Q&A: Her Brother Owns 3 Houses — Is That Why We Have a 'Housing Shortage'?

Summary

Podcast Summary: Afford Anything – “Q&A: Her Brother Owns 3 Houses — Is That Why We Have a ‘Housing Shortage’?”

Host: Paula Pant (with co-host Joe Salsihai)
Release Date: July 21, 2026
Episode Theme:
This episode tackles myths and realities about the U.S. housing shortage, driven by a listener’s question about whether wealthy individuals owning multiple homes are exacerbating the crisis. Paula and Joe examine housing supply, price dynamics, investor behavior, housing market data, and asset allocation in personal finance, providing clarity on nuanced economic issues—and field two more questions on portfolio simplification and mortgage payoff vs. investing.

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Overview of the Episode

• Main Theme:
  Examination of the U.S. housing shortage—a nuanced, data-driven discussion addressing whether owning multiple homes by affluent individuals materially impacts the market, and what data really says about the supply gap. Also featuring rich discussions on personal finance questions about portfolio simplification and the classic “pay down the mortgage vs. invest” decision.

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Key Discussion Points and Insights

1. Question: Does Wealthy Ownership of Multiple Homes Cause the Housing Shortage? (Karen’s Question)

[01:47–23:48]

Paula’s Analysis:

• Yes, There is a Major Housing Shortage:

  • Multiple credible sources (Zillow, White House, Freddie Mac, Realtor.com, CRS, NAHB, Moody’s, Goldman Sachs, Brookings, McKinsey) all estimate a deficit ranging mostly between 1.2–10 million homes.
  • “All of these studies are saying that the shortage in absolute supply is somewhere between a shortage of 1.2 million units to the low end of the estimate ... the high end is 10 million. The kind of consensus number seems to be somewhere around 4 to 5 million.” (A: Paula, [11:11])

• Type and Location of Housing Matter:

  • Luxury/vacation homes often bought by the wealthy are NOT the entry-level homes where shortages are concentrated.
  • “The shortage is largely concentrated in the entry level starter home domain… not the homes that wealthier people are buying.” (A: Paula, [03:44])
  • Affluent buyers tend to purchase in vacation destinations (Aspen, Hilton Head, etc.), not in major cities/metros with the worst shortages.
  • Severe shortages are most acute in places like Los Angeles, San Francisco, New York, Boston, and D.C.—not typical vacation home markets.

• Absolute Units vs. Availability:

  • “Karen’s asking about the absolute number of houses and you’re talking about housing availability… There is a distinction between absolute number and availability.” (A: Paula, [05:38])

• Household Formation Suppressed:

  • “Because of affordability conditions, if a person lives with a roommate, then what would have otherwise been the formation of two households gets consolidated into the formation of one…” (A: Paula, [10:00])
  • Approximately 1 million U.S. households haven’t formed due to high costs (Freddie Mac).

• Statistical Nuance & Local Variation:

  • “There is no such thing as the real estate market. There are just many, many, many hyper local micro niche markets.” (A: Paula, [12:34])
  • Pockets of affordability exist—e.g., Midwest, selected parts of Florida such as Melbourne, which has surplus.

Joe’s Additions:

• Wealth Concentration Does Influence Supply:
  • “If I make enough money that I decide to buy three houses myself, it contributes to more of a housing shortage.” (B: Joe, [04:34])
• Stats Can Obscure Local Stories:
  • “We draw conclusions when we hear statistics… But when you parse the data, it doesn’t look at all like we first thought.” (B: Joe, [17:38])

Notable Quote

• “Nobody's saying there's not a shortage… the fact that their numbers swing by millions just blows me away. Of course, in a country with 340-ish million people, what's 1 million or 2 million difference between friends?” (B: Joe, [12:18])

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2. Market Dynamics and Data Breakdown

[14:35–23:29]

• Permitting vs. Jobs:

  • LA has just 1 new housing permit for every 3 new jobs—demonstrating why shortages are most severe in high-growth major metros.

• Luxury vs. Affordable Home Prices:

  • Luxury home sales (43% of inventory) are propping up average home prices, even as affordable (<$250k) home prices fall:
    • “Prices on affordable housing actually are coming down, prices on luxury houses… are up.” (B: Joe, [16:34])

• Supply Gaps by Region:

  • Largest absolute deficit in the South (1.62 million homes), but most acute recent shortage in the Northeast.
  • Midwest fares best—“no cities in the Midwest that appear in the list of the top 20 metros with the worst shortages.” (A: Paula, [21:55])

• Building More: The “Do Good and Do Well” Solution:

  • Increase density (convert basements/garages, add ADUs, create more bedrooms): “If every single one of us increases density by one unit or even, heck, one bedroom… at a wide enough scale, that has a powerful effect…” (A: Paula, [24:03–25:10])

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3. Question: How to Simplify a Complicated Portfolio for DIY Management (Sarah’s Question)

[32:53–60:18]

Caller Profile:

• Early 40s, $1.5M invested (split between rollover IRA, Roth, taxable; plus home equity), wants to retire in 15 years with $100K/yr income.
• Portfolio: 13 mutual funds/ETFs, same allocation in all accounts, seeking simplicity and more efficient allocation.

Key Points:

• Asset Location is Crucial:

  • “She wants better asset location… not disrupting overall asset allocation, but putting the right assets in the right taxable or tax-advantaged buckets.” (A: Paula, [37:10])
  • Growth assets in Roth (tax-free), income/bonds in tax-deferred, efficient assets in taxable.

• Simplification vs. Diversification:

  • More funds (up to ~10) marginally improve diversification, but “the utility of going from 10 to 20 funds is less than going from 1 to 10.” (B: Joe, [48:28])
  • Simplicity is only good if it means you'll stick to the plan; “Wisdom is knowing you’ll never maintain [a 10-fund portfolio] if you’re not going to maintain it.” (John Luskin, paraphrased by B: Joe, [47:00])

• Efficient Frontier & Knowing “Why”:

  • Use efficient frontier theory to balance risk/return and select asset classes (A: Paula, [51:09]).
  • Understand “why” an asset is in your portfolio, not just whether it boosts past returns (B: Joe, [49:00+]).
  • “The biggest problem I saw in 16 years as a financial advisor was not that you had the wrong asset classes, it was that you blew up your strategy.” (B: Joe, [55:35])

Notable Quote

• “Intelligence is knowing that a 10 fund portfolio beats a four fund portfolio over time. Wisdom is knowing you’ll never maintain it… if you’re not going to maintain it, you definitely shouldn’t do it.” (B: Joe, [47:00] paraphrasing John Luskin)

Action Steps:

• Match asset location to withdrawal timeline
• Understand the “why” for each asset class
• Consider efficient frontier tools
• Free asset location cheat sheet: affordanything.com/assetlocation

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4. Question: Should I Pay Off My Mortgage or Invest Extra Cash? (Michael’s Question)

[62:17–82:51]

Caller Profile:

• Age 26, single, $120k/year, $460k invested, planning to buy $350k house (20% down)
• FI-focused, plans part-time work after reaching FI, considering mortgage payoff vs. investing difference

Key Points:

• Mortgage Term: 30-Year Preferred over 15-Year:

  • Flexibility is key—30-year gives lower required payment and more cash flow optionality.
  • “Particularly in your 20s… you want maximum optionality… one of the great benefits of youth.” (A: Paula, [71:04])

• Paying Off Early vs. Investing:

  • Both Joe & Paula: If you pay off early (regardless of 15 or 30 year term), you get the benefit of lower withdrawal rates and more flexibility.
  • “The delta between your expected return in paying off the mortgage versus your expected return in putting it into a broad market index fund, that delta is not wide enough to justify the risk.” (A: Paula, [71:54])

• The “Do the Math” Trap:

  • Joe’s stance: Be careful with calculations—inputs (expected market return, mortgage rate, time horizon) drastically change conclusions.
  • “Beware charts and graphs. And math can be charts and graphs… what I would dispute were the inputs that they used to come up with math…” (B: Joe, [72:16])

• “Know Yourself” Decision:

  • “If you decide to pay off the loan, you are capping your upside on your financial return, but you're also getting rid of some potential downside.” (B: Joe, [74:42])
  • Use the “which would you regret less if, in hindsight, it was mathematically the wrong thing?” test.

Notable Quotes

• “Assume that with the benefit of hindsight, you've chosen the mathematically wrong thing, which one would you still regret less?” (A: Paula, [77:22])
• “That wasn't a mathematical decision. That was a know-yourself decision.” (B: Joe, [78:06])
• “It is based on the goal… if you're looking for more flexibility earlier on, [lower overhead by paying off the mortgage] is not a bad place to be.” (B: Joe, [81:54])

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Timestamps for Major Segments

• Housing Shortage Q&A (Karen): 01:47–23:48
• Housing Data Deep-Dive: 04:33–21:55
• Market Dynamics & Luxury/Affordable Disparities: 14:35–23:29
• Portfolio Simplification Q&A (Sarah): 32:53–60:18
• Mortgage Payoff vs. Investing Q&A (Michael): 62:17–82:51

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Memorable Moments

• Nerd Humor:
  • “I just bought a new pair of shoes and I've just decided I'm not going to buy anything Velcro anymore because it's just a ripoff.” (B: Joe, [01:24])
• Buy in Melbourne… really:
  • “If you want to buy an affordable home, go To Melbourne, Florida. You can get a home there for nothing.” (A: Paula, [19:58])
• Analogy on market segments:
  • “When you're co mingling entry level affordable homes with luxury homes, that's the equivalent of asking about the price of pants on TEMU versus the cost of a pair of pants at Nordstrom.” (A: Paula, [17:01])

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Actionable Resources

• Asset Location Cheat Sheet: affordanything.com/assetlocation
• Free Guide for Real Estate Investors: affordanything.com/rent
• Voicemail for Questions: affordanything.com/voicemail

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Tone & Language

• Approachable, candid, and “nerdy” in the best way—a blend of rigorous data analysis with everyday analogies and humor.
• Strong focus on nuance: “all real estate is local,” “know yourself,” statistical skepticism, and behavioral finance insights.

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Conclusion

This episode masterfully navigates the complexities of the housing shortage (it’s real and acute, especially for entry-level homes), busts myths about wealthy owners “stealing” supply, and delivers nuanced, practical advice on asset allocation and mortgage payoff decisions—with a repeated emphasis on knowing yourself, questioning simplified statistics, and focusing on flexibility and personal values in financial planning. If you want to understand the real drivers behind America’s housing shortage (and how to play a proactive part), or need to tune up your portfolio, this episode is for you.

Transcript

[A]

Joe, have you ever owned a second home or a vacation home?

[B]

I did. Well, I owned a. A rental property.

[A]

Oh, but that's different. That's not a vacation home.

[B]

No, I have not. I have not. I've looked into it, but I never have purchased one. No.

[A]

Yeah. All right, so we're going to answer a question from someone who knows people, has family members who have second homes that stay empty, vacant, unlike a rental property. And she's wondering, is there really a housing shortage or are there just a whole bunch of people who have a whole bunch of vacant homes sitting? We're going to answer that question. We're also going to hear from a woman who wants to retire in 15 years with an annual retirement income of 100,000. And we're going to hear from a gentleman who is 26 years old. He has a very good income, especially for the age of 26, and he is planning on buying a $350,000 home. What does he need to know? We're going to tackle all of that right now.

[B]

All of that.

[A]

Welcome to the Afford Anything podcast, the show that knows you can afford anything. Not everything 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?

[B]

You know, Paula, I. I just bought a new pair of shoes and I've just decided I'm not going to buy anything Velcro anymore because it's just a ripoff. Come on. Come on, people.

[A]

With that said, let's hear our first question, which comes from Karen.

[C]

Hi, Paula and Joe. I keep hearing that the US Needs to build more housing because we have an undersupply. However, I often wonder if we really do have a shortage. See, I have a brother who is a patent attorney. He's also married to a patent attorney. Needless to say, they have a lot of money. They own three houses and will possibly buy a fourth near his wife's family. These houses are all for their personal use. So I wonder if our country is actually short on housing or if due to high income inequality, we just have wealthier people buying up a lot of the available supply, which, let's be honest, is at price levels most normal people couldn't afford. Anyway, could you provide some clarity on the housing supply issue? Thanks.

[B]

Wow.

[A]

Yes, Karen, I love the question, and yes, absolutely. Now bear with me while I put my nerd glasses on because I pulled up a bunch of stats to answer this. So, short answer, yes, we have a massive, massive shortage. How big of a shortage we have is going to vary depending on who's measuring it and a couple of nuanced points that I want to bring to the forefront. There is wide variation in terms of where the shortage is located and the price point of the shortage. So, Karen, when you talk about wealthy brother who's a patent attorney and has a bunch of vacation homes, two things. Number one, when people buy vacation homes, oftentimes they are buying higher end luxury homes, which is different from entry level starter homes. And that's our shortage is largely concentrated in the entry level starter home domain. There's shortage all throughout, but there is more of a shortage in the entry level starter home domain. And those are not the homes that wealthier people are buying. A second homes that. So the type of housing is pertinent to the discussion, also the location of housing. So generally when higher income people buy vacation homes, they're buying those homes in Aspen, on Hilton Head island, they're buying Fort Lauderdale, like they're buying those homes in desirable vacation destinations. Mackinac island in Michigan. Right. These are places that people like to go to for vacation. Whereas the cities and towns and major metro areas where the housing shortage is most prominent, and we're going to go through a lot of detail in just a moment. Those are not vacation destinations. Those are places where people live, where people have jobs, but they're not places largely where people tend to have vacation homes. So you ready, Joe?

[B]

I am certainly ready. And I even think, you know, and I love that you're about to put some nuance on this, but if it weren't as nuanced as you're about to get into and wasn't so location specific, I still do think that there's a housing shortage. I think somebody owning three homes means that we do have more of a housing shortage. If I make enough money that I decide to buy three houses myself, it contributes to more of a housing shortage. I feel like on one hand she is putting some stank on her brother for owning three different houses. But if there weren't houses on this property, if he chose to have 100,000 acres of land, let's say, it wouldn't have been a problem. It would have been, you know, he's so wealthy, he owns 100,000 acres of land. But if he has 100,000 acres of land that has eight bedrooms on it, well, then we Immediately go, well, wait a minute. Is this, you know, are these available houses or is this not available houses?

[A]

Yeah. Yeah. So, Joe, I think you're talking about the distinction between Karen's asking about the absolute number of houses and you're talking about housing availability. So we're talking about the. The distinction between the absolute number of houses in existence versus housing availability.

[B]

Yeah. Which means the question is, is, should someone who has extreme wealth be allowed to own three houses or five houses?

[A]

Yeah. And so the stats that I'm about to present demonstrate that the absolute number of houses the exist, regardless of who is the owner, the existence of the absolute number of houses is in severe shortage. So, ready for those stats? All right, bring it. We'll start with Zillow, which puts the shortage at 4.7 million housing units.

[B]

Oh, that's it.

[A]

Yes. So there's a wide range. So bear with me, because the White House Council of Economic Advisors says 10 million homes. So this is a 2026 report from the report of the President says that there would be 10 million more homes if homebuilding had continued at its historical pace. Zillow is putting it at 4.7 million. Freddie Mac is putting it at 3.7 million units below what's needed given the current population. Notably, their current estimate as of Q3, 2024, was 3.7 million. Their 2018 estimate was only 2.5 million. So in the previous six years, the Freddie Mac gap grew by a roughly 50%. Realtor.com put the shortage, based on their 2026 housing supply gap report. They put the deficit at 4.03 million homes. That's as of 2025. Again, that is a rise from the 2024 report where they had put the shortage at 3.8 million homes. The Congressional Research Service, they actually have a lot of studies inside of it. So a meta analysis, which means. A meta analysis means you're analyzing all of the analyses. So you're putting together a big bucket of analyses and looking at all of them together in this big bucket of a meta analysis. The CRS summary says that the shortage is between approximately 4 million and 5 million units, although these estimates vary based number one, on data sources, number two, on the target vacancy rates because you can't have 100% occupancy. And number three on methodology in terms of measuring vacancy and occupancy, but somewhere between 4 to 5 million is what Congress, the Congressional Research Service says, finally, one more, one more, one more. National association of Home Builders. They put the shortage. That's the low End estimate, they put it at only 1.2 million housing units.

[B]

Some of these numbers surprise me.

[A]

Yeah.

[B]

Generally when you look at this, we talk about this with financial advisors, right? Look at the incentives. Generally speaking, people will create a methodology of creating statistics which will help them toward their incentives. I'm so surprised that that home builders number is so low.

[A]

Right.

[B]

I would have expected them to have the biggest number, especially with, as we record this, the legislation sitting in front of the president that it appears he may end up ignoring, which is going to make it easier for home builders to build houses faster, to speed up some of the regulatory loopholes that they have. So I would have expected that number to be the biggest one to be like, oh man, it's 12, it's 15 million. The other thing surprises me is the fact that those two numbers are so, so, so different.

[A]

Yeah. Well, part of what's going into Freddie Mac's estimate is that Freddie Mac is also taking into account that according To Freddie Mac, 1 million US households simply have not formed. So Freddie Mac is taking household formation into account because of the affordability strain. And so based on this is where the methodology gets really different. Freddie Mac, part of their report states that there are people. So for example, if you live with a roommate, then you and your roommate, if housing conditions were more affordable, you and your roommate would each have their own condo, or you would each have your own single family home. You would each live in your own separate autonomous dwelling.

[B]

Okay?

[A]

Which means you and your roommate would form two separate households. But because of affordability conditions, if a person lives with a roommate, then what would have otherwise been the formation of two households gets consolidated into the formation of one household. Right? And then you think the households that have three or four roommates, that's four households that have now been consolidated into one household. And then you think about people who are in their 20s or 30s who are still living with their parents or living with grandparents or uncles or aunts. Again, that is lack of household formation. So part of the reason that there is so much variation in the estimates is that some of these stats are purely looking at homes that have not been built, whereas others are also taking into account households that have not been formed that otherwise would have been formed. Just to give a further context in terms of what investment institutions and other private institutions are putting the shortage analysis at, and bear in mind, these are all independently run analyses that Moody's says that there is a housing shortage of 2 million. Goldman Sachs says there's a shortage of 3 million. We've talked about Zillow already, which is over 4 million. Brookings says 5 million, McKinsey says 8 million. So across all of these private investment firms, consulting firms, you know, private institutions running their own independent analyses, the number, the shortage. And again, this is not housing availability, which Karen's question was about housing availability. Is there an adequate supply of housing, but the availability is skewed. That was Karen's question. All of these studies are around absolute supply. And all of these studies are saying that the shortage in absolute supply is somewhere between a shortage of 1.2 million units to the low end of the estimate is 1.2 million. The high end is 10 million. And the kind of consensus number seems to be somewhere around 4 to 5 million.

[B]

And the consensus is nobody's saying there's not a shortage.

[A]

Right? Right.

[B]

There is nobody saying there's not a shortage. And the fact that their numbers swing by millions just blows me away. Of course, in a country with 340ish million people, what's 1 million or 2 million difference between friends?

[A]

Right, Right. Yeah. As a percentage of total number of households. Now, there is. Karen, there is nuance to this. Again, whenever we talk about national housing stats, stats get flattened whenever you're talking in national numbers because there's. So as I often say on this podcast, there is no such thing as the real estate market. There are just many, many, many hyper local micro niche markets. And so to go to your question, where are wealthy or high income people buying their second homes, their vacation homes generally? They're buying those homes in Aspen, they're buying those homes in Hawaii, they're buying those homes in desirable vacation destinations. That tends to not be the locations where we see the most acute housing supply. The state with the biggest supply shortage is California. Of course, California is a large state

[B]

generally, but is it biggest by percentage as well?

[A]

Well, the stats from Zillow state that relative to this is not for California broadly, but specifically for Los Angeles and San Francisco as well as New York, Boston and D.C. relative to the population, they have the largest housing deficits. That's among the 50 largest metros, according to Zillow. A little further nuance to that is that we are seeing population decline in some of those cities. So New York City has the largest gap at 400,000 units. Los Angeles has the second largest at 337,000 units. And so, Joe, to your question, is it relative? Again, this is not by state. I'm looking right now at the NAR Housing Shortage Tracker, the National association of Realtors Housing Shortage Tracker. Among major metros I mentioned, Los Angeles has the second largest shortage. They have on average, one new housing permit for every three new jobs.

[B]

Wow. Yeah, well, there's a stat right there.

[A]

Yeah, exactly. So, yeah, again, going back to absolute number of housing, one new housing permit for every three new jobs. You can see how that concentration would really grow. The concept, the shortage concentration would grow in specific locations.

[B]

We also have some really wonky economic data right now. Paula, I read this last week and I just pulled this up again back to the national association of Realtors and their last quarterly data. The supply of houses is up nationwide, moderately.

[A]

So it's relative to last year?

[B]

Yes, yes. Relative even. Yes, correct. And there are fewer buyers, there are fewer closed sales than there were this time last year, even with that data. So you would think one plus one equals two more supply. Fewer buyers means prices come down. Prices actually up. Prices up about 2.8% year over year. What's interesting again is that this is partially, Paula, because of the fact that we don't have a national real estate market. And in places where prices are up, they're up a lot. And they're up on those luxury homes. So 43% of sales in the last quarter were in the luxury category. There's 43% of sales and price prices of 4% year over year. Now listen to this. 250,000 to 500,000, 45% of sales. The biggest chunk, prices up only one and a half percent year over year. Much, you know, much more like a, a normal inflationary number. Well, even 4% could be of inflationary number. But homes under 250%. Only 12 of total sales, but a

[A]

lot of homes of under 250,000.

[B]

Under 250,000. Yeah. What I say under 250.

[A]

You said 250%. Yeah.

[B]

Homes under $250,000, only 12% of sales. But prices are down 10% from a year ago. So prices on affordable housing actually are actually coming down. Prices on luxury houses, the ones that, that our color is asking about.

[A]

Exactly, which is why it can be flattening and reductive. Again, anytime you're talking about broad aggregate numbers, you know, when you're co mingling entry level affordable homes with luxury homes, I mean, you're talking that's the equivalent of asking about the price of pants on TEMU versus the cost of a pair of pants at Nordstrom. Shoppers at TEMU and shoppers at Nordstrom are in different markets. And what might affect pricing at the Nordstrom level does not necessarily correlate to pricing at the TEMU level and vice versa.

[B]

And this might be our first big aha of the episode is that when you hear statistics, what a lot of us do, Paula, is we draw conclusions immediately. We draw conclusions when we hear. As an example, you know, just taking the one that, that I shared just a moment ago, the fact that we have more inventory but prices are up, when you parse the data, it doesn't look at all like we first thought. And so when somebody presents you with a bunch of statistics, it is best to then begin asking more questions and see if you can separate it down to figure out more about where these stats actually come from. Who are the people with the stats? What are the incentives behind the stats? And then third, maybe when we look more granularly at the data. Is granularly a word?

[A]

Yeah, yeah. Granularly. Yeah, the word.

[B]

So when we just. It's difficult for my tongue to form that whole word.

[C]

But.

[A]

But the adverb form of granular, when we take a more granular look, that's

[B]

a much better way. I should have said it that way. We find that the data makes much more sense.

[A]

Right, Right. Oh, I found on a subject of data, this is what I was looking for earlier with regard to a couple of structural patterns around location. So coastal metros, L.A. san Francisco, New York, are losing residents, but they have a lot of regulatory constraints that are keeping both demand and pricing high. Whereas in places like Phoenix, Austin, Dallas, Atlanta, Miami, they have much more lax regulatory constraints, but they just can't build fast enough to keep pace with population and job growth. In Atlanta or Dallas, it's a throughput issue. Like, it's just a. Can you build fast enough to keep pace with all of the people who are coming in? Whereas in, you know, in New York, it's a regulatory issue. So some of the constraints are different depending on what location you're looking at. And then you've got places like Central Florida, you know, Austin and Central Florida, both Austin, Texas and Central Florida, those two places in particular have really done an amazing job of building fast, like loosening regulations around building. One thing Austin has done very, very well is they've let people build ADUs in their backyard. Especially with the growth that Austin has seen, it could have become a housing crisis. And it is not. You see the same in Central Florida, that entire band From Clearwater, Tampa, St. Pete, all the way over to Melbourne, like, coast to coast, that whole Central Florida band, you just see so much new construction. If you want to buy an affordable home, go To Melbourne, Florida. You can get a home there for nothing. I mean, it's just if you want to be an owner, Melbourne, Florida is the place to do it. So there are pockets of the country that have a housing surplus. Very localized pockets. But that's very different than Karen's question, which is around vacation, luxury, home availability.

[B]

Yeah, yeah. And by the way, Melbourne Chamber of Commerce, if you'd like to sponsor this episode of afford anything, just a few other stats.

[A]

The south in general has the largest cumulative deficit in raw numbers. So the south has a deficit. According to stock Titan, this data from stock Titan, the deficit in the south is 1.62 million homes. But the Northeast faces the most acute shortage when measured against cumulative construction since 2012. So the south has been beat up for the longest amount of time and so has the most cumulative damage. But the Northeast has the most acute damage in a shorter period of time. So again, going back to all housing is local. One interesting note, There are no cities in the Midwest that appear in the list of the top 20 metros with the worst shortages, which is to say the Midwest relative to the rest of the country is doing a lot better in terms of the shortage, the supply

[B]

problem, and in terms of affordability, then might be a great place to exactly focus on if you're location independent.

[A]

Yeah. So if you don't want to move to Melbourne, Florida, there are going to be a lot of places, a lot of places in the Midwest where you're going to find that affordability.

[B]

Live in Cincinnati, where Paula grew up.

[A]

Yeah, Cincinnati, where I grew up. Indianapolis, where I own rental properties.

[B]

Another cool town.

[A]

Exactly. Of the top 50 major metro areas, Memphis has the lowest overall shortage. Actually, according to ABC News 27, the Memphis shortage is just over 3,300. So we're like measuring it in at a four digit number, like in the low thousands.

[B]

Very close to adequate supply.

[A]

Yeah, exactly like that. I mean that's like a rounding error.

[B]

Sure.

[A]

Yeah, that's getting pretty close to rounding error. So anyway. So Karen, I hope that adds some context and some nuance and flavor to your question. The short answer is yes. We definitely, definitely have a severe housing supply of somewhere between 1 to 10 million units nationwide. Although how severe that supply is in terms of how it affects you is going to vary depending on if we're talking about entry level housing versus higher end luxury homes. And also if we're talking about a coastal major metro area in California or New York versus a city in the Midwest.

[B]

Yeah. And I think this isn't good news. Or bad news. But I think we also figured out we can't blame the national shortage on her brother. I'll let her decide if it's good news or bad news. I've had times where I go both ways on, you know, sometimes with my siblings it's been good news, other times it's bad news.

[A]

Yeah, you're looking for any excuse to blame exactly all of our nation's problems on your siblings.

[B]

It's all my sister's fault.

[A]

Well, thank you, Karen, for the question. We are going to take a moment to hear from the sponsors who make the show possible. And when we return, we're going to hear from Sarah, who has a goal of retiring in 15 years with a retirement income of $100,000. That is up next. Want to look and feel your best this summer? Don't just think skin deep, think cell deep. Prolon's five day fasting mimicking diet can help to kickstart your body's natural ability to renew and rejuvenate from within. Backed by decades of scientific research, Prolon is clinically shown to help stimulate autophagy, the body's own process of cellular cleanup. To help you reset your metabolism, help you lose fat, help protect lean muscle mass and more. Prolon is a plant based nutrition program featuring soups, snacks and beverages designed to help nourish the body while keeping it in a fasting state. I did the five day program over the winter back in like January, February and I felt healthy, I felt energized, I did not feel hungry. My energy was up. I felt good. Prolon has a five day program. It comes with five boxes labeled by day so you know exactly what to eat. No prep required, no planning required, ready for your own reset. For a limited time, Prolon is offering afford anything listeners 15% off site wide plus a $40 bonus gift. When you subscribe to their five day program, just visit prolonlife.com Paula that's P-R-O-L-O-N-L-I-F E.com Paula to claim your 15% discount and your bonus gift. Prolonlife.com Paula these statements and products have not been evaluated by the Food and Drug Administration. These products are not intended to diagnose, treat, cure or prevent any disease or condition. In business, there's no room for guesswork. Every shipment matters. Every deadline counts. When you're trying to keep operations running smoothly, the last thing you need is uncertainty. That's why reliability is at the core of USPS ground advantage. From the moment your package is first scanned in. It moves through a secure nationwide network, aiding in a timely and accurate delivery. You get near real time tracking so you can keep up with your shipments and with affordable upfront pricing. There are no hidden fees or surprise surcharges to throw off your cost sheets. It all adds up to predictable deliveries you can depend on because knowing your logistics are handled lets you focus on everything else. Your customers, your team and the future you're building. Visit usps.com groundadvantage to start shipping with confidence. USPS Ground Advantage we mean business as always, I am wearing quints as I'm recording this. The thing is the best summer pieces and really the best pieces all year long are the ones that you wear on repeat, right? The ones that are comfortable, versatile. That's what the summer quinces from Quince are like. So we're talking comfortable and premium materials. Organic cotton, European linen, washable silk, really soft and comfortable denim. Everything at quince is priced 50 to 80% less than similar brands they work directly with with ethical factories and they cut out the middleman. So you are paying for exceptional quality, really, really high quality clothing, but you're not paying any brand markup. So it hits that trifecta, right, of affordable high quality. This is not fast fashion. This is durable, high quality clothing that you will have for years and years and years and ethically made. If you go to my YouTube channel and look at the interviews I do, every single interview I am wearing at least, least one, if not two pieces from Quince. So typically I'll be wearing either a sweater, in which case it's one of Quince's cashmere sweaters, or in the summertime I'm wearing a silk camisole under a blazer. That way I can take the blazer on and off when I'm commuting to and from the studio. And there's a solid high quality silk camisole that I can wear on the subway in the New York City summertime. And I'm also, if I'm wearing a blazer, guarantee you I'm wearing quince pants. Just look at any YouTube video that's been published within the last year. I'm wearing quints in every single one of them. I live in this stuff. Make your summer wardrobe feel easier. Go to quints.com Paula for free shipping on your order and 365 day returns. Now available in Canada too. That's Q-U-I-N-C-E.com Paula for free shipping and 365 day returns quince.com/paula P A U L A. Welcome back. Before we get to Sarah's question, there was something I meant to say at the end of Karen's question that I forgot to say, which is I am a big believer that if you want to do something to improve the housing shortage, increase density, just do what is in your power. If every single one of us increases density by one unit or even, heck, one bedroom, if all of us do our role in that, if that happens at a wide enough scale, that has a powerful effect on increasing the total housing supply. And so I am a big, big, big believer in if you want to both do well and do good, if you want to make more money and also increase housing supply, buy a home with a basement that can be converted, like a walkout basement that can be converted to an autonomous dwelling unit. So now you've got a single family home with a walkout basement, right? You turn that walkout basement into a separate unit. Now the single family home that you bought is two units instead of one. You have just played your part in increasing the number of units available. You've just doubled from one unit to two. You can do the same thing if you buy a single family home that has a detached garage and you convert the detached garage into becoming its own unit. You can do the same thing if you buy a home and build an adu, an accessory dwelling unit in the back as an autonomous independent unit. You can even do the same thing if you can't necessarily create an entire separate unit. If you get a two bedroom home and you have, let's say you've got a large living room for the cost of some drywall and a few two by fours, like it's very, very cheap to build a partition wall. You can put up a partition wall and turn a two bedroom into a three bedroom. And now you've created more housing density. So a larger family and large families often struggle to find places to live, a larger family can live there. And what's beautiful about this solution is that you're doing something proactively to address the nation's housing shortage, which is a serious problem. And you yourself as a rental property investor are making more money because now you have just purchased a single family home and turned it into a two unit, or you've purchased a two bedroom home and you've turned it into a three unit. So you yourself are making more money and you're also making a positive contribution to this housing supply shortage. So I'm a big believer in doing that. Number one, I just want to say that. Number two, if you live in a high cost of living area, like I live in Manhattan, right, you're obviously not going to do that in Manhattan. Unfortunately, even though Manhattan needs it, you're going to do it in a place where you have cheaper costs, you don't have the regulatory burden, you don't have the permitting and red tape burden, and you're going to do it in a place where the numbers pencil out such that it makes sense to do it there. So all of that is to say we've put together this free guide and it's seven expensive mistakes that first time real estate investors make. It's totally free. You can download it at afford anything.com/rent. That's afford anything.com/rent. Particularly if you live in an expensive area and you're thinking about investing in a less expensive area, like you live in New York, you're thinking about investing in Indianapolis or even if you don't, even if you live in Indianapolis and you're thinking about investing elsewhere in Indianapolis, but you want to maybe turn a two bedroom into a three bedroom. Regardless of whether you're investing locally or out of state, these are just some of the mistakes that you should avoid. It's a free guide. Afford anything.comrent. with that said, let's turn to Our next question comes from Sarah

[C]

hi Paul and Jo. I'm a second time caller here. I called in a few years ago with the question about adjusting the 4% rule for expected differences in spending over the years as a way to safety check what my financial planner was doing. Your answer and what I learned from listening to your podcast helped give me the confidence and knowledge to take an earlier mini retirement. Since that call, I took a couple years break from work, spent time with my kids, relocated, bought a house and returned to work. About a year ago I was working with a financial planner that charged a flat annual fee to help me through a lot of change and uncertainty and also investing some money from equity I had in my last employer. I made the decision to self manage my money. Now that I am back to work and expect the next five to 10 years to be really stable, I'm hoping to retire in about 15 years with the retirement income of about $100,000 per year. My question is about how to take over what my financial planner was doing and simplify in a way that is more manageable for me to do myself. I have about 1.5 million invested that was being managed by my financial planner and is speaking split into just over a million in a rollover IRA, 150,000 in a Roth IRA and 325 in a taxable account. I also have about 500,000 in home equity and 25,000 in a 401K. Now that I'm looking at my portfolio myself, I'm invested in 13 mutual funds and ETFs that include things like a global REIT and one to three and 20 year bonds. My IRA, Roth IRA and taxable account also all have the same allocation. This seems too complicated for me to maintain and know where to invest any new money. And I also think each of these accounts should be allocated differently. My question is about how I can make this manageable for myself. I know I don't have to worry about tax in the IRA and Roth IRA if I were to place any funds. And I know that I'm limited in the taxable account without triggering taxes. I'm mainly looking for how to reduce how many different funds I have. Like can I go to three or four? I would also like to make my asset allocation more efficient. I would really appreciate any advice on how to simplify my portfolio. And thank you again for everything you've taught me and the profound impact it has had on my life. Thanks.

[B]

That's so exciting. The fact that she was able to take the mini retirement and get all that done. It's just great.

[A]

Yeah, it's incredible. Sarah, thank you for calling back. And also congratulations on what you've done on spending that time with your kids and relocating. And Jo and I can give you information, but you're the only person who can make changes in your life. And so it's incredibly gratifying for us to hear that you've actually taken this information, taken action on it and used it to live a better life.

[B]

As always, Paula, when we have questions like this, I think it's important to take what seems initially complex because you can hear a lot of complexity in this question.

[A]

Yeah.

[B]

And to really boil it down to what are the truly important pieces of the question. And there's a couple of questions that I would have back to her. The first one is she says she thinks these accounts should be allocated differently. And what I would have loved to have heard was how. How does she think they should have been allocated differently, besides, more simply?

[A]

I have thoughts on that.

[B]

Well, me too. But I would have liked to have seen because it might have given us an idea toward what her end goal is and what would have made hit her happier. Second is she says she wants to be More efficient. Efficient means so many different things. I hear that she wants it more simple, but does she mean more tax efficient? Does she mean more smooth ride toward her goals? Is that more efficient? Like, I'm not sure. Efficient is a word that sounds phenomenal, but it can mean so many different things depending on how you apply it. So I'm not really sure how she wants it to be more efficient. But that said, I knew, I knew you'd have ideas. And of course, I have a bunch of ideas, too.

[A]

Well, when she said that she wants it to be allocated differently, you know, she's got exactly the same allocation in a tax deferred traditional IRA as well as a Roth ira, as well as taxable account. So you think about the three different tax treatments, right? Tax deferred, tax exempt, taxable. And she's got the exact allocation in accounts with all three of those tax treatments. So when I hear her say that she thinks it should be allocated differently, which I completely agree with. And when I hear her say that she wants it to be more efficient, I interpret both of those statements to mean she wants asset. Yeah, asset location. She wants better asset location.

[B]

It is so funny because for people that aren't with us on you two, I'm holding up my notes, but check out what I drew. I drew a little text triangle immediately. Paula, we're on the same page.

[A]

Yeah, yeah, exactly. And just for people who are new to this, who are wondering what the heck we're talking about, here's how asset location works. There are three different types of accounts that you can create that have three different tax treatments. One is tax exempt. So a roth account, Roth IRA, Roth 401k. Those are tax exempt accounts. That means that in the year you make that money, you pay taxes on that money. But everything that you put in to that account, to that Roth account or that tax exempt account, all the capital gains, all the dividends, all the growth forever will be tax free. And so whatever you expect to grow the most should go into the tax exempt account because all of that growth is tax free, right? So you don't want to have your bond allocation in that account because that's not going to grow as much as the small cap allocation or depending on your philosophy, maybe there's a lot of controversy over, like mega caps, whatever you think is going to grow the most. Some of that is speculation. But whatever asset class you think is going to grow the most, maybe it's small caps, maybe it's large caps. Whatever it is that you think is going to grow the most, I keep saying that that's what goes into your tax exempt accounts, your Roth accounts. That's an example. That's what we call asset location of you're not disrupting the overall asset allocation of your total portfolio, but you are making a decision that a portion of your portfolio is going to go into the account that has the best tax treatment for that portion. Right. You do the same thing with your tax deferred accounts. Those are the accounts in which you don't pay the taxes in the year that you make the money. So you get a tax benefit in the year that you make that money. But down the road, you know, 20 years down the road, when you're taking that out, those dividends and capital gains, that's when you pay the piper. So you're going to be paying the piper are on a much, much bigger sum of money, right? And then taxable is taxable.

[B]

And I think when you take those and you start looking at asset location, of course, then there is the investments to throw off the biggest tax price. You might want to put in either the tax free bucket or into the pre tax bucket. The most tax efficient ones you probably want to put in the taxable account side because of the fact that they're going to be much more efficient. But even more than that, to me, I think, I look at these three and I think about them in terms of flexibility and utility. The biggest utility bucket, the one that's really going to be useful as a Swiss army knife later, is the tax free one. Because I can then maximize tax brackets down the road whenever I feel the need. The more money I have there, the better off I'm going to be when it comes to maximizing tax bracket concerns. So let's say I'm living in the bottom of one tax bracket. I can take just the money between the place that I'm living in that bracket, all the way down to the bracket below it out of that tax free bucket. The government thinks I'm living a much cheaper lifestyle than I am. So the cost of money becomes a lot easier with that money in the tax free port. So I want to use that almost like a spread across the, across the entire landscape of the rest of my life, the flexible money. I really want to know what my goals are. So I want to start with when do I think I'm going to use this money and then how do I efficiently get money out of that pre tax bucket so that I don't really flag the government too much. So I'm going to take that out also much more like a spread, but also according to ease of use. So while I can take the money out pre 59 and a half or the money in the 401k maybe age 55, I'm going to choose to minimize my use of loopholes by using it after that just for ease of management. And I think then I'm going to try to spread that money out over time. So the way I look at these is dependent on your goal. If it's pre 55, I might go more heavily into that taxable bucket first, which means that's going to be your more conservative allocation because it's the first bucket of money I'm going to and then the other two because I'm using them more like spreads against each other. I'll be more aggressive in the tax free bucket and in the pre tax bucket. Which then gets to her stated goal is I'm not going to need this money for 15 years. Now, she didn't say she's not going to need it for anything, but I assume that when she said that retirement's 15 years away, the premise of the question is this is my retirement money, what do I do with it? Well, if it's 15 years away, those bonds immediately in my eyes go bye bye, they're gone.

[A]

Yeah, that makes sense.

[B]

Here's the problem though with what I just said, which is if you take what I just suggested there and you do it, I just increase the volatility in your portfolio by quite a bit. And there's a reason why financial planners don't do that. They don't do that not because they're not afraid of the market, Paula, but because they're afraid of you. They are afraid of their client not being able to hang on to the roller coaster ride that is a higher volatility portfolio. And so you kind of got to ask yourself while it makes sense over long periods of time to beat inflation. And the best way to beat inflation is to buy the companies that create the inflation in the first place. Because the cost of a handbag or the cost of. We were using pants earlier. Yeah, the cost of pants.

[A]

Temu versus Nordstrom.

[B]

Yeah. But for both of those companies, they're

[A]

going to keep pace with inflation.

[B]

Well, to create shareholder value, they beat the pace of inflation.

[A]

Yeah.

[B]

So they have to find a way to beat the cost of inflation. So owning those companies makes total sense. So right along with these companies which have a capitalistic objective to beat inflation, they're in it for the sustainability of their company. That's why I suggest owning companies makes sense over 15 years, man. The problem is, though, is that that is a bucking Brock override, Paula. And so I think she has to ask herself if that's okay. Because when she says she wants it to be easier to manage and she wants it to be more efficient, I would actually suggest that those two are a little bit diametrically opposed. And when you tell me that you have $1.5 million of investments, my desire to go along with a simpler portfolio becomes less. I would suggest instead, if you're going to manage your own money at one and a half million dollars or more, I would become, and this is painful to say, it's going to be painful to hear, and it might rub some people the wrong way. You need to become more comfortable with a rising number of asset classes. So there's a level of education that I think that you need much more than you need simplicity. You can make it more simple, but at what cost? Because the reason you got rid of the financial planner, I'm assuming, is because of the cost. If you make it more simple, you're going to pay that cost, but you're going to pay that cost in returns. You're just paying it out in a

[A]

different way in terms of getting more comfortable with the rising number of asset classes. If you have a good dashboard that looks at your holdings, that tracks your holdings and helps you see what you have and rebalance as needed, it's not all that much more complicated. I'm thinking about Paul Merriman. Paul Merriman has a four fund portfolio, an eight fund portfolio. He's got a 10 fund portfolio. It's not that much more complicated to manage the 10 fund as opposed to the 4 fund.

[B]

Yeah.

[A]

Particularly as a buy and hold investor who is going to one time set everything to the proper allocation and then check in again a year later to rebalance. Like there might be, like the initial day of reshuffling everything. That's going to be the greatest hill to climb. But very much like rental properties, you front load the workload and then after that it's just maintenance.

[B]

I think there's one cautionary tale, which is I totally agree with you. I think it should be nearly as easy. You know, if you set this up correctly, managing four funds versus managing 10 means you're going to spend maybe 10 minutes more per year rebalancing. I mean, 10 minutes. However, there's some people that see that as a lot more complexity. And again, this kind of goes back to know yourself. The gentleman who currently hosts the Bogleheads podcast. The Bogleheads on investing podcast is a CFP named John Luskin. John at a recent talk had a great, great slide that I loved on LinkedIn. He said intelligence is knowing that a 10 fund portfolio beats a four fund portfolio over time. Wisdom is knowing you'll never maintain it if you're not going to maintain it. Even if it's only 10 minutes, you definitely shouldn't do it. And then you go back to cost. Paula, if it's cost, because I know people worry about cost and this is when we get back into the financial planner, no financial planner game. How are you paying the cost? Because there's going to be a cost. Paul Merriman has shown in his extensive research that there is a cost for reducing the number of positions. Now there's a, there is definitely a like declining utility. Yeah, yeah, yeah. Going from 10 to 20 does not have the utility going from 1 to 10.

[A]

Right, right.

[B]

Going from 1 to 10 huge utility. 10 to 20, not so much. But I think the answer lies in and how to make this easier. There is a great way that I think about this Paula, and it goes back to when I, when I, when I sold my financial planning business I decided to become a high school teacher and attract coach. So I went back to school to get my post BA teaching certificate and when I did that I had to take a class on the way humans learn on human development. And it's very interesting that when kids learn you can spend all day, I see these parents spend all day telling their kid why, why this happens, why that happens. The human brain is not generally ready for that until much later stages human development. So telling your 5 year old why we're doing something is not nearly as effective as saying just do it. It's because I said so. And the efficacy of telling them why you're doing it makes almost zero change in the behavior. But for an adult, if you don't tell an adult why, it drives us crazy. Because in human development adults are not going to change unless they know the why. So when she says global reit and I don't think you know, she's listing off positions she doesn't think she could have. Ostensibly I think global reit, the question that wasn't stated but that I heard there was why do I own this? I have these different bond funds, why do I own them? What I love about timelining this out and then matching the brokerage money, the non IRA money to a time frame and then marrying the pre tax money and the tax free money to a time frame is. You can begin to answer for yourself the why question. This global REIT exists in my portfolio because global real estate over a 20 year period is a fantastic diversifier, which by the way, it is and that's why you would hold it. But when I know the why behind it, I don't sit here and look at this thing and I go, this is, I own, I own real estate in Singapore. When I'm sitting in Terre Haute, Indiana, like what am I doing with a global reit? Well, once I know the why behind it, it becomes much, much better. So that's also why I want to learn a little bit more about how these asset classes work. Because when I can get the why behind it and I can place it to a time frame, I can marry it to a time frame, I then am not going to blow up or I'm much less likely to blow up my own strategy.

[A]

I think also using the efficient frontier. And Joe, you've done trainings in the past around the efficient frontier. We'll link to a couple of the episodes that we've done. We won't go deep into it, but seeing where these various asset classes map out on the efficient frontier, for me that was really eye opening in terms of that why question. Because for me, I actually it influenced me to not have a REIT position in my portfolio, frankly, because I saw where REITs were along the dimension of both risk and return and it was just too far off, off the plan, like relative to the construction of my portfolio. And again, it's going. Your mileage may vary, right? Everyone's portfolio is different, but based on my portfolio, by mapping it out on the efficient frontier, I saw that I didn't need a reposition. But some other people are going to reach different conclusions.

[B]

I like that, especially for another reason. I like it because we know things are going to change and if we know why we hold it, we also then begin to parse out. Speaking of, you know, back to this idea of parsing out data, we begin to parse out when that might not work for us anymore. Because in some conditions these asset classes work very well and others they don't. And number one, if I understand why an asset class isn't working well versus why it is working well, I also know why I would continue to hold it or why the conditions may have changed and I need to, to get rid of it. You and I, Paula Offline, have been talking about this gentleman a lot. I'm going to bring him up again. Joseph Moore. I brought him up on this show before the historian. You know, the past does not equal the future. And he goes into this idea that we think that the past equals the future, and it doesn't. And what's great about the efficient frontier is it moves. It moves over time.

[A]

Exactly.

[B]

And so the one thing that you have to know when you're building an efficient frontier portfolio is that it isn't going to stay on the efficient frontier because as new data comes in, it will change. So you are no longer looking for an optimal portfolio because then you're just chasing returns. Right. Which has always been a fool's errand anyway. Instead, you're getting behind the why I own this stuff in the first place. And I'm using it as a construction vehicle in an environment that is much more like a sandy beach. And you're building a sand castle where it's all going to change and your sandcastle is going to get wiped away. You know, the conditions under which you built that and you're much. You have the confidence and the fortitude to withstand the changing conditions versus getting married to a portfolio. This is why I don't suggest buying a Paul Merriman portfolio. I love the Paul Bear portfolios. Everybody who's listening to this knows how much I love Paul Merriman. If you just buy his portfolio, I believe you're chasing returns. I think it's far more important to understand why the hell I own this and where it fits in my timeline, because stuff's going to change if I buy his portfolio. I think the past is going to equal the future. It's also why I'm not on board the risk parity train. I know risk parity is hot with some audiences. I think it's great. It's been great. The past does not equal the future. I'd much rather understand why the hell am I owning so many managed futures in my portfolio. I don't get it. I don't think it's something that we should own in the future. So I'm not a fan of risk parity, which is interesting because you get risk parity how? From the efficient frontier. The efficient frontier is kind of a first step toward that. But I think it's important to understand why I love the efficient frontier. And I don't love some of the places people have taken it. I'm just going to press the easy button and buy this or buy that. Well, then you ruin the reason why you were doing it in the first place, which is getting why I own this the biggest Problem I saw in 16 years as a financial advisor was not that you had the wrong asset classes, it was that you blew up your strategy. And my whole methodology of constructing a portfolio is a way to help you avoid blowing yourself up. Which happened far, far, far more than people think.

[A]

Right. I had a friend who asked me for some advice. He's 48 years old and essentially has almost zero, close to zero retirement savings. The little bit that he had was in individual stocks. He asked me for some help. I gave him a long, detailed explanation as to why he should move into index funds instead of individual stocks. Thought I had convinced him. I checked back with him a week later. He had gotten caught up in the SpaceX IPO.

[B]

Oh, no.

[A]

Yeah, well.

[B]

And once again, not that it's performed badly. As of the time that we are recording this.

[A]

As of the time that we're recording this, it's actually below its initial IPO release price.

[B]

Oh, is it? That's funny.

[A]

It wasn't today.

[B]

It wasn't too. I've injected.

[A]

Well, there you go. Actually, that's illustrative of the volatility.

[B]

And that is the reason why we don't like it. Not that it can't go to the moon. Get it?

[A]

But I'm not.

[B]

They can't do that. But the volatility versus being your first position or a major position is not where you start.

[A]

Right, right, right, exactly. And there's this cognitive bias resulting which is evaluating a decision based on the results that it yielded rather than on the decision making process itself. Right. So any given investment may or may not pay off. That doesn't make the underlying decision right or wrong. For example, you run a red light, there are no negative consequences. You don't get into an accident, you don't get a ticket. You reach your destination faster. Was running a red light a good idea? No, it was a bad idea that happened to have a positive consequence.

[B]

Great analogy. I'm gonna steal that one.

[A]

Oh, thank you, thank you, thank you.

[B]

Fantastic.

[A]

That's why I do this professionally.

[B]

All right. Can I match a story with the story? Oh, while you were talking, I have this wonderful friend of mine who texted me just a couple days ago. She's a wonderful local woman in her mid-70s, living on a fixed income and really needs to stretch her dollars. So just for the price of buying me breakfast, we have gone out to breakfast before and I've helped her with portfolio stuff. So she writes me. I received this info in my inbox. I'm considering taking stock from some Texas railroad land which, by the way, I had already told her she should probably get rid of that. But another story, it's from some Texas railroad land to invest in Energy X. I know lithium is a big deal and they're going to be working on some lithium projects here in northeast Texas. What is your reaction? And I wrote, far too much risk. I'd be more diversified. And then I told her, I love this quote. And this was, this might have been Paul Merriman who put this up on screen, this quote. And I snapped a photo of it. But listen to this. He's quoting Paul Samuelson, who is the Nobel laureate in 1974. Paul said investing should be dull. It shouldn't be exciting. Investing should be more like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas. It's not easy to get rich in Las Vegas at Churchill Downs or at the local Merrill lynch office.

[A]

Yeah, yeah.

[B]

And then she wrote me back and said, thank you. I hope you don't mind saving my ass again.

[A]

Nice.

[B]

But it could make a lot of money. Lithium projects, Energy X could be phenomenal. Not for a 70 year old with money that she really needs to have last for a long time.

[C]

Right.

[A]

Well, Sarah, I hope that provided some perspective, provided some, some next steps. We also, on free giveaways, we like to give things away. We like to give a lot of things away. We have an asset location channel cheat sheet. So afford anything.com asset location. What we talked about earlier in terms of what assets do you put in, what type of tax treatments, what should go in, tax exempt versus tax deferred versus taxable. We have those asset classes and where they go laid out in this. And it's totally free. Afford anything.com asset location. That's afford anything.com asset location.

[B]

We should be like Oprah with that.

[A]

You get a cheat sheet and you get a cheat sheet. Everybody gets an asset location cheat sheet.

[B]

And the crowd here on YouTube goes wild. Oh my God, I got a cheat sheet.

[A]

Cheat sheet. Cheat sheet. All right. Well, with that, we're going to take one final break to hear from the sponsors who let us give this stuff to you for free. When we return, we are going to hear from Michael, who is 26, single, has a high income and is about to buy a home. Oh, by the way, if you're looking for something to do during the commercial break, affordanything.com asset location.

[B]

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[A]

Welcome back. Our final question today comes from Michael

[D]

Hey Paula, and Joe. It's Michael in New Mexico and I've got what I think is a bit of an interesting situation that I'm hoping can spark some good discussion for you all. So to kind of lay out my situation, I'm 26 and single. I make about 120,000 a year and I currently have saved about $460,000, roughly equally split between my taxable investment accounts and my retirement savings. I plan before the end of the year to buy a $350,000 house with 20% down, and I expect that loan will have about 6 to 7% interest rate on it. When I run the numbers on whether I should save the money into my investments or put it into my mortgage to achieve FI faster, I get roughly the same amount of time. And when I hit fi, I don't necessarily plan to just retire right away, but rather to continue working in some kind of part time capacity to allow me to dedicate more time to the things I value When I run the numbers on what my withdrawal rate would look with these two paths. So that's where it kind of gets interesting. So with the loan, I plan to spend about $3,000 a month, roughly two thirds of that being the actual loan itself. And if I were to pay that loan off, I'd have a withdrawal rate of somewhere between 2 and 3%, depending on what my exact rate of return is over that time. And if I were to save the money into my investments, I'd have a withdrawal rate of roughly 4%. To me, paying off the loan Makes more sense from the math standpoint, as I'd have a lower withdrawal rate. And even if I don't necessarily need that money, I would have more flexibility if I got married or something else changed my life situation. I'm not particularly emotionally attached to paying off loan versus investing the money. I'm just trying to find the best use for the money. That I'm already going to be saving. Towards some form of fi. Am I going about this problem in the right way, or is there something I've missed In my thinking on this? I'd love to hear your input. Thank you so much for listening.

[A]

Michael, I love the question. We're going to give you two answers. We're going to answer the question that you directly asked, but we're also going to answer some of the questions that you haven't asked. But we'll start with what you asked. I sure am.

[B]

It's a dare.

[A]

I don't know what you're up to for the next 20 minutes, Joe, but

[B]

I'm listening to you answer all kinds of hypothetical questions, apparently.

[A]

Well, okay. Because the thing with this level of focus on the mortgage interest rate, the thing that's going to come up for him, and he has not asked this question, is 15 year versus 30 year. Michael, when you go to apply for that mortgage, you're going to be presented with that question. And I think you're going to be very tempted to take out the 15 year. Because that's going to have a lower interest rate. And the reason for that is very simple. If somebody is giving you a loan For a longer period of time, there's necessarily more risk. So the interest rate has to be higher. To adjust for the fact that there's inherently more risk With a longer loan. No matter what the prevailing interest rates are at the time that you take out this mortgage, I guarantee you the interest rate on that 15 year fixed. Will be cheaper Than the interest rate on the 30 year fixed. Given that the nature of your question Was so focused on do I pay off the mortgage or not? And so focused with the mortgage rate itself at the crux of that question, I suspect that when it comes time to make that decision, you're going to be very tempted to get the 15 year. My recommendation, even though that you did not ask this, is do not get the 15 year, get the 30 year. And Joe, I bet you can guess why I'm saying that.

[B]

Well, Ojo would have agreed with you.

[A]

No,

[B]

I used to set this up for people where you take the 30 year at a marginally higher interest rate. It depends on where the yield curve is. But sometimes, and if they're close enough, take out the 30 year, take the rest of the money, put that money in a spot and invest it. Then if you lose your job, the cool news is, is that you have less of a commitment. You have a smaller monthly commitment, so you have more flexibility. The disability statistics are very disturbing that people have that we don't want to look at. I don't want to buy disability coverage because I'm safe, but the statistics say otherwise, that the chance of that happening to you are better than you think. So your overhead is less with a 30. You can put the money into the market and you can, if the long term averages continue to do what they've done for long periods of time, then you'll end up with more money that way as well.

[A]

Wait, you said you used to agree with me. Sounds like you still do.

[B]

No, that was my old argument. Oh, it was 100% my old argument.

[D]

Boo.

[A]

All right, what's your new argument?

[B]

Well, I think you choose one way or the other. I mean, here's the thing, Paula, is that if he's going to go into, let's pay off debt, let's get the debt paid off as fast as possible. And I do like to your point, thinking like a CFO, but the bank will give you 15 and 30. You don't have to follow any of those. You could say, you know what my payoff plan is 18.5.

[A]

Right, right, right. So, Michael, just let's take a step back because I realize we've gotten off track and we're starting off by answering the question that you haven't asked.

[B]

We have, but we're halfway down that road, Paul. We are.

[A]

Yeah, yeah, yeah. But I think it'll help answer the question that he did ask to first address the question that he didn't ask.

[B]

Yes. Which is actually where I'm kind of going is with the question that he asks that he did ask, because I do more strongly believe, you know what, if you can dive bomb that interest rate, if you're committed to paying off that debt quickly, then pay it off quickly and a Very quick way to pay it off. If you're going to devote extra money, take a lower interest rate because you're going to put more than the 15 number in anyway. So don't be halfway into this strategy. Be be all in on the strategy and. And do it.

[A]

Wow.

[B]

The biggest problem I have again with do it yourself mechanics is that without that third party in the way. The reason why, Paula, for me that I would help people set up this 30 and invest the difference strategy worked was because of me. Because I will also tell you that when I gave people this is a to do to do at home and I wasn't the one that did it and they were going to do. Never got done. It didn't get done. So if it's not going to get done, take the 15, take the bank at what they, whatever, you know. The best thing is that they'll give you and let them dictate the terms. You don't have to play by that. You could still pay it off and with a 30 or a 15 year, a 40 year loan, adjustable rate loan, whatever, you could pay it off in eight. The resources to do it.

[A]

Don't take out an adjustable rate loan.

[B]

But what the bank gives you is not the important thing, it's what you do with that. I think that's the more important part of the equation. So if, if he's going to go to our paying off that loan early and it depends on what the yield curve looks like, and it also depends on if he would actually invest the difference and leave it alone. I would probably take the 15 and pay extra on the 15.

[A]

Okay, I disagree. I would take the 30 but then pay it off as rapidly as possible. So, Michael, the good news is where Joe and I are converging, where we are in agreement is on the question that you did ask, which is that both of us seem to be in agreement that your optimal strategy is to pay off the mortgage as fast as possible.

[B]

I don't know that that is the optimal strategy because I do want to get to that. Because that's the question that he asked.

[A]

Yeah, that is the question that he asked. I am on team. Pay off the mortgage as fast as possible, take out a 30 and pay it off as quickly as you can. The reason for taking out the 30 is that because you have a lower monthly payment, even though the interest rate is going to be a little bit higher because the 30 gives you a lower monthly payment if any type of emergency unfolds. Joe, you talked about how people frequently get short term or Long term disability, right? You might get into an accident, something might happen, or a loved one gets into an accident and you need to go take care of them, or you want to go take care of them for a while. If anything happens, you've got flexibility. Whereas if you are burdened by the much, much higher monthly payment that comes with a 15 year mortgage, you have just curtailed your flexibility. And particularly in your 20s, I mean any stage of life, but especially when you're young, you don't want to curtail your flexibility. You want like one of the great benefits of youth is maximum optionality. And so preserve that optionality in your 20s and 30s by virtue of not saddling yourself with a higher monthly payment than necessary. So I would take out a 30 year mortgage, 30 year fixed rate mortgage, and then I would pay off that mortgage as quickly as possible. And the reason for, I've just described the reason why I would go 30 instead of 15, which is not the question you asked, but to the question that you did ask, which is do you pay off the mortgage or do you invest this money? The reason that I would focus on paying off the mortgage as quickly as possible is because the delta between your expected return in paying off the mortgage versus your expected return in putting it into a broad market index fund, that delta is not wide enough to justify the risk.

[B]

I don't know if that's the case. Number one, it depends on his time frame that he actually gets it paid off. If he gets it paid off in seven, eight, nine years, maybe if he gets it paid off in 16, 17, 18 years. This is where the phrase, and by the way, Michael, this is not your fault, this is my issue. But the phrase doing the math triggers me. And the reason it triggers me is a mentor of mine told me early in my career, beware charts and graphs. And math can be charts and graphs. There's a big difference in doing the math. If your expected return of Future market is 7 and a half percent and your return of future return is Dave Ramsey 12%, huge difference. And it's going to hugely affect your strategy. So when we let the math dictate our expected outcomes, we have to look at what the human did to affect the math. Before we got to the math, we decided on some benchmarks and I would love to see when you ran the math, because often I worked with a lot of engineers when I was an advisor, Paula, and they would generally use this phrase, I did the math. And I'd never dispute the math. Of course you're going to lose when you're fighting an engineer and you're going to dispute the math, but what I would dispute were the inputs that they used to come up with math because the input is going to change the math substantially. I think that if we're running a seven and a half percent expected return, Paula, I think you're, you're right. I think you're right on. I think the delta does not justify the return. If we're looking at though a 10.2 return over 17 years, 18 years to pay off the mortgage, then it way way maps out much better for investing the money.

[A]

I think running a between 8 to 9% return like 10.2 is a little high to project with that degree of certainty. I think mapping out even in somewhere between 8 to 9% long term annualized return just doesn't make sense. That delta is too small.

[B]

I don't know. Here's what I do know. I don't know what the future is going to do. I don't know what's going to happen. So here's what I would do. I would ask the question, which one makes you less unhappy? If you decide to pay off the loan, you are capping your upside on your financial return, but you're also getting rid of some potential downside. Right. You're decreasing the standard deviation. You're zeroing in on exactly what's going to happen. And for some people, that's, that's what they're looking for. I'm looking to eliminate as much risk in this equation as possible. And by dealing with a fixed asset and a fixed rate of return, we've effectively done that. We're much more likely to know our outcome. We're a lot less likely to know our outcome if we have the money invested and we have the mortgage there for a longer period of time. However, if we just look back 15 years and remember I'm the guy that just got done saying the last 15 years doesn't equal the next 15 years.

[A]

The last 15 years are pretty sweet,

[B]

but you're limiting your upside.

[A]

Yeah.

[B]

And if you.

[A]

But the last 15 years, I just got to say the last 15 years were so sweet, historically abnormally sweet.

[B]

You can take the 1990s, you can take the 1980s, you can take 2010 to 2020, you could take the last 10 years. You can pretty much take anything besides that first decade. 2000, 2010.

[A]

Exactly.

[B]

Could be that still mapped out the way better off if you had kept the mortgage. So I would not go in expecting a return. I would not go in trying to guess what the return is going to be. I would go in going, if I decided to invest the money and the market went down or did not do as well as I had hoped, does that make me less unhappy? I love how I'm using a double negative, but I think you know where I'm going with this.

[A]

Right.

[B]

Which is if I do this strategy and it goes against me, which one? So I go ahead and I zero in on the interest rate, which one

[A]

will you regret less, is what you're saying.

[B]

And the stock market rocks because I think if we assume that we're going to choose the wrong thing, if we go in assuming we, we choose the wrong thing, I think we're going to make a better decision about which way is going to be the one that we pick.

[A]

So basically, as a thought exercise, assume that with the benefit of hindsight, once you know in the future how history ends up unfolding, if you assume that with the benefit of hindsight, you've chosen the mathematically wrong thing, which one would you still regret less?

[B]

Right. I think it's a fantastic thought exercise.

[A]

Yeah.

[B]

Because clearly doing what you are suggesting that he does would have been horrible the last 10 years. It would have been way worse.

[A]

And I will say, as somebody who paid off all of my rental properties, seven rentals, totally free and clear, and that means paying off 3% mortgage interest rates between 3 to 5%, like 3 handle to 5 handle, paying all of them off and then seeing how the market performed, I will say I have zero regrets.

[B]

But what's funny about that is. So what you just said is it wasn't about the math at all. Because I've known you for a long time, Paula. That wasn't a mathematical decision.

[A]

Right, right.

[B]

That was a know yourself decision.

[A]

Yeah, it was. It was a know yourself decision. It was also contextualized with the fact that I am not a tenured professor, I am an entrepreneur. And those are very different risk profiles. If you're a tenured professor and you plan on never quitting that job, or at least you don't plan on quitting that job in the next 20 years, you know that you have income certainty. Right. And that is a very different position to be in from somebody who, like Michael, wants to reach Fi and then switch to part time work and he's going to be entering a phase in his life where he's going to have income uncertainty. And when you're entering a phase of income uncertainty, then, and I know this by virtue of being an entrepreneur, where you're also Constantly in living in just perpetual income uncertainty, you want to create certainty in the other elements of your life so that you are better positioned for the uncertainty on the income side of the spectrum.

[B]

Well, and that certainly is a piece of knowing yourself.

[A]

Certainly, certainly the lack of certainty is certainly.

[B]

Yes, it is a big piece of knowing yourself. It's not just emotionally like we were talking about earlier with whether I have global REITs in our portfolio. Right. And if I'm going to blow up my portfolio, but it also is knowing your income streams, knowing your time frame, knowing all of these things. Like, you know, we compare ourselves to the S P500. The S P500 doesn't have any time frame. So it's, it's the most ridiculous thing when people go, well, my portfolio didn't beat the S P500, so I didn't do very well. Well, when's your goal? My goal is three years from now. Are you kidding? Last thing you wanted was anything to do with the S P500. So comparing your results to that is ridiculous. So knowing yourself is also, Paula, knowing what you're talking about, what are the other extenuating circumstances in, in your own life? Our mutual friend, Andy Hill. Andy Hill paid off his mortgage at a young age, and it was because he wanted to quit his job. I mean, point, he wanted to work for himself. He wanted to be an entrepreneur. And he knew, like you just said, that having less overhead was going to help him achieve that goal.

[A]

Right. Andy Hill's been on this podcast, he's talked about that decision. And for him it was because he's got two kids who are still young and he wanted to spend more time with them. So the cost of that is paying off the mortgage instead of investing in the market.

[B]

And look at the number of mathematicians over the years that have argued with him and said, oh man, that's dumb. And I look at Andy and I'm like, there's nothing about that that was dumb. The math didn't math. But it was a great decision.

[A]

Yeah.

[B]

So I don't know that I have an opinion which one is best. My opinion is you clearly like paying off the mortgage.

[A]

Yeah.

[B]

For me, I think I gave him the parameters around how I think about it.

[A]

Right.

[B]

There's far more potential upside to keeping the mortgage.

[A]

And Michael, my position is I don't think that the delta, the likely delta on that upside justifies it. I also think given, given your goals, given the fact that you want to make a career change, switch to part time, go into a more exploratory phase of your life once you reach fi, given all of that, plus given the likelihood that your life might change significantly, maybe you'll get married, maybe you won't. Nobody knows. Given that so much is up in the air and you want to preserve flexibility, optionality, all of that points to keep your overhead low. And the way you keep your overhead low is get the 30 year mortgage and then pay it off as fast as possible. Those two things keep your overhead low. All right. It's fun to disagree with you, Joe.

[B]

Yeah, I think there is, there is so much more fighting we could do because just the phrase, just the phrase that the delta doesn't make sense drives me crazy. But pulling out the calculator, and I think everybody can do this on their own, pulling out the calculator, I could so quickly go the opposite way on that notion alone. But we will, we will let the mathematicians go at that one. I do agree that it is based on the goal and I do agree that if you're looking for more flexibility earlier on, he's putting himself in a place where you've been, where Andy has been, and, and it's not a bad place to be. What I wouldn't do, though, Michael, is blame it on the math. I would not. The math part still, obviously, Paul, even when you said it, it wrinkled me. The math part drives me crazy. The part that doesn't drive me crazy is basing it on your goals. That piece I have no problem with.

[A]

You could always blame it on a sibling. Going back to the first question, you could.

[B]

You probably should.

[A]

Let's not even say could.

[B]

That's what happens. My sibling said that this was the way to go. And then when it doesn't work out, you got somebody to blame, which is even better. And that's why Paula is frustrated.

[A]

Yeah.

[B]

You know.

[A]

Yeah. The plight of the only child, nobody to blame it on.

[B]

It is so frustrating.

[A]

All right, well, thank you, Michael, for the question. Joe. I think we've done it again.

[B]

I think we have. But our good friend Rema is telling us that we need your questions so we can fight more.

[A]

Paula, we have to fight more questions. If you have a question that you want to submit to us, go to afford anything.com voicemail. That's affordanything.com voicemail.

[B]

Especially questions that you think would agree with my way of thinking, not Paula's.

[A]

Especially questions where you think Joe and I will disagree because those are the most fun ones to answer. Send us any questions that you think will provoke a Paula versus Joe showdown. That once again is afford anything.com voicemail. We're also going to give you afford anything.com asset location if you want to discover where to locate your assets and if you know what I mean, and if you want to play your role in increasing the housing supply, in solving our nation's shortage problem, doing good while also doing well for yourself because you'll make more money by virtue of doing that. Afford anything.comrent. thank you so much for being part of the afford anything community, Joe. Where can people find you if they'd like to know more?

[B]

Well, guess what? You can find me on YouTube. We're on YouTube right now. We just this last week made public our discussion with one guy that maybe a few people have heard of, a gentleman named Morgan Housel. And coming up next week, another guy that I can't stop mentioning on this

[A]

show made public our discussion. Sounds so like, what is he gonna say now?

[B]

Oh, you can't believe.

[A]

What did he make public?

[C]

Right?

[B]

We'll make it like Buzzfeed. The 14th thing he said made me LOL. And that's on the stacky Benjamin's YouTube channel where you can also find our discussions with Paula Pant, where we're live on Mondays, by the way, creating our Friday episodes. And that's always fun. And Paula, who is traditionally pretty horrible at trivia, is like mounting a charge. No idea what's happening, but Paula is on the move. So if you want to see if Paula does not finish last place, you can also. Which would be so weird. Wouldn't that be weird?

[A]

Unprecedented. These are unprecedented. We're living in unprecedented times.

[B]

Yes, but my discussion with the one and only Morgan Housel and the history professor. I can't stop talking about Joseph Moore coming next week to YouTube. Just go to the Steck and Benjamin's YouTube page. Smack that like button. Subscribe all the above.

[A]

Ring the notification bell.

[B]

Ring the bell. Ring our bell.

[A]

Thank you again for being an afforder. If you enjoyed today's episode, you know where to go. Affordanything.com voicemail affordanything.com rent and affordanything.com asset location. Those are your three destinations. This is the afford anything podcast. My name is Paula Pant. I'm Joe Salsihai and we'll meet you in the next episode. When you're co mingling entry level affordable homes with luxury homes. That's the equivalent of asking about the price of pants on TEMU as compared to the price of like Cartier. Does Cartier make pants? No, they don't. You can see how far away from the luxury market I am. They're a jewelry maker, not. Not a clothing designer.

[B]

Dance at Tiffany's.