, you can see why you'd be overwhelmed. You're like, I want this thing for my one and a half year old. I want this thing for my five year old. I want to keep the town home, I want the house. I have these pensions. I don't know how they're going to work. I want to retire at 60. We want to travel twice a year. We got all of these competing goals, like, how do I make sense of any of that stuff? And the thing that has been so effective for me and back when I was a financial planner for my clients was this idea, Grace, called timelining your goals. And by timelining everything out, you will see, you'll put them out in front of you in a way that they're not listed like we just did. Because when you list that makes my heart rate go faster and faster and faster, my blood pressure go higher and higher and higher because I'm like, oh, another one. And oh yeah, oh yeah, and another one. If I lay it out graphically, then I can see them. And the magic of these goals is this. This is basic Stephen covey stuff, right? 7 Habits of Highly Effective people. When you pick up one end of the stick, the other end of the stick comes with it. Meaning in this case, Grace, what you do toward one of these goals also affects what happens with the other goals. So as an example, let's look at age 60 and the fact that you have a one and a half year old and a five year old. You're going to be in your early to mid-50s when your kids start going to college and you want to retire at 60, those two goals are going to have friction against each other. They're totally going to have friction against each other. And then if you're trying to look at this hugely expensive cost of college, this five to 10 years townhome, if the townhome is 10 years from now, your oldest is 15. At 15 you're starting to think about those college wheels that's going to play against these goals. The car to staying ahead on your next car is going to affect all of these things, right? Can I do that? Can I not do that? So with a limited check, how do I look at the relationship between all these goals? And the best way to do it is graphically, because I found it's the only thing that decreases the blood pressure. Because now we see, oh, this is happening here, this ball of money I need for my five year old and then three years later I've got the one and a half year old that now is entering college. Am I going to have two in at the same time? Depends on birthdays, right? Depends on what happens then. But maybe I've got two in at the same time, I don't know. But when I see these things start to intersect, my conscious mind and my subconscious mind Begin working on the goal together. And Paula, this is where it gets really powerful because then on that timeline, so I've got me as a stick person over here on one side of the of just take a regular piece of copy paper and then across the bottom put your timeline with you passing away on the far other side, way, way, way on the other side. And then put ages that these things are going to happen and put these little balls of money. I'm going to need, I'm going to need a ball of money when I retire at 60, I'm going to need a ball of money. When my 5 year old goes to college, I need a ball of money. When my 1/2 year goes to college I need a ball of townhome. And then I look at those and they bring up Paula. Then some obvious questions. Obvious question one, let's take retirement. Retirement then is okay, what's that going to cost? Well, she's already predicted what she thinks it's going to cost, but we don't know because she doesn't know what the effect of the pension is, which you and I both know hugely important to find. That is job number one. To find out what that pension is going to be. Conservatively.

[Paula Pant]

I also want to know how secure is that pension?

[Joe Saul Sehi]

Absolutely.

[Paula Pant]

The institution that is providing that pension, how secure are they? What are the risks of insolvency?

[Joe Saul Sehi]

Yeah, I mean think about that already. We think about our, the way we say for it's going to change based on what happens with that pension. So solving that pension is going to look at that one bubble and then I can take a look once I get some idea of what my plan would be. Okay. Based on all these factors, I think I'm going to need to save this. I can draw a line back to today and I can do this. I'm going to need to save X amount of money times Y rate of return. And the cool thing about that, that also then sets up benchmarks along the way because when I look at these, some of our listeners, it might be 25, 30 years old. You hear number like 5 million, Paula, you freak out like are you kidding me? Even a million dollars, like I'll never get there. But you and I know how quickly that compounding works over time. So celebrating the fact that you got to $2,000 is a big celebration. If that's your first milestone and you're number one to get there, I got to get to 2,000. The next year I got to get to 5,000. Then the next year I got to get to whatever, celebrate these small milestones along the way. But once I know what that is, I do the same thing then with college because she said college is important. So these 529 plans, we know how much money she's going to want for the new house. Ostensibly the same thing. Draw a line back to and that will tell me, okay, I need to save X for my retirement, I need to save Y for these colleges, I need to save Z for the new car. And then I need to save whatever the next letter would be for the house.

[Paula Pant]

Goal omega.

[Joe Saul Sehi]

I should have started a W.

[Paula Pant]

I.

[Joe Saul Sehi]

Should have started earlier. I know now, but now I know what my saving amount is that I need for all four of those things. And then I look at my budget and either I can do it or I can't do it. And if I can't do it. But this is where the magic starts. Because in most of the cases when I was a financial planner, my client couldn't do all these things. They couldn't do it. We had to start making some decisions. And these decisions are lovely. And this is when Joe Saul Sehi and Paula Pants start to intersect with our friend Vicki Robin. Because this is not about money again, this is about priorities. And I want to put all these priorities in a cage like it's an MMA match. And I want to say this. If I can't get that house the way I want or when I want, and I can't pay for all of my kids college and I can't retire age 60, which one gives first? And the cool thing is everybody listening to this has the answer that, well, of course I'd get rid of the college, or of course I'd retire later, or of course the new house isn't that important. Like everybody has their thing, but it's different for everybody. But when you would tell me that when I was your financial planner, now I know, oh, that's not the priority. This is the priority. And so let's say we push back retirement from 60 to 62 because you don't care. Now we can fully fund the kids college. And now I know college is the main goal. Retirement's the number two goal. Or maybe the house is. Whatever it is, you've got priority one, priority two, priority three. And with that third priority, you might be able to make it work in other ways you haven't thought of. Maybe I can find a way to expand the budget by either decreasing expenses or increasing my income. Right. I know. If only somebody had a negotiation class here. Speaking of Haken Products.

[Paula Pant]

Thank you, Joe. Thank you, Joe. We're running it through beta right now, and it's going through a huge number of improvements. So it's not going to be fully ready until sometime in early 2025.

[Joe Saul Sehi]

But that's still good news, right? Yeah, it's going to be fantastic.

[Paula Pant]

Yeah. Yeah. We're going through it with the beta testers right now, getting a lot of feedback, so.

[Joe Saul Sehi]

And you and I know, Paula, all the studies show your boss wants to give you raise. They have other priorities, and they're not just going to throw you money. You need to make your case. So, yeah, increasing your income, maybe starting that side hustle you've thought about is an option. The second is to decrease expenses. Really look at do I value these things. But now it's not so much about a budget. Everybody hates a budget. But if I tell you, Paula, if we can find another $200, you can retire when you want to guess how motivated you are, if that's your number one goal.

[Paula Pant]

Right.

[Joe Saul Sehi]

All of a sudden you're on a mission. You're like, oh, yeah, I don't. I don't need to eat at restaurants twice a week. I'm good without that. If you tell me that I can make this happen earlier, heck yeah. Because that's my number one goal. All of a sudden, your money starts lining up with your priorities, and that's where this get. I would timeline these out again. Look at then what does that mean I have to do today for each of these? Look at my budget and see if that's possible. And then set up your plan for each one individually, realizing that they're all part of a unified whole.

[Paula Pant]

I like the MMA analogy. I know I laughed when you made it, but it truly is a battle of resources, and it should be, shouldn't it?

[Joe Saul Sehi]

And the stronger goal should win the resource.

[Paula Pant]

Right?

[Joe Saul Sehi]

And how often are we not doing that?

[Paula Pant]

Yeah, exactly. And within that battle, goals get either modified or their timeline gets extended.

[Joe Saul Sehi]

It's pretty exciting to know that you have all these levers. I can either set a more aggressive asset allocation, which is fraught with risk. I could push the goal back. I can lower the goal. So instead of paying for all of my kids college. Go. Okay. They're gonna have to figure out a quarter of it, and I'm gonna just do two thirds or.

[Paula Pant]

Nice math, Joe. Not a math major in college.

[Joe Saul Sehi]

Wow.

[Paula Pant]

We're leaving that in, by the way.

[Joe Saul Sehi]

Thank you. Paula's like, that's what an idiot I work with right there.

[Paula Pant]

Oh, that's funny.

[Joe Saul Sehi]

Let's go with 3/4, Paula. Maybe I fund 3/4 of it, or maybe I do 2/3 and they get scholarships for that piece that Joe left out and then the other quarter, whatever.

[Paula Pant]

Yeah, yeah, but you know what I.

[Joe Saul Sehi]

Mean, I can lower the goal. I can push it back. Like people think there's no options.

[Paula Pant]

Right.

[Joe Saul Sehi]

But when it is the MMA thing, to your point, then we realize we have lots of options around these goals.

[Paula Pant]

Yeah. And you know what strikes me when it comes to the time around the goals is there are certain goals. Many parents, and you certainly don't have to do this, but many parents want to be prepared for their children to start college at the age of 18 straight out of high school. Obviously every family is different and some plenty of people don't go to college at 18. Plenty of people go when they're 22 or 25 or 30 or older. But a lot of parents, for planning purposes, will hold that as a goal that has a fixed timeframe. Whereas there are certain other goals like when you purchase a home or when you retire that have a much more flexible timeframe. And Joe, to your point about you can dial up the risk, but that makes it riskier. It makes it riskier when the timeframe is fixed. With college, that time frame, depending on your set of values, for many parents that time frame is fixed and so the risk has to be dialed down due to the inflexibility of the goal date. Whereas other goals that have a flexible timeline, all right, you can actually keep that risk high even if the timeline is relatively short because it's also a flexible date.

[Joe Saul Sehi]

We would have this happen in non risky asset classes. So what a fan I am of Ginny Mae's. You like Ginnie Mae's, but you and I also know that Ginny Mae's have some pretty bad years sometimes. And sometimes for like that house goal, Paula, that's in the middle of that 5 to 10 year region. I would use a Ginnie Mae knowing that we can beat FDIC insured rates over long periods of time, but also knowing and making sure my client knew very well that hey, this thing could go down by 5% in a year and then we'd have to make it up later. But if the goal of the new house didn't have a specific date and we're okay with living where we are another two years, if that happens, if we're going to have more money by doing it that way, well then heck yeah, I'm going to take that risk, which is not a huge risk to Take Right. So even in the non risky part of your investing, you can flex a little bit if the goal is flexible. This is exciting though. I love where Grace is at. I love the questions. They're the right questions to be asking. It's the right time to be asking them because these goals are still far enough away that there's plenty of things that you can do to meet them all. I would have people come into my office at 55 and go, I want to retire at 60. What can I do? And there are some things a 55 year old can do, but not as many things as you can do in your 30s. It's a powerful time to be asking these questions.

[Paula Pant]

Well, so thank you Grace for the question and I do recommend Joe's book.

[Joe Saul Sehi]

Can we supersize it Paula?

[Paula Pant]

Oh yeah, absolutely. Go for it.

[Joe Saul Sehi]

Last year for the first time I took a small number of people. This is not going to be for everybody but Grace said that she's looking at hiring a financial planner. Maybe she wants to do that. That if she wants to understand how all this works before she makes that decision. I'm taking a small cohort of people again this year starting in late January through my book and we're getting all the achievements. The book has all these achievements like you're in Cub Scouts. And so we're going to start with things like timelining and setting up your dashboard. We're going to talk about investing the same stuff we talked about early on today, about keeping it easy and then the efficient frontier and how that works. Estate planning, maximizing, heck, a lot of the stuff we talked about today we're going to go through how to understand all of these things. 90 minutes with me and a small group of people and we work together to build your financial plan over a 10 week period. If you can't make it live, we will record it. But you really want to try to be there live. It's going to be not like I said, not for everybody. But if you want to know how this works, it's stackingbenjamins.com bookclub and this is not like my mom's book club where she has some friends over and they. It's really about drinking wine, Paula. For my mom. So stackingbenjamins.com bookclub if you want to dive in or if you just want to read the book, just go get stacked. You know what, it's holiday season. Have somebody else buy you stacked.

[Paula Pant]

And definitely read. What is it? Page 17? Is that the one?

[Joe Saul Sehi]

It's so weird. That Paula has the exact page that she's on. Yes.

[Paula Pant]

Was I right? It's either page 13 or 17. I can't.

[Joe Saul Sehi]

I think it's 13.

[Paula Pant]

Is it 13? Okay.

[Joe Saul Sehi]

Yeah. And what's cool is that an audiobook actually is really good too, because you have the actual interviews, but we take audio from actual interviews that I've done with experts in these different areas. And Paula, that section of the book is a transcription from you and I in the Afford Anything show and you leading a discussion around timelining.

[Paula Pant]

Oh, wow. I should listen to the audiobook.

[Joe Saul Sehi]

Yeah. And so on the audiobook, it's you and me answering somebody from the Afford Anything community's exact question about, kind of like Grace's question. But we also have at the end of every chapter, either a transcription in the book of something from the podcast from the Stacking Benjamin show, usually except for this one, Afford Anything from either the Afford Anything show or from Stacking Benjamins. And so you'll hear people like Laura Adams, Money Girl. You'll hear Gene Chatsky, Jill Schlesinger, lots of the big names in finance, talking about their expertise in the area that we just went over in the book. And plus there is a cameo several times throughout the book from my mom. My mom is in the book. Ah, yes. And actually what's funny is I'll even pull the curtain back further. It's not really my mom, it's the actor who plays my mom. That's a whole nother story.

[Paula Pant]

Well, Joe, I would ask where people can find you if they'd like to hear more, but I think you've just told us.

[Joe Saul Sehi]

But I think that was it.

[Paula Pant]

Yeah.

[Joe Saul Sehi]

Come join me. Stackingbenjamins.com bookclub and again, it's not gonna be for everybody, but if you wanna be in the small group doing this, I'd love to, love to hang out with you for 10 weeks and build your financial plan.

[Paula Pant]

Nice. Well, Grace, thank you for the question. And to all of you, thank you for being part of this community. This is the Afford Anything podcast. If you enjoyed today's episode, please sign up for our newsletter, affordanything.com newsletter it's active again. Finally.

[Joe Saul Sehi]

Woohoo.

[Paula Pant]

I know, right? I have tried and tried and tried to revive this newsletter and we're finally doing it. So this newsletter is now active again. You will be getting insights delivered hot and fresh to your inbox. This is not stuff that's on the podcast. You only get it on the newsletter. So affordanything.com newsletter Absolutely. Zero cost. Affordanything com newsletter thank you so much for tuning in. This is the Afford Anything podcast. I'm Paula Pant.

[Joe Saul Sehi]

I'm Joe Solsehai and we'll meet you.

[Paula Pant]

In the next episode.