Are You Headed for FIRE or the Middle-Class Trap? (Finance Friday)

Summary

BiggerPockets Money Podcast: "Are You Headed for FIRE or the Middle-Class Trap? (Finance Friday)"

Release Date: March 7, 2025
Hosts: Mindy Jensen and Scott Trench
Guests: Leah and Zach

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Introduction

In this episode of the BiggerPockets Money Podcast, hosts Mindy Jensen and Scott Trench delve into the financial strategies of Leah and Zach, a dynamic couple aiming to achieve Financial Independence, Retire Early (FIRE) by the age of 45. Their primary concern is avoiding the notorious middle-class trap—a scenario where despite diligent saving and investing, individuals find themselves financially stagnant. With a current investment runway of approximately 15 years, the discussion centers on optimizing their financial decisions to expedite their journey to FIRE.

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Guests' Financial Journeys

Leah's Path to Financial Awareness ([00:33] - [03:27])

Leah shares her upbringing in upstate New York, emphasizing the lessons instilled by her single father about distinguishing needs from wants. Her father’s work ethic, balancing multiple jobs to support Leah and her brother, laid the foundation for her financial discipline. A pivotal moment in her financial education occurred during her college years at the University of Michigan, where she discovered the BiggerPockets resources during long car rides. This exposure ignited her understanding that early retirement is attainable, challenging the conventional notion of working until age 65. By age 28, Leah boasts over $300,000 in investments, a testament to her disciplined approach and strategic financial decisions.

Zach's Investment Initiation ([03:27] - [04:49])

Zach recounts his late start in financial planning, which began during his senior year in college. A personal finance class taught by Professor Verone, a Marine veteran, was a game-changer, highlighting the critical importance of early investing and the power of compound interest. This education led him and his sister to adopt annual gifting of personal finance principles, reinforcing their commitment to financial growth. Today, at 28, Zach and Leah collectively hold approximately $470,000 in investments, positioning them strongly towards their FIRE goals.

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Current Financial Standing and Goals

Income and Spending Analysis ([04:49] - [07:18])

Leah and Zach both work as account executives in tech sales, having chosen to remain with the same company since their junior year in college. Their combined annual income is approximately $369,000, with annual expenses around $161,000. This significant income-to-expense ratio provides them with a surplus of roughly $208,000 annually, allowing substantial investments beyond their 401(k) contributions.

Retirement Objectives ([06:15] - [07:18])

Leah and Zach aim to achieve full-time FIRE by age 45, with a stretch goal of retiring by 40. Their Financial Independence (FI) number stands at $3.5 million, factoring in planned expenses, including the future costs associated with raising two children and maintaining a family home. This target anticipates their primary residence in the Raleigh-Durham area, a growing market with desirable public schools, necessitating a four-bedroom home priced between $650,000 and $850,000.

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Strategic Financial Advice

Maximizing Investment Opportunities ([07:18] - [14:00])

Mindy and Scott commend Leah and Zach for their disciplined spending and robust investment habits. Scott specifically highlights the couple's $290,000 mortgage at a 4.99% interest rate as manageable within their financial framework, advising against aggressive mortgage prepayment. Instead, he encourages leveraging their high income to maximize after-tax investments, suggesting that their current spending does not impede their ability to accelerate their FIRE timeline.

Home Buying and House Hacking Strategies ([14:21] - [23:31])

The discussion shifts to the couple's aspiration to purchase a "forever home." Scott introduces the concept of house hacking—buying a multi-unit property where one unit is occupied and the others are rented out—to generate additional income and accelerate wealth accumulation. He suggests that Leah and Zach explore this strategy in the Raleigh-Durham market, where housing prices may present favorable opportunities.

Leah acknowledges the practicality of house hacking, recounting a past experience where a friend rented a room from them. This strategy aligns with Scott's advice to utilize their current financial surplus to build equity and generate passive income without compromising their long-term goals.

Investment Diversification and Tax Planning ([33:12] - [44:09])

Mindy emphasizes the importance of avoiding the middle-class trap by allocating their substantial surplus into after-tax brokerage accounts and Health Savings Accounts (HSAs), rather than solely relying on 401(k)s and home equity. She advises leveraging their $154,000 annual surplus to build a diversified and accessible investment portfolio, thereby enhancing their financial flexibility and independence.

Leah and Zach also discuss tax implications, with Scott reassuring them that current tax brackets make capital gains negligible for their portfolio size. This allows them to focus on pre-tax planning without undue concern over immediate tax burdens.

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Conclusion and Key Takeaways

Final Recommendations ([44:09] - [55:12])

Mindy and Scott provide Leah and Zach with actionable advice to optimize their financial strategies:

1. Continue Maximizing 401(k) Contributions: Both should continue to max out their 401(k)s to reap tax benefits while also contributing to after-tax brokerage accounts to diversify their investments.

2. Explore House Hacking: Consider purchasing a multi-unit property to generate rental income, thereby accelerating their path to FIRE.

3. Focus on After-Tax Investments: Allocate a significant portion of their surplus income into diversified after-tax brokerage accounts and HSAs to build accessible wealth and avoid the middle-class trap.

4. Stay Informed on Tax Changes: While current tax implications are minimal, Leah and Zach should remain vigilant about potential future changes in tax policies that could impact their investment strategies.

5. Regular Financial Review: Continuously monitor and adjust their financial plans to stay aligned with their FIRE goals, ensuring they adapt to any changes in income, expenses, or market conditions.

Notable Quotes:

• Leah on discovering FIRE: “It was such a light bulb moment that you don't have to work until you're 65. Like, there are ways to do this so that you can retire early” ([03:27]).

• Scott on house hacking: “House hack, keep the expenses super low and do that. That will provide more flexibility right away than what I just described” ([33:12]).

• Mindy on avoiding the middle-class trap: “Throw that at your home equity, because the middle class trap is all of your wealth is, is trapped in your home equity, which is not easily accessible” ([34:35]).

• Scott on tax implications: “The tax that the effective tax rate is zero on the first big chunks of this... it will have a negligible impact on your ability to retire” ([47:12]).

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Final Thoughts

Leah and Zach exemplify how disciplined spending, strategic investing, and informed financial planning can set the stage for early retirement and financial independence. Through insightful guidance from Mindy and Scott, they are poised to navigate complex financial decisions, leveraging their income and investment acumen to avoid common pitfalls and achieve their ambitious FIRE goals.

For listeners aspiring to similar financial milestones, this episode underscores the importance of:

• Diversifying Investments: Balancing between pre-tax and after-tax investment vehicles to maximize growth and accessibility.

• Strategic Real Estate Investments: Utilizing house hacking and rental income to build passive wealth without overextending financially.

• Proactive Tax Planning: Understanding current tax benefits and preparing for potential future changes to optimize investment returns.

By following these principles, individuals can forge a clear path towards financial independence, sidestepping the constraints of the middle-class trap and securing a financially free future.

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For more insights and personalized financial advice, listeners are encouraged to engage with the BiggerPockets Money community through email or upcoming podcast episodes.

Transcript

[Mindy Jensen]

Today's Finance Friday guests are hoping to retire by the age of 45. Their biggest fear, getting stuck in the middle class trap. As of now, they still have a Runway of about 15 years so that they could avoid it. How will they do it? Scott and I are going to give them some advice and give them some answers in today's episode. Hello, hello, hello, and welcome to the Bigger Pockets Money podcast. My name is Mindy Jensen and with me, as always, is my analytical, yet brilliant co host, Scott Trench.

[Scott Trench]

Thanks, Mindy. Great to be here with our model of good financial decision making. Mindy Jensen. See what I did there? All right. Biggerpockets has a goal of creating 1 million millionaires. You are in the right place if you want to get your financial house in order, because we truly believe financial freedom is attainable for everyone, no matter when or where you're starting or whether you are in the grind on the journey to financial independence. Leah and Zach, thank you so much for joining us here on BiggerPockets Money. We are so excited to have you. Welcome.

[Leah]

Thank you. We're so excited to be here. Both longtime listeners, so it's truly a privilege. Woo hoo.

[Mindy Jensen]

All right, so Leah, I'm gonna start with you first. Where does your journey with money begin?

[Leah]

Yeah, so I think for me personally, I'm originally from upstate New York. I was raised by a single father, and I think he really instilled in us at a young age, needs versus wants. So that's kind of my first understanding of money. And he also was always working like two to three jobs growing up, trying to help us reach our goals, me and my brother. But he did set expectations with us at a very young age that although he loves us so much, when we turn 18, he's like, you guys are going to financially be on your own. So knowing that from a really young age, I was like, okay, well, I'm really passionate about learning. I want to get an education. Like, how am I going to get there? So the one way that my dad did invest in me was with sports. So I was really thankful to get a full ride scholarship to University of Michigan. And it was on those car rides from upstate New York to Michigan, which is a six hour drive, that I came across the Biggerpockets episodes. So it started listening to the real estate ones as a way to pass the time and then eventually started listening to Bigger Pockets Money when that launched. So I think it was really in college that I started to understand, wow, this makes so much sense. Like, it was such a light Bulb moment that you don't have to work until you're 65. Like, there's ways to do this so that you can retire early. So fast forward, graduate college. I start working in sales as an account executive. And it was about a year out of college that I had enough money where I was like, okay, I think I can invest outside of my 401k. But I was nervous with how to start, so I ended up working with a financial advisor for my first $10,000 that I invested. And then at that point, it was the year of 2022, and I heard about, I believe it was actually from Biggerpockets Money, the book A Simple Path to Wealth, and JL Collins. So that book completely changed my life. That's the book that gave me the confidence to start doing everything on my own. I opened up a Vanguard account. I started dumping money into VTSAX. By the time I turned 25, I had reached my first $100,000 in investments, which I was really excited about, really proud of. Fast forward. I just turned 28 last week, and I'm at over 300k in investments between my brokerage and my 401.

[Scott Trench]

Zach, can we hear about you?

[Zach]

Yeah. So my money kind of journey didn't really start until college. In my family, just money decisions or investing never really came up as a topic, a conversation around the dinner table. And it actually took my senior year of college, where my sister was actually a freshman at the same university. And I was looking at somewhere because we've never been able to take a class together before. And so I said, hey, there's this personal finance class, you know, that anyone any year can take. Why don't we just take that so we can have a class together? So we ended up taking it at our university with Professor Verone, old Marine, you know, a veteran. And he ended up really opening our eyes to the importance of getting into investing early. The power of time and money and investing. So me and my sister, we actually, every year for Christmas, the textbook that the professor actually has a local printing press make for, like $20 each. Because again, he's all about how can we be most economical with our money. Every Christmas, we give it back to each other to kind of remind us of, like, the principles he taught us around investing, saving, et cetera. So that's really where mine started from my money journey. And then now today, you know, aggressively Investing in a 401k, index funds, et cetera. So that's kind of where we're at. And I think what our Total investments at this point are around $470,000 of hopefully retirement ag, you know, Nest egg for us to build on.

[Scott Trench]

Awesome. And you're 28 as well?

[Zach]

Yes.

[Scott Trench]

Awesome.

[Mindy Jensen]

And what are your careers?

[Leah]

Yeah. So we are both account executives. We actually work for the same company. We met when we were juniors in college and now we are six years out of college, six still working for the same company, both in tech sales, essentially.

[Scott Trench]

Awesome. And one of the things we get into, we will look at annual income numbers here, but that changes things a little bit. We should, we should think through that. This is, this is a. There's a baseline spending we can plan on, and there's a number that could be much higher than that for income potential that could be driven on a given year, given that you're both in sales. Right, Correct.

[Leah]

I think also one other important note, something that Zach really brought to our relationship is he's the one that was like, we should really start tracking our spending. So ever since we were like one year out of college, we both have been tracking our monthly spending going back now, like five years, since we graduated in 2019, started doing it like a year out. We are definitely victims of spending scope grief or inflation, lifestyle grief. You'll definitely see that if you saw our full numbers.

[Scott Trench]

But you guys spend very reasonably relative to the income that you bring in. So I don't think you have a spending problem here. We're getting ahead of ourselves though, with that, so we'll take a look at all those. But you guys are crushing it financially here, and you know that. And so this is all about how do we make it happen faster and with more flexibility over time.

[Mindy Jensen]

So what is your retirement goal?

[Leah]

Yeah, I think for us. So ideally a stretch goal would be to reach full time fire by 40. I think realistically our number is probably more when we're 45 years old because we do plan on having two kids. So those will absolutely throw off our projections, our numbers, our spending. So right now, based off our spending, our FI number is 3.5 million. And we're trying to hit that by 40, but more likely probably 45.

[Mindy Jensen]

So we've got 12 to 17 years to get there.

[Leah]

Correct.

[Mindy Jensen]

Okay, well, I believe you will, but a couple of things before we look into your numbers. First of all, kids don't have to be expensive. They can be expensive, but they don't have to be expensive. So spend money on safety items and they're going to poop in all of their clothes. So go ahead and pay nothing for their clothes. Go to garage sales and thrift stores and, like, they can look cute in stuff that somebody else paid full price for.

[Scott Trench]

They're going to have childcare, Mindy, because. Because they both make such. We're going to get to the income numbers in a little bit. But there's no. At that level of income, it will not make sense for one parent to stay home, unless that's what you want there. But it won't make financial sense.

[Mindy Jensen]

No, I didn't say that. I said, just don't spend every dime you can on them. Because it's so easy to spend all these. These stories about, oh, it's $300,000 to raise a kid from 0 to 18. It doesn't have to be. It doesn't have to be anything close to that. And you can still have a happy, healthy child. Your kid wants to spend time with you.

[Scott Trench]

I completely agree. I just think that there is a risk that they need to be aware of, that they'll be spending 20, 20 to $40,000 between one to two kids in daycare for a handful of the years in there. And that depending on how they set things up but work through that, they may have family nearby. We have all these things to get to. It'll be fun.

[Mindy Jensen]

That is a good point and one that I always forget about because I did choose to stay home with my kids. Not because that makes me a better person, but because I was making $30,000 a year, and it was a lot easier for me to be like, well, I guess I'm gonna stay home instead of taking all of my salary and instantly paying it all to the daycare people. So. But anyway, that is. That is not the situation we find ourselves in here with Leon, Zach. We find ourselves in a situation with a total net worth of just under $650,000, and that's broken out into cash of 106,000. I want to talk about why that's so high. 401k at 268,000. There's a little bit in there in a Roth, but the bulk of it is in a traditional 18,000. In a Roth IRA, 187,000. In individual brokerage accounts, $352,000 in assets in the primary residence against a $290,000 mortgage. Now, let's get to the income, because this is where it's really fun. Leah makes a conservative estimate of just under $200,000 for 2025, and Zach is at 170. So that's a grand total of, conservatively, $369,000. For 2025. Now, Leah and Zach, would you categorize your area of living as high cost of living, medium or low?

[Leah]

I would say based on our expenses. I would. I would say medium, if not low.

[Mindy Jensen]

Yeah, that's what I would think, too, but I just wanted to. I wanted to get your take on that. We have expenses of practically nothing, so I didn't even do the math on how much you're making per month. But your expenses are $8,000 a month. Conveniently, you did some sort of annual spending, which is 161,000. Again, that's a $200,000 delta between what's coming in and what's going out. So I think that spending is not your issue at all. Could you tighten it up? Sure, you could. Do you have to? No, you're still going to get to five. I would encourage you to look at your expenses and make sure that your money is going where you want it to go. It's really easy to mindlessly spend on things, but, I mean, your mortgage payment is $1,700. Your food grocery, 925 restaurants, and eating out 1748. Okay, so I see a potential savings point, but again, you're spending $8,000. You're spending $160,000 a year and making 360,000. If you want to eat out for $1700 a month, I'm fine with that. Like, I have to give you permission, but, you know, I don't see anything in your spending that's obnoxious. I see. Obviously, you could make cuts, but you don't need to. Now, let's look at debts. There is one debt for $290,000 on your home. It is a 4.99% interest rate. If I was in your position, I wouldn't pay that off at all. I mean, I would pay it, but like, the minimum monthly. I wouldn't make any extras. You don't have any rental properties, which is totally fine. No pensions. And some of the questions that you had were interesting. Do you want to read off some of these questions you had for Scott and I?

[Scott Trench]

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[E]

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[Leah]

I think I just won my taxes. Yeah, I just switched to H and R Block in about one minute. All I had to do was drag and drop last year's return into H and R Block and bam. My information is automatically there so I don't have to go digging around for all my old papers to switch. Nope. Sounds like we just leveled up our tax game.

[Zach]

Switching to H and R Block is easy. Just drag and drop your last return. It's better with Block.

[Mindy Jensen]

Welcome back to the show, joined by Leah and Zach.

[Scott Trench]

Let's actually start there. What what is the the first thing on your mind that we can help you out with here that's present.

[Leah]

Yeah, I think like it's really on brand with some of your your recent episodes. I think something big for us is that we're concerned about getting stuck stuck in the middle class trap. Knowing that for the past three years I've been maxing out our 401ks because I'm like, oh, I really like these tax benefits, not having to like pay taxes on that money. But now if we're trying to retire at 40 or like 45 and trying to bridge that gap, I wanted to understand your perspective on like where should we be deploying that money? Like I would have hypothesized that it's like double down on the individual brokerage and just say bypass the tax savings.

[Scott Trench]

My immediate response Here is there's another thing in this document that you wonderfully prepared for us. Thank you for the prep work and detail in this that says you're thinking about a dream home that you're saving up for and that's a big reason why you have cash. Can you walk me through that? I think that something tells me that that's going to be one of the first things we need to think through here in the context leading you towards your long term goal.

[Leah]

Yeah. So for context, Zach and I both work from home. We plan on having two kids. We are in the Raleigh Durham area, which is a growing market. We want to send our kids to public schools. So we know that we're going to need a four bedroom house just so that we both can have an office, there can be room for the kids and we want it to be like in a good public school district. In today's market you're looking at like 650 to 850k for Raleigh Durham area. And a big thing for us is that we don't like having an expensive monthly mortgage. So we want our monthly mortgage payments to be below $3,000 a month. So I think that's why we're trying to save up a really big down payment.

[Scott Trench]

Let me ask you this. What, what is the interest rate you would get right now if you bought this home on a 30 year fixed?

[Mindy Jensen]

6.75.

[Scott Trench]

That was kind of the first thing. And you know, this is a absurd statement, but I'm just going to put it out there for this, that forever home, we didn't buy ours until our kiddo was one and a half. Right. Because if you think about that, what you just described there for your permanent house, good school district, that price range or whatever that matters when the kiddo's five. Right. You may want to get there sooner. I went there sooner with that, but I didn't do it before we had kids because there was not really a practical advantage for that. So that's one consideration. What's your response to that? That first thing that could you, could you delay this up to four or five years at minimum, depending on when your timeline is for having the kids in the first place?

[Leah]

Yeah, I think that we're thinking like ideally we want to stay in our current house four or five more years. Yeah, yeah. So we'll probably have our first kid. Well, we will have our first kid in this house and right. We have a three bedroom right now. So we will just have to both share an office, which should be interesting and then have A room for a baby, number one.

[Scott Trench]

Let me ask this one. So there's kind of two things. If you said I want to buy that forever home right now, I would come in with the heretical advice of saying I use your heretical too much. I would come in with the absurd advice of saying I might consider just paying the thing off. Like, like that's your get the mortgage at 6.75%. Pay it off, right, because after tax I assume you're going to file a standard deduction for the most part. You might have some mortgage interest deduction on a purchase of that size with a 6.75% but you're, you're really like, you're getting a guaranteed six and three quarter percent return on that. And you know, sure, the market, well on average outperform that. But there's, you know, you've probably heard recent episodes of me saying I'm a little skeptical about the near term on that front. So that would be one, one path forward on there. The second one would be to say this. The housing situation is potentially the biggest lever. And like I had our kiddo in half a duplex. It was a nice four bedroom duplex on each side on it. And you know, you may find if you look up and you're like, hey, can we do that for a couple years? Since we're going to be, we're not, we're. This is not our forever home right now that could seriously accelerate things regardless of whether you choose to keep it as a rental long term from there. I actually think despite your enormous income and situation that that could be one potential lever for you in the next couple of years that, that I would, I would urge you to consider. I also think Raleigh, I haven't looked, but I'd encourage you as homework. It'll take you five, ten minutes. Go on Zillow or talk to a local agent and look at what's for sale in the market in the world. Just like float the idea out there. I think what you'll find is that the prices are absurd and don't make any sense and you don't like them. Then recast the search and do it for properties that have actually sold. I did this in Denver, which is, I think a market that has a lot of similar items going on in there and you may find either that the rabbit hole of thinking about using the housing situation, which is going to be a huge lever for you right now, that will not be available to you in three, four years for it, I think you'll find that there's a major bid ask spread that could be very interesting. So what's your reaction to that whole line of thinking? And if you don't like it at all, we'll go in a different direction for, for other parts of this.

[Leah]

So just to make sure I'm understanding correctly, is your recommendation to actually buy sooner, like and lock in the 6.5 for our dream home and then just aggressively pay it off early or as you're saying, pay off our current mortgage and our, that's under, that's at 5% interest.

[Scott Trench]

I'm saying consider house hacking. Consider a luxury house hack on it. Moving out of this because you have that lever for the next several years, you have a clear bridge to your permanent forever home. And it sounds like you don't really love this house right now. It's not your forever home. Is that, is that right?

[Leah]

Correct. Yeah. This is our starter home.

[Scott Trench]

Yeah. So if you're going to be in a starter home for the next couple years and you really want that flexibility a little sooner, that's a major, that's a major lever. Just because you earn a super high income and don't have to do that doesn't mean that you might not really benefit from an approach like that. In particular, right now, I suspect Raleigh Durham is getting absolutely crushed. From a rental market perspective, I believe that prices are probably down pretty substantially and it's a deep buyer's market. Is that correct? Am I, am I wrong?

[Leah]

I haven't even honestly looked a lot at like buying right now just because I know that it's far out for us.

[Zach]

I mean, from a rental perspective, from the small sample size of like friends that I have that are rent, like it's, it's pretty expensive, like for like a, you know, 500 square foot, 12 bedroom. Like a lot of people, they're paying like close to like, you know, 12, you know, 2100 bucks. Like some of it can get, you know, pretty, pretty excessive. Houses are around the same. I have a couple friends that are renting houses.

[Scott Trench]

Great. Well, I, I, I just considered that for you because one of the things that jumped out to me when I was looking at this at the question that pops in is, hey, we're saving up $126,000 for our forever home down payment. Okay. But, so, so I, I think there's either go buy the forever home and then just start paying it off because you're going to need that if you want to be retired at 40, like and you have a 6 to 7% interest rate mortgage, 6 and a half, 7% interest rate mortgage on there, then that's not a bad plan. Right? Like that's. Are you going to get super rich on that? I don't know. But if you think about that, in three, four, five years, you could be sitting on your Forever Home paid off and that would give you flexibility in a couple of years that might be really worthwhile. One of you goes on to earn Uber bucks. Like, like, I mean, there's a good reason to believe that one of you guys will earn a tremendous income in a coup of years. And sales kind of come, come and go for that. That may be, that may be a worthwhile option to explore. So that's the first thing. That's the first question. And the second is if we can delay the purchase of the Forever Home for several more years, then let's like, let's deploy this $126,000 in cash and take what's not working for what's not really going to be working hard for you in this primary right now. It's not going to go anywhere, I believe in the next couple of years. It's not, it's not, it's not a meaningful driver of your wealth, I guess would be more of the, the way to say it. It's not a bad situation that you're in. But can we take that and redeploy it to something that will be like, maybe we'll be pretty close to our current living situation and we'll end up with a couple hundred thousand dollars more in four or five years or shot at it and much lower expenses for when we actually go to buy that Forever Home. Am I, am I making any sense with this first observation here? It's just the first thing that stood out to me. Right. You have all this cash. Let's make a move one way or the other with it.

[Leah]

Yeah, I've actually never thought about that, like going for the Forever Home now, just taking the cash that we going in and then house hacking it. Because we, when we first bought this home in 2022, we did house hack. He, he had a really close friend that rented a room from us for the first couple years. And then when we got married, I was down for him to continue living.

[Zach]

You were like, you can stay as.

[Scott Trench]

Long as you want.

[Leah]

Davis, he was awesome. And Davis was like, ah, you guys are married. I feel weird. I'm like, no. So I, I think that's actually a pretty cool idea. And especially too with like my understanding I'm not an Expert. But my understanding is that a six and a half like percent interest rate is actually still a good interest rate in the long term range of things. So like it's a good point that you're mentioning. I never thought of like why not just do it now and then aggressively like pay it down and house hack.

[Scott Trench]

And to be clear, I'm stating, I'm saying there's two options. One is doing what you're saying. I didn't even think about house hacking your forever home. I guess we could rent out our basement here which is our forever home. But that's nothing crossing. I'm saying go, go for it with like a, like a duplex or a triplex. Like don't get, don't get a dumpy one that you know the 23 year old out of college is going to get that requires you know, the, you know, a complete remodel but you can get probably like a nice one. I bet you that you look this year you're going to find that Raleigh Durham is a deep buyer's market and there's an opportunity on that front and that would drive a lot of wealth for when in four or five years you buy that forever home for it. But if you, you also could decide to buy it. But I just think like this, this is burning a hole in your pocket. You're just hoarding cash that for a plan that seems a long way away. And it was the first thing that jumped out for me when looking at your statement. That's more of what I would is and I would just challenge you to look through a couple of those options.

[Mindy Jensen]

I think having at least an initial conversation with an agent is going to do you a lot of good. You can tell them exactly what you're looking for, what area because apparently Raleigh is huge. Tell them where you want to be and, and what, you know, what is really important to you. There might be a really awesome property out there right now. And tagging off of your comment about the interest rate 6.75 and I'm not quoting you, I'm just saying, you know, one of my lenders had sent me a video last week that said that they're at six and a half to six and three quarters should interest rates drop and there's no indication that they're going to, but should they drop and start with the number five, all of the people that are sitting on the sidelines right now are going to jump back in. It's going to be such a giant mental shift that interest rates are now below 6 that there's going to be a lot more competition for all of these properties. And more competition means it's no longer a buyer's market, it's a seller's market. So you have, you, you have this, I don't want to say block, but you have this idea that you don't want to pay more than $3,000 a month for your loan. And again, rates aren't coming down anytime soon. But what if you could get in now, pay $3,000 a month, more than $3,000 a month for a couple of years and then should interest rates fall, you're the only person competing for that property to refinance.

[Leah]

Yeah, that's a great point.

[Scott Trench]

I'm going hold Dave Ramsey here. And so is Mindy, I think on this.

[Leah]

Yeah, it's funny because originally we were like, oh, we gotta save up a 350k down payment. So that's why we have so much cash on hand. Because we're like. And we can't put that in the market. Cause like we're trying to buy within a five year timeframe and that's. But I, but it's not working for us. To your point.

[Mindy Jensen]

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[F]

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[Scott Trench]

No, it's not.

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[Scott Trench]

All right, let's jump back in with Leah and Zach. What do you guys think your dream home would cost you?

[Leah]

I think that when we were looking at it and like we were thinking it's going to be like probably 650.

[Scott Trench]

So you, you guys make 4, 3, 3, 70 in a bad year in household income, right? 369 is what I have here. And you could earn more than that, right? If even if you max out your 401ks, both max those out after your 100k in spending, you should have 100k in liquidity easily that you're going to generate. And you're at 28. Balance sheet reflects that. So there's not. Sometimes I'll see like, hey, I earn this much income, I spend this much and there's no cash accumulation, which tells me that one of those numbers is crap. That's not what's going on here. Like, you guys, you guys are actually earning this income or something close to it, and you're actually Spending what you think you're spending there and you actually will, unless things go poorly, which they certainly could generate 100k in liquidity. That 600k house is paid off by the time you're 34. So you take your spreadsheet and you say, okay, if I put that 100k into the market every year in my after tax brokerage account, that's going to model out to this level at 10%. You know, I'm skeptical and kind of got that pit of fear in my stomach here. I know that that's not best practice for financial, you know, pundits or whatever. However I'm described at this point, Mindy and I are described at this. But like, that's how I feel and I'm not, I'm not shy about it around there. And. But your model, you don't have to let, you can have all these bookends on how that's going to translate over the next six years. You know exactly what's going to happen on that mortgage. And then that takes out this number from, from you at 34 where you say, okay, my expense level is now, you know, something super low. Right. You have, you have taxes and insurance separate anyways, so you pull out that 1700 from your current level. That's a different retirement number. We have a very, I've just, we just changed the entire game that we got to play outside of that mortgage pay down here with it. And if things go well in a couple of years, you could, you could pay it off much sooner. So that's the, that's the. But that was my instinctive response to this could be wrong on there completely. But that was. Just jumped out to me as the first, first discussion point for today.

[Leah]

No, I think that resonates. I think too it's also like, if you think about our income, like history, this is really together like one of our first years that we're, that we're making more than we're used to. So I think it's helpful to have that outside perspective because it's like, oh, we have to look at this as like this is going to be a continuous thing where in the past we haven't always had 100 extra K to deploy, but now we're at that point in our careers where that's like the norm moving forward.

[Scott Trench]

Yeah. If you said, hey, there's some risk to that or I don't like it or I'm fearful of it, or I want to get rich much faster than that or have much more flexibility, then house Hack, get out of this house. House hack. Keep the expenses super low and do that. That will provide more flexibility right away than what I just described with buying the dream home. But if you're feeling like I really don't want to move into a duplex and figure that one out and have a rental property after that, then this would be a very reasonable approach.

[Mindy Jensen]

One of your questions was avoiding the middle class trap. And I just want to push back on what Scott said a little bit too. Take all of the extra that you have after you max out your 401ks and throw that at your home equity. Because the middle class trap is all of your wealth is, is trapped in your home equity, which is not easily accessible and your 401k which is also not easily accessible. Of course you can access it with like fees and paying extra and all of that, but why bother when you could just not put that money in there in the first place? So you have approximately a $200,000 delta between your income and your spending and 46,000 of that ish will go to max out your 401k. So that leaves 154,000 to invest. If you're looking to stay out of the middle class trap, I would be looking at putting that into after tax brokerage accounts, your hsa, because you will have medical expenses going forward. And I think you can get to a position of financial independence very quickly. What do we say? 17 years. So you've got 154,000 times 17 years is 2.6 million. And that's assuming. No, no growth. I think your, your plan is really solid. Let's keep you out of that middle class trap first.

[Scott Trench]

Let me just chime in on the middle class trap here because I slightly disagree. If you save up another 200, 300 grand or whatever and put this down on your dream home and then you have a $3,000 per month mortgage payment locked in at six and three quarters percent. We wake up in eight years. Okay, it's, we're 36, we have two kiddos under five in the picture. With this, we have to generate $36,000 per year just to pay the P and I with that, with that plan. And that will continue. You will be six years out of 30 into that. That's the middle class trap, right? Like, or that's a, that's a component of the middle class trap that I'm talking about. Like, okay, you pay off the thing. I agree that like having all your wealth in the home equity. I think it's that partial in between state that is really keeping people forced into that situation. Right. If that thing is paid off, then one of you may be able to take on a higher risk job that has no base or bottom, bottom level with more upside. Or one of you could stay home with the kiddos for a year or whatever. That's gonna feel very uncomfortable. Even if you have a high net worth, if that will result in the need to harvest assets to pay the mortgage balance on there. That's all. There's some, there's math and there's the feeling component of it. And given how high interest rates are, I believe that if you do your model and you say here's my compounding rate at 10% in the market and here's my compounding rate at my, on my mortgage, your numbers aren't going to be that crazy off in six, seven, ten years from that. And then all of the assets can go from there. So just one component on that front. I agree though that there's, the other path we can take absolutely is putting it all into the market, into these, into basically index funds and after tax brokerage accounts, in which case we're going to get it to a different modeled outcome there. And on average that will work. The way that you, you are thinking about it. I'm in there, but I think our job is to come in and challenge some of those, some of those thoughts. And so hopefully this is giving you some, something to think about.

[Leah]

I think too one thing that we've been talking about a little bit is I feel like we understand the value and like the power of real estate. But for us personally, like we don't want to be landlords. I think that our full time jobs like take up so much of our time and mental capacity that I don't think we have it in us to be landlords on top of that. But I would be curious to understand like what are some other ways because I don't, I get nervous especially after hearing you Scott, and like where you're at in your journey and you're like, I'm deallocating from stocks. So I'm like, I want to have exposure to real estate but not through rental properties. So like what would you recommend?

[Scott Trench]

One option. So there's kind of several, several items there. One is if, if you were, if you said, hey, I want to get really rich really quickly and I want some real estate exposure, I'd say house hack. Right. I know you guys are earning a high income, but that would be, that would be a place to potentially go for the next couple of years. That would be the lowest risk, highest upside play in your situation that I could think of for that. You are absolutely right though, that you have, you have an interest, you have an awesome problem, right, because you guys both earn at least a hundred dollars an hour at minimum, if not much more in a good year. And if that, that should continue to increase. So it's kind of silly for someone making $250 an hour to worry about something else. But also we have to couch that with the idea that the goal is fire, right? So the goal is to make as much money as possible early in life and then stop. And that's the challenge in terms of how we think about where to invest in that. So if you said, how do we get exposure to real estate in a comfortable, low risk way, House hack. If you say, okay, I want a different way to approach real estate investing. Once you buy that forever house, real estate will the door for real estate as a huge component of your portfolio will be much harder to reopen. Right. Even if you do not decide to pay off that mortgage, you'll be shelling out more per month on a regular basis towards that mortgage. And that will decrease your ability to invest in an after tax basis because you will be silly. It will be really hard to not put more in the 401k at that point when you have a high income and you have the house on that front. So that's, that's going to be, I think the, the crux of the situation in terms of how to, how to do it. REITs are an obvious answer. You can go look at a REIT index fund, right? So that would be, that would be one answer. We had UC Escola on the podcast a while back. He seems really sharp. I subscribed to his newsletter. I've never made a bet or an investment based on anything that he has put out there. You could just sign up for that on Seeking Alpha or whatever. But that would be a, that would be one, one area if you were interested in learning about that. And the last one would be syndications, but I think, I think that's a, that, that would be some, that would be an option available that syndications are private lending in here. But any reactions to that? First?

[Leah]

Yeah, I think REITs is something that I've like heard of, but I think I need to do more digging on that because I feel like that's, that's come up in the past. So I think that might be an attractive option. And then I've heard I'VE heard about like syndications too. But then I've also heard you like has to be an accredited investor. And I don't know if we're at that point.

[Mindy Jensen]

But Scott said Reeds, I think that's a great option for you. You make a lot of money in your day to day. You don't need to spend a lot of the mental bandwidth that you don't have extra of on a rental property to make, you know, $200 a month.

[Scott Trench]

I guess I was trying to think about how to frame why I'm, why I'm kind of reluctant to do something besides the house and the stock market basically in your situation. And I think the best way I can frame it is while you are worth $650,000 right now at age 28, which is great, you're still very far away from what you've cited as your goal. You need to 7x that number. So a diversified portfolio that's safe, you just know will get you there slower essentially. So those other approaches are not as optimal in the situation. You should pick an asset class, I think, and go all in on it that you're the most comfortable with on it. My instinct coming in is if you buy that dream home, then okay, great, you're basically going all in on the home right now and you just pay it off and the asset class is deleveraging or whatever. I'm framing that that also poorly, but that's kind of my, my instinct here. And then when you get if you were, if you were sitting here and saying, hey, I have two and a quarter million dollars and I'm a million dollars away, okay, now it's time to start really diversifying and building a financial fortress at this point. Or if you said, hey, the goal, we can reframe the goal to a million dollars because we're going to have a paid off house and all these other things for the financial portfolio, then again, that also changes things. But I think you're so far away from what you've stated as your goal that an aggressive allocation makes a lot of sense. Until further notice on this in one or two asset classes. And so if you're like, what do I do there? Well, then you pick one. If you like syndications, go big in syndications and understand that there's risks and high fees and it's the wild west. But there's also the chance that really good returns in many of those cases and real reason to believe that that market is in the dumps right now. If you like REITs going to REITs if you like stocks going to stocks. But I would pick one or one or two and just basically say I'm going to go big on this trust the long term averages to get me there because I'm still at least 10, 15 years away. Grind it out and just make sure that that cash is always being applied to the next best item on that.

[Leah]

I think that makes me happy to hear actually. I think I would like to just prioritize the primary residence and a dream home and then just continue to go all in on stocks and individual brokerage.

[Scott Trench]

Yeah, these are big decisions so I would not react to any of them right now. I just take them as thoughts to think through because like I don't know how like oh I don't like I, but like, like these are million dollar items here in the next 10 years. But these are just instincts again that I'm, I, the questions that I'm asking, imposing. So but yeah, that's, that, that's sort of what I did in recent years.

[Leah]

No, that makes sense. I think one thing I was like starting to think through recently too is because we're 28 now and combined we have 268k in our 401k. If you just let that compound until we're 59 and a half, doesn't that kind of mean that we don't really have to put that much more into it? Like shouldn't we just do the company match even if we're giving up the tax benefits? Or would you still recommend. No continue to max that out because the tax benefits.

[Mindy Jensen]

If I was in your position with your income and your spending, I would probably continue to max it out to for both of you to get the company match and also to get the tax reduction because you have $154,000 left over in air quotes because it's not left over, it needs a job. But you have $154,000 to put into your house to put into your after tax brokerage. So I think you can do both and you are in a very special position that you can do both where you can still get the tax benefits while also not, that's not all of your money is just going into your 401k. If all you had was $46,000 after your expenses then I would say, you know, maybe max out one or the other while putting money into an after tax brokerage. But you have the ability to both, to do both. So I would do that.

[Scott Trench]

I completely agree. If you came to us and you said hey, we have a household income of 150, we'd be going line by line through your expenses and trying to find some more room. There's. And then we would still be faced with a hard trade off where we cannot max out both 401ks HSA, those types of things. You earn so much income and still live the way you did a few years ago when the income was not there that you should be able to go through the whole neat stack of free tax retirement accounts at least for the next several years, very neatly funding the whole way through for both of you guys and still build even more wealth after tax in your situation. So when that becomes not true, I would revisit whether, whether or not to max them out. But in your case like you guys earned so much and you spend so little relatively that I would, I would go the whole way through. Well great. So we covered, we covered a couple of big questions here around that was, I was, was where's another area you'd like us to take a look or think through here?

[Leah]

I guess two questions and I think we started looking into it a little bit in preparation for today. But accounting. One thing I've never done is like accounted for taxes as part of our fine number. So I guess like is there a simple answer for how you should be accounting for taxes as part of your fine number?

[Scott Trench]

You know, someone reached out the other day. Let me pull this up here. I am so sorry to the wonderful brilliant genius who did this and sent this over. I forgot your name. It's in the email. I'll give you credit in due course here in the intro or outro that basically says hey look, the tax impact is negligible even at super high withdrawal rates and super high net worths in fire because your income, the capital gains tax brackets are you pay 0% on the first $89,000 in income and you pay 15% marginal rate on the next $553,000 in income. So the tax that the effective tax rate is zero on the first big chunks of this. So if you have a portfolio of less than around a million or two, it's basically a non factor. And you can almost just use the pre tax numbers to really do that planning with a small buffer on there. You do have to start considering it a little bit more when you get to $20 million in net worth and want to withdraw 850 grand a year. But that is not the goal that you have here. So we can kind of ignore that to a certain extent with the caveat that you know I think that there's a real risk that every person who's pursuing fire should have in the back of their minds, which is, is that going to continue indefinitely? Because government policy can change and I wouldn't be surprised if in the future capital gains are taxed at something closer to ordinary income tax rates in a future state. So just something to kind of keep in the back of my mind. But for now that is not, that will not, if you're using a current tax code and situation, it will be, it will have a negligible impact on, on your ability to retire.

[Leah]

That chart was super helpful. Thank you.

[Scott Trench]

We're going to have this, this, this guy who did a really great job on it. Come and talk about it on BP Money soon.

[Mindy Jensen]

I'm going to share my screen really quick. Scott. You can withdraw tax free up to $253,400 because 96,000 0% tax bracket, $30,000 standard deduction 126,000 principal of investments. Sold. I think this is an excellent place to start thinking about things. But yeah, you're, and you're spending $160,000 a year. So your tax obligation is, what do we say? Tax free.

[Leah]

Yeah, no, that's helpful. I feel better already. Wow.

[Zach]

Yeah, we were literally just talking about that too because we were looking through the tax record for like if, like hey, if we wanted to go big on like the like brokerage after tax brokerage account, like you're not actually paying anything on that principle. And like you said, I didn't even think about the standard deduction as well.

[Scott Trench]

So when you, when you actually go to retire, that will not be a factor. But one thing I'll also call out is let's go back to that mortgage pay down example, right. Like one of the things I think that will be potentially more pressing than the can we retire at 40, which you will have great financial flexibility and options if you continue to earn this income and spend the way you're doing, regardless of what asset class you choose to invest in or how you. That won't, that won't be the meaningful part of your situation for seven more years. Probably then invest your investment portfolio returns will become the main driver of your net worth potentially. But I think that a more pressing issue is again that like let's, let's zoom in a little bit closer than 40 and fire. And let's zoom in at 35. Right. Because I'm 34 right now. I'll be 35 this year, you know, and that's something that I'M I'm, I'm glad I kind of made certain decisions the way I did because, because the, the requirement to realize income is much lower in my life right now. And that would be, that would just be the, the, the thought process there. You can also lower those tax burdens by not having to realize income. And the way you do that is paid off cars, you have no debt there, paid off house, get a travel, rewards or whatever, stockpile of the points, all that kind of good stuff. But the lower you can get those expenses, the less income you have to realize, the even more negligible that tax burden is and the more flexibility you'll have.

[Mindy Jensen]

But if you also want to juice the no tax option, your contributions for your mega backdoor Roth in 2025 cap out at $70,000 for those under 50. So you could each put $70,000 in your mega backdoor Roth. Now I have never done a Mega backdoor Roth. We should have somebody on Scott who can talk about mega backdoor Roth and the process for that.

[Scott Trench]

I bet that they don't have to do that either. You guys, almost certainly based on, if you work at a big company will have a Roth 401k option. So that would negate the need for you to go through the Mega backdoor Roth. But Mindy, we should definitely do a show with the Mega backdoor Roth maximizing couple. That'd be interesting.

[Leah]

We do have that option actually. So we have like when we go Fidelity, we do our 401k, we can do a Roth or a standard 401k contribution. Would you recommend we just max out the Roth as our option for the year then?

[Scott Trench]

Oh man, that now, now we're going to get into 35 year tax code forecasting. So here's exactly what's going to happen over that time period here. I'm just kidding. What I, what I did is I, I maxed out the Roth for a long time and that was my bias in there. I have so little in my 401k in the pre tax side of things that this year I'm maxing out the 401k for it. So the pre tax side of things. But I've typically biased more towards the Roth for the simple reason of I believe there's a really real possibility tax brackets go up and I think there's a lower probability that the government reneges on the promise of tax free growth in the, in the Roth. But who knows what happens 30 years from now on that.

[Leah]

How dare we not have a crystal ball.

[Mindy Jensen]

Okay, well Leah and Zach, this was a lot of fun. I enjoyed looking through your numbers and I think that you've got lots of great options ahead of you. Um, I think that 45 is going to be the longest that you'll be working. I think you could really start to move those numbers back down. And I think you just, you have a lot of, a lot of opportunity. You've set yourself up for success by not spending every penny that comes in, by starting to invest, by thinking about a forever home instead of hopping around from house to house. And I hope that Scott and I gave you some things, some homework to do, some things to go dive deep on and see which is the best choice for you.

[Leah]

Yeah, no, this has been extremely helpful. I think that I thought I had a plan in place and I think today really challenged our thinking in a positive way and gave some new ideas. So really appreciate it.

[Scott Trench]

And your plan is great, guys. What you came in with is awesome. And it just, it, it, it, it's just you're going to win so easily with the income minus expenses. So that, that's what you guys are crushing it. Congratulations on that. You'll win. With 10 different approaches on there. Just some nuances that we.

[Zach]

No, I'll just say thank you. Yeah, no, I really, this has been really helpful just to think of like all these different avenues we could take to maybe can cut that down that time down maybe to 38, 35, who knows?

[Scott Trench]

My parting shot will be do you really need three and a half million? That'll be that. That's the parting shot.

[Leah]

I know, I know. I feel like the true fi community would look at our spending numbers. They're like seventeen hundred dollars on eating out. Are you kidding me? And I'm like, yeah, we enjoy it. We're a little bit ramit sati in that sense, you know, but that's, that's totally fine.

[Scott Trench]

Your current spending is 100 grand, right? So you have the. If you look, zoom out and you say the. If you take the paid off house and you keep doing what you're doing and inflation adjusted dollars, I think you only need like 75 grand in spending right now for that. And if your kids are in public schools, you know, that's. But like, that's, that's the parting shot here. Is your number too big for it? Because at that point, then we have a whole host of other questions. Do we start diversify, do we start diversifying earlier? Do we start getting more conservative with the portfolio allocation earlier? But that's the parting shot. I'LL give you.

[Leah]

That makes sense. Well, thank you, guys. This was so fun. We so appreciate it.

[Scott Trench]

Yeah, thank you, guys.

[Mindy Jensen]

You are welcome. This was a lot of fun. Thank you. And we'll talk to you soon. All right, Scott, that was Leah and Zach and that was a lot of fun. I really enjoyed hearing the different angles that they are considering and really looking at. And I love that, that they are not going to find themselves in the middle of the middle class trap in 15 years. A. I don't want to pat us on the back, Scott, but in part because we did that episode about the middle class trap a few weeks ago and talked about, you know, you could find yourself having done everything right and still you don't have any money.

[Scott Trench]

Yeah, I think, I think what, what's also hopefully clear is, you know that this is going to be a journey, right? Like, we know that this is a real problem that really faces a lot of biggerpockets, money listeners, both, both people currently in the middle class trap and people who want very badly to enjoy, you know, their 30s, 40s, or 50s with, you know, with what they've accumulated at that point rather than waiting until traditional retirement age. But I don't think Mindy and I have all the answers to that right now. And it's going to be a long journey for us to figure out what that bridge and those, those approaches look like. So, you know, we're, you know, use all this, be on the journey with us, but know that we are not. This is not like, this is a question that I don't think has been explored in a really robust way out there. And we intend to do that over the course of the year.

[Mindy Jensen]

Yeah, I am super excited to dive into that a little bit more. I'm gonna call out anybody who finds themselves in the middle class trap, anybody who is not in the middle class trap. If you want us to review your numbers and give your. Give our opinion of what we would do in your situation, please, please, please email mindyggerpockets.com or scottiggerpockets.com or both of us of us. And we would love to chat with you. All right, Scott, should we get out of here?

[Scott Trench]

Let's do it.

[Mindy Jensen]

That wraps up this episode of the Bigger Pockets Money podcast. He is the Scott Trench and I am Mindy Judson saying get on the train, Candy cane.