← ChooseFI | Financial Independence Podcast
ChooseFI | Financial Independence Podcast
The FiiRE Framework With Paula Pant | Ep 568
01:23:56
Paula Pant introduces her innovative FI-I-R-E framework, which encompasses Financial Psychology, Increasing Your Income, Investing, Real Estate, and Entrepreneurship. The discussion emphasizes the critical role of financial psychology in shaping...
Loading summary
Transcript155 lines
- [00:01]
A
Hello, and welcome to Choose a fi. Today on the show, we have Paula Pan, the host of the Afford Anything podcast and a great friend of the show, a great friend of our community, and she has come up with a new framework around the acronym fire. However, hers is FI I R E. So it's FIRE with two I's. Stands for financial psychology, increasing your income, investing, real estate, and entrepreneurship. And Paula walks the walk. She's been in this community for as long as I can remember, and she's one of those people who just oozes credibility. And I love this new framework. I love how much time we spent on each of the five pillars of this framework. And I think you're really going to enjoy this episode. It has a lot for everyone. And I think no matter where you are on your path to fi, you really, truly are going to get something out of this. And with that, welcome to choose fi. All right, Paula, welcome back to choose fi. It is so good to see you.
- [01:03]
B
Oh, thank you so much. It's good to be here. It's good to see you.
- [01:06]
A
Yeah. It has been a long time. I think the last time we saw each other was when I flew up to New York to do the 500th episode. I think 501st episode also of Afford Anything.
- [01:16]
B
Yes. Yes. That was so much fun. You came to New York. We recorded live in Brooklyn at a comedy club in Brooklyn in front of an audience. We had got so many tickets. We sold out tickets so quickly for the 500th episode that we added a second recording just so we could accommodate the demand. So we recorded episode 500 and 501 on the same night live in Brooklyn. And now as of the time that we're recording this, we are currently at episode. Let me check 644 as. As of the time that we're recording this.
- [01:53]
A
Oh, my God.
- [01:54]
B
Yeah. So 144 episodes ago was when we last talked.
- [02:00]
A
Wow. Okay, that puts it in perspective. Damn, that's crazy. And that was only a year and a half ago, right?
- [02:05]
B
Yeah, yeah, exactly. Exactly. Well, we moved to two episodes a week. We now do episodes Tuesdays and Fridays. So, you know, you do two a week and they start adding up fast. 104 a year.
- [02:15]
A
Wow. Yeah, it is indeed. We did that for the first five years of choose of I. So I remember it. Well, I certainly remember it. That's wild. So, yeah, if anybody wants to check those out, those are really great episodes. So obviously, Paula's here. Afford Anything is one of my favorite podcasts. And yeah, episodes 500 501, but literally, just hit subscribe. Paula is, in my opinion, the best interviewer in the entire personal finance space. She's extraordinary, and it's just a wonderful podcast. So needless to say, just hit subscribe.
- [02:46]
B
Thank you. Thank you so much. And, Brad, I have to say, it's wonderful. Like, there are times just a little behind the scenes here for everyone listening. You know, there are times I'll put out an episode and then you'll message me on WhatsApp with, like, a comment about that episode. And it's so. It's. I love knowing that, like, you're there listening and. And it's always like, the day after the episode comes out, I'm like, yeah. Or the day of, I'm like, fast. Wow.
- [03:13]
A
I really do listen. I truly do. So, yeah, I love that. That makes me happy. All right, well, for everyone out there, we are going to have a fantastic conversation here today. So Paula is clearly deeply of the FIRE community and the personal finance community, but she's come up with a new framework for fire. So even though here at Choose A5, we've gone away from fire, and it's just the financial independence, but clearly it's always there. Right? Financial independence, retire early is what we talk about when we talk about the acronym fire. But Paula has come up with an interesting new framework that she calls F double I R E fire.
- [03:52]
B
Exactly.
- [03:53]
A
Yeah. And, Paula, I thought this would be a really fun thing as a launching point to talk FI generally, your new version of fire, and I'd love to go through this framework. So I guess why don't you introduce it first?
- [04:07]
B
Sure. So double I fire, as I call it fi, r e or double I fire, by the way, double I came from, you know, 007, because I'm like, you know, I could call it like FIRE with two eyes, but that's just such a mouthful. Double I. It's double I.
- [04:23]
A
That works. That works.
- [04:25]
B
So what double I FIRE stands for is the S is financial psychology. The first I is increasing your income. The second I is investing. And let me just actually pause right there, because in the traditional fire, financial independence, retire early. You know how on Choose Fi, you always talk about how financial independence is what we're all pursuing and the retire early part is optional. Well, in the double I FIRE framework, it works the same way. So that F double I is what I believe we all should be pursuing, which is understanding and being in a healthy place with your financial psychology, increasing your income and investing, that I think is universal and that everyone should pursue that and then the RE is optional. And so the RE is real estate and entrepreneurship optional, not necessary.
- [05:20]
A
Okay, I like that. Okay, so under both frameworks, the RE is optional, clearly. So choose your own adventure in essence. But yeah, I love that. So. And of course, real estate and entrepreneurship are near and dear to your heart, so you happen to choose both of those. But yeah, that's the beautiful part about, about fire of any variation is this really is. It's very personal. I know some people, some people still recoil when we say, like, personal finance is personal because they're like the, the math people who are like, no, it's really not personal. This is just math. I'm like, oh, come on guys, let's be realistic here. I think all of this is about choice. And yeah, I love that that's just at the absolute heart of your framework here. So speaking of at the heart of the framework, I know before we hit record, you said that really this is a way for people to get excited about personal finance principles.
- [06:11]
B
Right.
- [06:12]
A
And I think that's really the perfect starting point for the conversation.
- [06:15]
B
Yeah. So, Brad, you and I were having this conversation before we started recording around where's the delineating line between fire and personal finance? And I have long believed that fire is a way to get excited about classical personal finance principles. And so if you think about just quote, unquote, traditional personal finance, spend less than you earn, save 10% of your income or 15% or, you know, however much they advise, you know, save for retirement, save for this, save for that, maybe buy a house. There are all of these, you know, don't get into credit card debt, take out student loans, only to the degree to which the student loans that you're taking out are what you expect your salary to be in your first year after graduation. Right. Because that way you can spend 10% of your take home pay from your first year salary and pay it back in 10 years. Yeah. So like, those are all of the things that you learn in traditional personal finance and those are great. But the thing is, traditional personal finance doesn't really excite a whole lot of people. Some people it does, but it doesn't excite a whole lot of people because there isn't really a big promise at the end. So when I got into personal finance, I saw that the people who are most into it were people who were in credit card debt and were struggling to get out of credit card debt. And so personal finance was really exciting because it provided this pathway to getting out of a bad situation. And so there was a promise at the end, the promise of debt freedom. And that. That promise at the end of debt freedom was what got them into the scene. And then once they were in the scene, then they were into it. And so even after they'd finished paying off their credit card debt, they remained personal finance enthusiasts because, you know, for all of the reasons that we. We remain personal finance enthusiasts, it's a very good anchor through which to live your life. The problem is not. Not the problem, but the. The situation is that if there isn't an albatross around your neck, if there isn't something negative like credit card debt that you're trying to escape, then personal finance for the average person doesn't carry with it a big promise. So it doesn't have that excitement. And so it doesn't really bring a lot of new people in. And that's what Fire so beautifully does. That promise of early retirement or that promise of work optionality. Right. That brings you in. So even if you're not struggling with a problem, even if you're not struggling with credit card debt, we all have to work to pay the bills. And now there's a promise of, you know what, if you play your cards right, that work can become optional.
- [08:51]
A
Yeah, I like that. So the promise at the end, I think that's. That's a really cool way of looking at both the traditional personal finance world and. And again, we talked before, before the podcast, and I was kind of railing on the traditional personal finance world for essentially not existing. Like, I still don't exactly know what the traditional personal finance world is or who. Who they are. I mean, honestly, like, I know that sounds silly, but, like, there's so little information out there. Sure. There's the Suze Orman's of the world, who you know and love from your. Your famous episode. There's Dave Ramsey, of course. I don't even know if we would consider Dave Ramsey traditional personal finance. But, like, what even is the traditional person? Like, as silly as that sounds, like, all I hear are just platitudes like these generic things. Like you said, save 5% of your income, maybe 10. Well, I mean, have you ever looked at Mr. Money Mustache's shockingly simple math? Like, it would take you, I think, 67 years. I think it's from memory or something if you save 5%. So, like, that's not a viable path. They Talk about Roth IRAS. Only Roth IRAS and Roth 401ks can be great options, but I think for most people, the tax deduction is going to be vastly more beneficial. So like that's weird advice. Like the no credit card debt of course of Dave Ramsey, like is so doctrinaire and this like nebulous, oh, save for retirement. To your point, like that doesn't light anybody up really? Save for retirement? Give me a break. Like you're going to tell a 22 year old kid save for retirement when you're 62 or 67. Like who's going to get lit up for that? It doesn't make any sense. So like so much of it is about the negative deprivation mindset of like not even negative, but just like put off into the future for something that to your point, there's no payoff. So that is where the Dave Ramsey's of the world do actually do something nice. And like you said, the people who are advocating paying off credit card debt because there is a final goal. Right. And clearly in fi there is a final goal. So yeah, that is a cool way of looking at it, Paula.
- [10:52]
B
Oh, thank you. Well, I think first of all, for the record, you and I disagree on the Roth thing, but we won't go down that path for now. I am very pro Roth. Yeah. Oh totally, totally.
- [11:02]
A
Oh no, come on, Paul.
- [11:05]
B
But zooming out more broadly, like I remember when I was in high school, I read the Millionaire Next Door and even that, that was a promise that was like you could be a millionaire. And that was, I mean even now that is a lot of money, you know, compared to what the, the net worth of the average American. To have a net worth that is in the seven digits puts you ahead of the vast majority of American households. Not that it's a comparison, but just statistically speaking, it means that you will be, you know, doing well in this country. And then particularly in high school, when I was in high school, that was a lot, lot, lot of money. It was an unimaginable sum of money. You just didn't know anybody, I didn't know anybody who had a million dollar net worth, hadn't met a single person, to the best of my knowledge, who fit that description. And so even in that, and I would say that the Millionaire Next Door does offer traditional personal finance as a, as a formula. But even then there was this promise of like entering into this very, very elite group of people. And that that book showed how an average person who doesn't have any fancy connections and doesn't have any fancy pedigree or didn't go to the best universities or anything like that, how an average person who owns an H vac company or who owns a pest control company could do that.
- [12:33]
A
Yeah, that book was a game changer for me also. And I read it similar to you. I read it in high school and that for me was the first. Even though it wasn't. It's not a five book per se. I think it really is. I mean, that was an early moment on the path to five for me. And it was a paradigm shift. And I think that's what, for a lot of people, for a lot of people, Mr. Money Mustache is that for a lot of people choose to buy his ad for a lot of people afford anything. Is that right? Like these are, it's. Once you've seen it, you can't unsee it. And I think for me, the millionaire next door was that precisely because, oh, wow, like, you mean I can just be a little bit smarter? I can just live a little bit below my means and actually get wildly wealthy in the process. Like, okay, like that seems like winning. And I think to your point about like the promise at the end, like, there was always something that seemed like, and this might say a little more about my psychology than I, than I care to admit sometimes, but like the fact of like living the same middle class life as everybody else but getting wildly wealthy at the same time by just being a little bit smarter, that always appealed to me so deeply, Paula. It just, that was the thing for me.
- [13:40]
B
Right, right, exactly. And you know, it's interesting because what you're, what we're both talking about right now is the psychology aspect, the financial psychology aspect. You know, what is it that motivates you? What's the big why that underpins the reason behind why you're going to manage your money in the way in which you do? Because without that why, there's, there's no motivation, there's no stickiness. You know, why would I eat broccoli instead of chocolate cake if I didn't have a very, very compelling reason? Why would I choose not to smoke cigarettes if there wasn't a very, very compelling reason to do so? And so that financial psychology element, I think it's, it's part of the beauty of the FIRE acronym, the double I FIRE acronym. One of the things I love about it is that beginning with the letter F, I think that's where we all need to begin, because we all need to begin, number one, with knowing the why, knowing the big picture, knowing what it's all for. And then we need to understand what are some of the hang ups that we have, what are our anxieties about money. What deeply internalized scripts do we hold? What did we learn in childhood that might be wrong about money? But what are those scripts that we learned in childhood or through society that are no longer serving us or that are actively holding us back?
- [14:57]
A
How do you propose that people get to the bottom of those scripts? Because I think they hold a lot of people back. All of those things you said, anxiety scripts, these issues from childhood, or you can almost hear them, Money is the root of all evil. Or rich people are, are fill in the blank, bad and sound like greedy, terrible, whatever. Like these are scripts that perpetuate.
- [15:18]
B
Right. And it's funny though, the whole rich people are bad. It's like so knowing no other information about a person, the size of their portfolio or the size of their bank balance is in and of itself a moral indicator. I mean, just think about that logically for a moment. Right?
- [15:38]
A
Yeah, it's preposterous.
- [15:39]
B
Yeah, exactly. But that only works if you believe inherently that the only possible way to become wealthy is by being unkind to others. Right. And that is then a whole set of deeply internalized beliefs that needs to be untangled. Because that really resides under the premise that life is a zero sum game, that resources are fixed. And if there's a fixed allocation of resources, then a plus to one person necessarily means a minus to another on the big ledger sheet of life. And that's simply not the case. Because in an environment where resources are abundant and can be multiplied, then you can create, win, wins. And that is a paradigm shift.
- [16:28]
A
Yeah, it's easy to think, yeah, I'm thinking about the Simpsons and like Montgomery Burns and like the, the evil, the evil millionaire owner plan. And it's like, you know, these are, this is what you see in popular culture. But yeah, I mean, I think what's really pretty cool about books like the Millionaire Next Door, like communities such as ours, is that we are just regular people and we're not stepping over anybody to get wealthy. We're just living a little bit differently, A little more optimized with a little more intentionality, with a little long term thinking. Right. And it's like, oh, that's actually really inspiring to people because again, I'm living that same middle class lifestyle as everybody else around me, but I'm doing okay. And I think we can be beacons and we don't have to brag about it, obviously. Hopefully nobody in our community is going around bragging about their wealth and things like that. But like you can be a beacon for what it looks like to Live an intentional life and to be smart with your money. And I think there's something really cool. There's.
- [17:33]
B
Right, exactly, exactly. You know, and that. That's a big portion of all of this. It's that intentional living component. Because there are. Then this goes. This also kind of goes to financial psychology. These scripts that we learned from society that dictate how we, quote, unquote, should spend our money. You often see this as it relates to age. And I think that people, particularly in their 20s and 30s, are most affected by this because that's an age at which many people feel insecurity about whether or not they have hit the markers of adulthood. And so you'll often hear people. I remember right around the time that a bunch of my friends were turning 30, I would hear people say, oh, I'm 30, I shouldn't live with a roommate anymore. You know, it's silly to live with a roommate if you're 30. No, that's not actually true. If you do not enjoy living with roommates and you would prefer, if you would have, like, significantly greater enjoyment of your life by virtue of living alone, okay, then that's something that we should direct more cash towards. By contrast, if you are an extrovert, a total extrovert, and you love living in a home full of people and you don't. Why not? Why not do that? I was about to say, and if you don't have a family. But you know what? I actually, I know people who have families who also have people that they take in and, you know, who live in big, big households with lots of people, some of whom are their family members and some of whom are friends who they live with. Like, there are no guys. This is adulthood. The great thing about adulthood is you make your own rules. You know, you. You don't have to live this script that other people tell you you should live. So if you're a, an extrovert and you love having, like a big full house, not, I mean, full house. Right. Like, if you love having a big full house, have a full house experience.
- [19:28]
A
And there's so many scripts when it comes to real estate, and you and I are both happy renters, even though we are both, I guess, millionaires on paper. Right? Like, we, by any definition, and it's like we purposely choose to rent even though everyone says, right, like going back to the. The traditional personal finance world, the advice is generally, that is the American dream. That's the. You're going to be your greatest asset and the path to a significant net worth and owning your own single family home. That is not, not to be conflated with real estate investing, which we're going to talk about later, which is an entirely different, entirely different subject, let's be clear. But again, it's not following scripts like Paula, I clearly could buy essentially any place I wanted tomorrow that I would want to live in in my area. I could pay for it in cash if I needed to, but I don't want to. I, I, I've looked at the situation, I've looked at the opportunity costs, I've looked at mitigating stress. And I have said for me that renting is the right decision. And that again, is not according to the normal script. And going back to what you were saying is, I think for many of us who went to college, our favorite time in life was living with friends.
- [20:38]
B
Yeah.
- [20:38]
A
In the dorms. Right. Or in an apartment. And like, to have some stupid, arbitrary rule that I hit 30, I need to be an adult. Like, come on, like, second guess all these things. You gotta, you gotta challenge them, right?
- [20:54]
B
Exactly. Exactly. And I think that is the beauty of personal finance, slash fire, is it really invites you to question all of the scripts that society imposes upon us. Who is to say that you are any less of an adult because you haven't done some arbitrary thing? I would say you are more of an adult because you've exercised the critical judgment to know what you value and what you do not value, you know, and so long as you are not harming anyone else, you are free to spend your money in the way that reflects your most deeply held values.
- [21:33]
A
Yeah. Yeah. That is beautiful. And not to keep bringing this back to anecdotes from my life, but just two very quick ones is I lived at home after I graduated college for two and a half years, and I basically, I think I had a 90% savings rate, Paula. It was amazing. And I mean, those two and a half years were the springboard for my financial life. Had I been forced to go, or had I forced myself to go out and live on my own on Long Island, New York, in a high cost of living area, my savings rate would have been dramatically lower. I can't calculate exactly off the top of my head, but it would have been, it would have been cut in half. Minimum. Minimum. And now don't cry. For me, I still would have had a 30 or 40% savings rate, but maybe not, frankly. And having that amount of money saved at that early age was the necessary step for everything that came after for me. It was wonderful. So that made a huge difference. And that was a very intentional decision when a lot of my friends and people I knew wanted to prove that they were adults to whom, I don't know, frankly, because nobody cares. But so they rented an apartment by themselves. And, like, there was a massive cost to that. And then just again, quickly, like, when my brother graduated college, he was a waiter for a couple of years and at just like, a local restaurant. But he saved again, he lived at home, he saved all of his money. And even though he graduated from Tufts, which is an amazing school, and like, he just didn't. Didn't know exactly what he wanted to do those first couple years, so he wound up saving tens of thousands of dollars. And even though he was, quote, unquote, just a waiter, his net worth was dramatically higher than almost anybody his age. And again, it was not forcing himself into some script that, oh, I have. I'm a graduate of one of the best schools in America. Like, I need to do this. Like, no, he wanted to wait and bide his time and figure out what he wanted to do. And I think being able to not worry about what other people think is such a critical part of financial psychology. Right. So, yeah, again, these are just anecdotes, but, like, hopefully this is bolstering, like, the, the case to everybody of, like, this is why Paula has this first, of course, the F. The F doesn't hurt either.
- [23:33]
B
Yeah.
- [23:35]
A
But this is the bedrock of double life fire.
- [23:38]
B
Right, Right, exactly. It's beautiful that the term is financial independence, because part and parcel of that is independent thinking. You know, truly independent thinking. Like, I love that. You know, you've got to think independently of, you know, the majority of people in the United States are broke. The majority of people do not have enough money to be able to get them through an emergency. And so if you want to not be in that situation, you do have to think and live a little bit differently. You have to go against the herd.
- [24:13]
A
Yeah, absolutely.
- [24:16]
B
There's one other thing. So I often hear people say that they are, quote, unquote, bad at money. A lot of people believe that they are bad at money, and they equate spending a lot with being bad at money, or they equate, you know, like society has taught them that if you're not penny pinching and hyper frugal and you're not, you know, Ebeneezer Scrooge, then you're bad at money. And I don't believe that there is such a thing as being quote, unquote, bad at money or good at money. I think that a lot of people whom we, whom we view as being bad at money have an avoidant relationship with money. And by contrast, a lot of people whom we view as being quote, unquote, good at money, some of them have an anxious relationship with money. And so similar to, you know, human love relationships, some people who have an anxious relationship with money are hyper vigilant about it. And therefore they appear on the surface to be quote, unquote, good at money, when in fact they may have a high savings rate, but they actually have a very anxious relate, you know, a relationship with money that is plagued by anxiety and that is marred with hyper vigilance and that is actually kind of psych, deeply psychologically unhealthy. And by contrast, a lot of people who are quote, unquote bad at money just have a deeply avoidant relationship with it, you know, and both of those are unhealthy relationships. So I think that you can be quote, unquote good at money and have a healthy relationship with it. You know, those are, those are people who have a secure attachment style.
- [25:54]
A
I've read the book Attached as well. And for anybody out there who hasn't read that book, it's another one of those paradigm shifting things. It's almost akin to when the Five Love Languages came out so many years ago. Like, is it revolutionary? No, but it was at the time. It's not now because it's so, it's so pervasive. And I feel like these attachment styles are the next, the next wave of that. So anxious and avoidant and secure are the three major attachments. So. Yeah, Paul, I was going to ask you, so what does a secure money attachment style look like?
- [26:25]
B
Right, right. So a secure attachment style is that you are a good steward of your money, but you're not obsessive, hyper vigilant, anxious about it. Nor are you avoidant. You know, you are simply a good steward of it. Think about holding sand in the palm of your hand, right? If you want to hold sand in the palm of your hand, your hands have to be a little bit relaxed because if you clench your fists too tightly, the sand starts to spill through. So if you clench your fists too tightly, that is that, that anxious attachment style where you're clenching your fist too tightly, you're too hyper vigilant, you're too obsessive. And then ultimately what happens is you end up just turning your stomach into knots over the smallest, most inconsequential of details. You end up wasting your critical life energy on what ultimately end up being rounding errors. And often you miss really big picture opportunities or big picture threats because you're so hyper focused on the little things. So that hyper vigilance, that anxious hyper focus, just like in love relationships, often creates the very negative outcome that we are trying to avoid. Excessive anxiety can actually kill the relationship. So that's the issue with being obsessively hyper vigilant about money. You think you're being good at it, but you're actually driving it away. Just like clenching sand and too tightly in your fist.
- [27:52]
A
Yeah, yeah. And I suspect a lot of people in the FI community can relate to that. Right? I mean, we have a lot of people who are super frugal who think about every penny and not only are they missing the big. The big things like you mentioned, the big opportunities, I think a lot of people are missing life to some degree, thinking that they're winning by being so vigilant with their money. And there's clearly an opportunity cost to that. And I hope everyone's hearing what Paula and I to a lesser degree are saying, like, there's a massive opportunity cost here of being so hypervigilant because you can just miss out on life. And this is not to say yolo the heck out of your life and spend every penny. Clearly Paul and I are not arguing that. But there is that happy balance. There is that secure money attachment style that Paul is talking about here. That, that can be the happy medium that can fit in there. And you can be satisfied with your path to FI and also your life at the same time. It doesn't have to be either or.
- [28:56]
B
Right, exactly. And the other thing, you know, I know so many people who, they'll cut their own hair and they'll, you know, they'll do all of these. They make their own Gatorade instead of, you know, like. But don't have an estate plan. Right. And they have kids and there's no estate plan. Right. Those are the kinds of, when you, when you hyper focus on like the minutia, you sometimes miss the really big things that ultimately matter in your financial life as well.
- [29:27]
A
Yeah, I wholeheartedly agree. Thanks for listening to Choose a Phi and for all your support of our mission here. The absolute best way to support Choose a Phi is, is when you sign up for your next rewards credit card to use our cards page at choose a buy.com cards. I keep this page constantly updated so it should always be the top resource for you. Thanks for being part of our community and for your support. I think that's probably actually the perfect jumping off point for increasing your income. So this is the first of the double eyes. I think a lot of people in our community only look at the one side. They look at the cutting expenses. And I think, to be perfectly clear, I think cutting expenses, especially at the beginning of your fi journey, is important. Even though we've gone away from that to some degree, the hyper frugality, the ultra frugality. I think being mindful of how you spend is important and it always will be. So I don't want to minimize that in any way. But Paul, I think a lot of people are sadly resigned to the fact that they're earning whatever they can, that there's no option, that I, oh, I can't get another job. Oh, I'm stuck in this career. Like these, these scripts like we were talking about with this psychology, like, talk to me about increasing your income as, as you say, because I know this is a massive one for you.
- [30:40]
B
So one big, you know, you can tell somebody's mindset through this. There's one particular question that I would often hear. So, Brad, do you remember in 2016, 2017, when we were getting a lot of traditional media interviews around Fire.
- [30:56]
A
Yeah, yeah, yeah, yeah.
- [30:58]
B
A lot. A lot of traditional media had questions about it and, and they did such.
- [31:03]
A
A responsible job of talking about brown bananas and then totally missing the point.
- [31:09]
B
Yeah, exactly, exactly. And it's, it's funny, the traditional media interviews have gone away. It seems like that post pandemic, those have gone away. But pre pandemic, there were a lot.
- [31:20]
A
There really were.
- [31:21]
B
Yeah. And there was one question that I kept getting over and over and Brad, I'm sure you heard this too, which was, well, if you earn a low income, you know, is this possible for people with a low income? And the way that people would ask that almost made it sound, it had a fixed mindset around it, like you are simply in a permanent, irrevocable class of always, you know, being fated to permanently, immutably have a low income.
- [31:54]
A
Right.
- [31:56]
B
And that's not the case, but people would often ask the question in that manner. So I think step one is understanding that if you have a low income. And remember my, my income straight out of college, adjusted for inflation in today's dollars, was around ballpark 30,000 a year. That's in 20, $25. If you were to, to adjust it for inflation, it was 21, 000 in the year 2006. So do the math on that.
- [32:24]
A
Yep. Yeah.
- [32:25]
B
So just because you have a low income Right now does not mean you will always forever have a low income. And that's the first thing to keep in mind. So then the obvious follow up question is, okay, how what do I do? And I know people don't like this answer, but it's very much going to depend on, you know, the answer is it depends because it is very much going to depend on the specifics of your situation. So you could retrain to switch careers. You could start a side hustle. And when we talk about side hustles, remember there are various tiers of what that looks like. So there's gig economy, which is like uber doordash, that sort of thing. Gig economy is great for getting cash in the door immediately, but there's very limited upside. And then beyond that, there's selling services, so developing some sort of specialized skill that you can offer as a service. And then beyond that there's offering a product or a productized service. And each of those layers is, if you imagine a scale, the gig economy side of the scale is money in the door immediately, but the upside is very limited. The product or productized service is longest lead time before you start making your first dollar. But unlimited upside and then offering a service is somewhere in the middle.
- [33:44]
A
Gotcha. Okay.
- [33:46]
B
So that's the framework as you think through side hustle opportunities.
- [33:50]
A
Okay, I like that. And I'm curious how this will interact side hustles, Everything's about a definition, right? So I'm curious when we get to the E in double I fire, how entrepreneurship and side hustle is if they are distinct or if there's some interplay between the two. But just before we move off of this, there are also ways in your current W2 or your current job. Right.
- [34:12]
B
In your current role. So negotiation is a massive thing that I think this community has not really talked about enough or embraced enough because there's that expression, you, you don't get what you deserve, you get what you negotiate. And I think negotiation has a, a negative connotation in today's society because it's seen as, as being greedy, as being ungrateful, as being not a team player. We surveyed, we have a course called you'd Next Raise. And we surveyed our students on, you know, what are the things that are holding you back? You know, when you think about the next performance review that you have with your boss, or if you think about switching to a different job and having that conversation with the hiring manager, what are the objections that come up for you? And the number one thing that we have heard from Our students time and time again is, I feel like I'm going to look like I'm not a team player. I feel like I'm going to look too. Too shrill or too aggressive. You know, I feel like it's. It's going to make me unlikable. It's those types of that, that subtle social messaging that we send out that influences people to hold themselves back. And you see this in W2jobs when people are either at the hiring interview or at their. Their annual performance review. You see this in freelance contracts when people are stating what their services are worth and they get pushback from somebody saying, well, we only have budget for X and Y, you know, and a lot of it comes to the way that you present yourself. If somebody says, can you do this for X amount of, you know, we only have $3,000 that we can pay for this, you can either say, sure, that's fine, or you can say, my normal rate is 5,000. But we can pilot this at an initial rate of 3,000 for the first 30 days. And if you are satisfied with our services after 30 days, I will have to start charging our normal rate effective that second month of service. But we can pilot this for the first 30 days. You know, like, like, there's a big difference. Just. I mean, in both cases, you're accepting 3,000 for the first month, but there's a big positioning difference in the way in which you say that.
- [36:34]
A
Yeah. And interestingly, in the latter, you actually seem like more of a team player in a way. Right. As opposed to, like, meekly capitulating and just saying, okay, I'm going to take the 3,000. You're stating what you're worth. You're still taking the 3,000 for the pilot, but saying, like, this is not our ongoing relationship, and I suspect you're going to be respected dramatically more than if you just didn't say anything and just did your thing.
- [37:00]
B
Right. Exactly. Exactly. Because the person who meekly accepts the 3000 will then later go back to that client and say, hey, you know, we've been working together for like two months now. And I was, I was wondering, you know, it's so weak.
- [37:15]
A
Yeah.
- [37:15]
B
And so a lot of negotiation is not necessarily even. Sometimes it's. It's achieving a different outcome, Sometimes it's achieving the same outcome, but from a position of power and from a position of strength.
- [37:30]
A
I love that. Is that course something you have a short URL for that people can remember? Should we just put it in the. In the show notes?
- [37:37]
B
Yeah. Afford anything. Dot com YourNextraise.
- [37:39]
A
Okay, well, that's easy. And we will have it in the show notes, but yeah, that's, that's pretty easy. Your next race, I like it.
- [37:45]
B
Yes. And a big part of what we do with inside of that are live practice sessions. So every Tuesday at 3pm Eastern, we gather people into a zoom room and give everyone a practice session. So this week, half of the people were conference organizers who were trying to sell sponsorships and half of the people were sponsors who had contacted the organizer about a silver level sponsorship. You know, and the sponsors actually were going to try to see if they could get gold level at the silver level price or platinum level at the gold level price. Like for the sponsors that was their objective. And for the conference organizers, it will sell them on a platinum, you know. And so we gave everybody all of the details and asymmetric information about both characters because both sets of characters have different pieces of information in their back pocket. You know, the sponsors know what their total budget is. The organizers know how many other people are vying for those same spots. So both parties have asymmetric information. And so we, we ran these practice sessions where these two sets of people with asymmetric information then get into a zoom room together and actually have a mock negotiation. And the more you can run through this stuff in these practice sessions, the more ready you will be to, to speak with confidence when it's time to do it in real life.
- [39:06]
A
Yeah, it's just like anything in life, right? It's putting in the reps. Yeah, I love that. So. Right. Clearly negotiating salary another option, sadly. But this is the way it works. Is going to another job even in the same industry almost invariably is going to get you a higher salary. And because of the kind of these locked in pay scales that so many very large companies have, really the only way to jump up oftentimes is to move to a different company. Now that's not guaranteed. I'm not saying that's, that's the only way by any means, but you hear that over and over and over again, Paula, that like, hey, I took a fairly similar job at a different company and I got a fill in the blank 10, 20, 30% raise and my company was only going to give me the standard 3% cost of living adjustment. It's like you can't really keep up. So I think a lot of people still have the old mindset of oh, I need to be loyal to my company. And this is not to say treat your company poorly, but just understand that there's no significant loyalty coming back to you and you're not doing anything. You're not being aberrant or something weird. And like you're doing what is part of the necessary way to make your life better. You're not trying to screw over your company. You're not doing anything bad. This is part of the the deal. This is part of the game, unfortunately. And you have to understand the rules of life. This is part of fi also is like just understanding the rules of life. If that's what it takes, then that's what it takes. And I think there's also, even with moving to another company, the negotiating the salary is clearly an integral part of that. So that's the bedrock as far as I see it. But then understanding that you might be able to use that negotiation in your current company, but more likely it's going to be a new company. As I see it.
- [40:51]
B
We certainly see the biggest raises when people move companies. We actually one of our students used our material to negotiate a $5,000 signing bonus that she otherwise was not going to get. And we had another student who was able to capture 20,000 additional dollars in combination of salary and benefits beyond what they had initially offered. And so what's really powerful about when you transition jobs is that you at that time are not just negotiating salary, you're negotiating salary. Health insurance, retirement packages, depending on your job, work from home versus work in office versus hybrid parking spots, parental leave, professional development budget, so budget for conferences or courses or trainings, gym memberships, public transportation, vouchers. I mean, depending on the size of your company, there are all kinds of things that you could be negotiating right at that moment. And so hiring negotiations go far beyond just salary. And this actually speaks to, you know, the framework through which we teach these skills. You start with single issue negotiations. Right. So Brad, if you sell me your watch, then for the most part that is a single issue negotiation. Right. Like you've got a watch and we are talking about the price.
- [42:16]
A
Sure.
- [42:16]
B
I want to buy a used watch from you. Right. If you sell me even your couch now, it becomes slightly multi issue because we're going to be discussing not just the price of the couch, but also delivery. Are you going to be loading that couch and delivering it to me or am I going to be picking it up from you? That's probably not something we discuss with a watch because if, if we were face to face, he would just hand it to me.
- [42:36]
A
Sure.
- [42:37]
B
Or if we were interstate, I mean mailing a watch is pretty easy relative to a couch. So a watch is single issue. A couch is like multi issue light. Because it's like two issues, right? But then you move to, you go from single issue to like a couple of issues to hyper multi issue, which is what hiring negotiations are, where there are maybe 12 different things on the table. And where a lot of people make a mistake is they hyper focus only on one or two things. They'll, they'll hyper focus on the salary, but they won't even think about negotiating the vacation time, you know, or they won't think about negotiating some of these other elements. Relocation expenses. I know someone who, their company had a policy through which they could not technically give relocation expenses beyond a certain pre approved amount.
- [43:28]
A
Okay.
- [43:28]
B
And so as a workaround, what they did was they just negotiated for their official start date to be one week earlier than the day that they were supposed to actually show up on the job.
- [43:40]
A
Okay.
- [43:41]
B
So even though they technically, due to policy, could not change the relocation allowance by virtue of having a start date that was a week earlier than when they were supposed to report to work, they got that extra week of pay.
- [43:56]
A
Gotcha. Gotcha. Okay, so Ray, I love this. Don't myopically look at just the salary because I think, yeah, you said there are a couple things people usually focus on, but there can be up to 8, 10, 12 of these, that all of these are negotiable. And I think that's really great. And that does tie with something we've long said here that's really deeply resonated, Paula, with people in the choose of I community. Is the quote, everything is negotiable.
- [44:21]
B
Right, Right.
- [44:22]
A
It's like, and this is a really great ethos to have in life. And it's just in terms of every time you get a bill in the mail, like from just anything but specifically healthcare, medical billing. Yeah, that's a perfect one. If you're willing to pay that thing in full, you can negotiate virtually every single medical bill you get. You just have to be uncomfortable for a couple seconds. And Paul, of course the understanding here is this is not a win lose like you're trying to, you're just trying to be a nice human. Like whenever I talk to someone on the phone, whenever I talk to any type of customer service rep, I want to be the nicest person they talk to that day. And that's, I'm not doing it in some Machiavellian way. I'm just trying to be. I know that 98% of people they're talking to are yelling at them in some way. And if you just treat them like a human being, they're probably having a tough day. They probably have a tough day fairly often because you have to deal with negativity, like, just be pleasant, just ask questions, ask, what can we do? Is there any. Like, you'd be shocked at how many people are willing to help you. And I think to me, that's the. Everything is negotiable. It's not like, let's get down to brass tacks and like, quibble over pennies. It's, hey, can we just have a discussion about this? And I think you're going to be really shocked at how beneficial this is going to be.
- [45:35]
B
Right, exactly. My credit card, every year on the card member anniversary, I would call and say, hey, you know, card member anniversary is coming up. There is this big annual renewal fee. Is there something that we can do to offset this fee? You know, and every year they would say, all right, yeah, sure, absolutely. If, if you spend this much money over the span of the next three months, then we can apply a statement credit of this amount per month over the span of the next three months. And, and by virtue of applying that statement credit, you know, it, you're still paying the renewal fee, but the statement credit, you know, diminishes a part of that. Like. Right. So it's like things like that, that you just set a Google Calendar reminder once a year. And you know, by doing those types of things and incorporating that into your life, you get this practice at negotiation.
- [46:29]
A
Yes. And that's the key, is the practice. All right, Paul, I love that. So that was the first of the eyes.
- [46:35]
B
Yeah.
- [46:35]
A
Second, I is investing. Talk to me.
- [46:38]
B
Investing. And so investing in this context, because there's a different letter for real estate, investing in this context refers to public and private markets. So public market investing, stocks, bonds, any alternatives like gold. Of course, Brad, you and I are very aligned in that we're index fund investors. So, you know, I think we're all very much on the same page here in terms of the majority of your portfolio in broad market index funds allocated along the efficient frontier. So personally, I have an all equities portfolio. I do not have a bond allocation. I don't necessarily recommend that for everyone, but I think that there are instances in which that's a decent approach. I've done it for two reasons. Partially, it's because I have rental properties, and I see rental properties very much as the income allocation of my portfolio. Also because I have absolutely no intention of stopping work at any time in the next several Decades. And so, so I don't feel the need to. If I were on the cusp of retirement, I would maybe be behaving differently. But with decades and decades to go and with what I know is a strong risk tolerance in terms of market drawdowns, I'm happy to be in all equities because I can withstand that standard deviation.
- [47:55]
A
Yeah. And that's the critical part is knowing yourself here. And that's what I would counsel to everybody for. I mean, all of personal finance, all of life, frankly. But investing specifically in your case, it's a perfect example. Right. You don't need to follow the TR. Whatever the traditional is. Right. 60, 40 years, 70, 30.
- [48:13]
B
Because 110 minus your age.
- [48:15]
A
Right, Right, exactly.
- [48:16]
B
Yeah.
- [48:17]
A
Oh goodness, I even forgot about that traditional personal finance because you have real estate and also, and again, we'll get into this with entrepreneurship, but you were someone who loves business building it just lights you up. And this is not something you're doing just to pay the bills. This is, this is your life and you love it. So you have no plans to stop. So in terms of taking the foot off the accelerator, as far as not having a significant equities allocation would be silly because you're going to have income coming in, right? So it's not like you're drawing down from your portfolio and you need to worry about that. Like, like you said, you have a significant risk tolerance. You understand that there's volatility in the market, especially over a 20 to 50 year investing period. But in terms of maximizing net worth, I think having 100% equities is going to be your best bet in your very specific case. Now, of course, we never give advice to anybody, let's be entirely clear. But that's certainly. I'm not giving advice to any particular person listening to this. They have to figure out, you have to figure out as the listener, like what works for you, what's your exact situation. And that's not something that Paul or I can, can help you with today, of course, but it's just to get an understanding of where you are, what your life looks like, are there other income streams, et cetera, et cetera. But yeah, I mean, Paul, like you said at its foundation, I think most of us in the FI community think it starts with low cost index funds and ETFs. So broad based low cost index funds, usually people talk About S&P 500 or total stock market index funds. Those are usually the starting points. But of course there's always room for like you Said the efficient frontier. It's, you know, we can't exactly get into that today. But you know, if you believe in Paul Merriman and his, you know, pre 1980s analysis of, of small cap value, then you know, efficient frontiers, your bag. It's not exactly my thing but there are a lot of people who believe in that and that's fine, you know, do your thing. But I think at its essence most people start with low cost index funds.
- [50:19]
B
Yeah, exactly, exactly so and functionally so Paul Merriman and the, you know, his analysis stock market. If you zoom out, you get out of the weeds and you look at the root of it functionally what he's saying is in addition to a total stock market or in addition to a large cap allocation, also have some small caps in there and also maybe have some like value oriented index funds in there. Right. So he's basically saying have a little bit of diversification by tilting a little bit towards small caps and a little bit towards value.
- [50:54]
A
Yeah. And that's a great succinct summary of Efficient Frontier. And of course that's something we probably should do. I know Joe, Joe Salsihai is a big proponent of it. We should do a follow up episode on that.
- [51:06]
B
Somebody called me Efficient Frontier pilled.
- [51:11]
A
That's funny.
- [51:11]
B
He was like, Joe's got her Efficient Frontier pilled.
- [51:15]
A
That's hilarious. That is hilarious. Yes. I have definitely not become Efficient Frontier pilled, but I'm always open minded, I think is how I live my life. But yeah. So anyway, investing is very important. I think of course this is also not to say that individual stocks don't have their place in it because we've had people like Brian Feroldi. I'm going to have, I know you had run recently David Gardner from the Motley fool who's wonderful.
- [51:40]
B
He's so convincing. Oh my God, he's so enthusiastic.
- [51:44]
A
Like to the full headquarters to play board games with him. And thanks to Brian Feroldi a couple of years ago. And he's just enthusiastic in general. He's, he's a great guy. He really is. And, and it's, you understand, I think so many people think of investing as gambling that we're just trading piece of paper and it's just, hey, as soon as this goes up a couple dollars I'm going to sell it. Like that's not what we're doing here. You're thinking long term. So that would be my counsel for people is like the entire point of investing is long term. If you're thinking about what happened last quarter or what happened last year or what's going to happen next quarter? I think you're missing the forest for the trees.
- [52:23]
B
Right, right. In fact, that's what I love about what David Gardner talks about, the co founder of the Motley fool, in that he talks about what companies do you believe in so strongly that you would like to be a part owner of those companies? Like what is it that you believe in so strongly that you say, you know what, I'm planting my flag in the ground and I would like to hold this for the next 20 years because I believe in what they're doing and I believe in it so much that I would like to be an owner in what they're doing. And my follow up question to him was, well, I mean if we took that approach, wouldn't that bias us towards consumer facing brands? And he was like, yes, it would, you know.
- [53:07]
A
And he was okay with that.
- [53:08]
B
Yes, yeah. Yes, it absolutely would. And that's just part of the deal.
- [53:13]
A
Yeah. Interesting. Yeah, that was a really great episode, Paula. So for anybody who's interested, David most likely is going to be on Shoes of I in a couple of months, but Paula just had him on in September. So just go back a couple weeks in the Afford Anything feed and check that episode out. It was a good one. So anything else in terms of investing, Paul, or did we do? We covered the basics pretty well there.
- [53:34]
B
I'd say, and I won't go down the Roth rabbit hole, but I would say spread your investments across the tax triangle. Have a little bit of all three, a little bit of Roth investments, a little bit of tax deferred investments, and a little bit of taxable investments. So make sure that some portion of your portfolio is hitting all three points of that triangle.
- [53:56]
A
Yeah, I think that's very reasonable. I think just having optionality always helps. I mean there are benefits to all of these. We've had Sean Mulaney and Cody Garrett on recently talking about really effective tax rates of so many of these benefits that the federal government showers on us. And that's why, Paula, I do still very strongly stick towards traditional IRAs and 401ks just because I think there's a really high likelihood we're going to be able to pull that money out at essentially a 0% effective tax rate, pay $0 in tax on it. So to lock in a higher tax rate through Roth doesn't exactly make sense to me. But there are situations where clearly does. And also having the option of. And this doesn't apply to Roth, clearly. But sometimes you want to show more income. So because you're buying real estate.
- [54:41]
B
Oh, I was thinking if you're buying rental properties.
- [54:43]
A
Yeah, right.
- [54:44]
B
You're buying rental properties. You do want to show more income.
- [54:47]
A
And that's your background, which is wonderful. That's further flavor to it. And right. There's a 0% long term cap gains in your brokerage account up to, I think it's $96,000 for taxable income this year. That's after the massive standard deduction. So this is for married filing joint. So if you have just taxable brokerage, you can take a boatload of money out. Obviously with traditional IRAs and 401s, there's the standard deduction, so you can get $30,000 out tax free on that. And then of course, the Roth, by its very definition, you've paid tax upfront and you do not pay tax when it comes out. So you can massage all of these things. And that's why Paul is saying like, there are three legs to this and it is nice to have flexibility. There's no doubt about it.
- [55:30]
B
Right, exactly, exactly. And you know, when it comes to withdrawal, when you do get to that part of retirement withdrawal, your drawdown strategy is going to be highly dependent on whatever the tax situation is at that time. And if you are not going to retire until 2035 or 2040, we have no idea what, what the tax situation at that time is going to be. So hitting all three points of that tax triangle really enhances your flexibility and flexibility. You know, to quote J.L. collins, flexibility is the only true security. And when he said that, he meant it in the context of lifestyle, you know, because people often ask, what if I retire and it turns out that I don't have enough money to support my lifestyle. Well, if you can be flexible about your lifestyle, that is the truest form of security. So that statement is true in that context. But in terms of drawdown planning, it's true there as well.
- [56:21]
A
Yeah, wholeheartedly agree. I absolutely love that. So, Paula, we've covered the three of the essential ingredients, so the F and the double I. So let's move into the optional ones, but ones that can be pretty fantastic and again are near and dear to your heart. So let's start with real estate. So.
- [56:36]
B
Oh, real estate. Probably one of my favorite topics. Where to begin? Um, let's start with. Especially for people who, who don't know me. I'll very quickly summarize my real estate philosophy, which is, Brad, that I am very much in Agreement with you that your personal residence, your primary residence is not an asset, it is a consumer expense. If you want to make that consumer expense cool, you know, like we buy a lot of things for consumer gratification. So if you want to make that consumer expense, that's great. But as far as, does your, does it make sense to purchase a personal residence? I am very much a proponent of looking at the price to rent ratio in the area in which you live. And so the price to rent ratio is the price of the home divided by the annual rent. So, for example, let's say that you could buy a home for $500,000 and you could rent that same home for $2,000 a month, which is 24,000 a year. So the price rent ratio in that case would be 500,000 divided by 24,000, which is approximately ballpark, I think 20. And so in that particular case, you are in the gray zone. So if the price to rent ratio is 15 or under, it is a slam dunk. Buy, don't even think twice about it. Price rent ratio is 15 or under. Buy that place, okay? I mean, unless there's some extremely extenuating circumstance, you know, you're in a ton of credit card debt or you're only going to stay there for a year, right? But for any reasonable, you know, you're planning, you're going to be there, like, buy it. You're in a location in which it makes sense to buy. If that PR ratio is 15 or under, if the PR ratio is 25 or over, rent it, okay? And if that PR ratio is between 15 to 25 and, and really I'd say like that 20 to 25, 18 to 25, that's very gray zone. I like to think of 15 to 20 as like light gray and like 20 to 25 as dark gray. If you want to get a little bit more granular, you know, 15 to 20 is like light gray leaning by 20 to 25 is like dark gray leaning rent, you know, okay, I like this, but 15 to 25, you're in that gray zone. So the example that I give and the reason that I knew that how to divide 500,000 by 24,000 off the top of my head is because I give that example frequently because that puts you right in dead smack in the center of the gray zone.
- [59:06]
A
Okay, interesting. Okay, so that's a good background on primary residence. But now I know that clearly real estate does not stop there. I know you, as you've said, you have rental properties and you actually were, I Don't think you even know this, but you were integral in me having the mindset to get my own rental properties. We had you on years ago, it was probably six or seven years ago at this point, and I talked to you about some massive missteps I had in real estate speculation, which is actually what it was. It was not investing back in my early 20s where I bought vacant land and it was just a nightmare, Paul. It was the worst possible thing. But then having brilliant friends like you help me see that. Okay, I can put my accountant's hat on or just my intelligent person's hat on, let's say. So for everybody out there, you can put that hat on and say, okay, I need to just look at this as a business. And that includes, okay, this, it's very clear. It's. There's rental income coming in and there are expenses coming out. Is this the best way for me to allocate my, my assets, my net worth? And at that point, like, while I'm not articulating it beautifully here, Paula, that was an eye opener for me, just looking at it saying like, okay, this is just a business. Don't think about it in terms of what is it going to appreciate to. Because that while appreciation is wonderful and it does happen most of the time on real estate, though not necessarily always, I don't want to count on that. I just want to look at this as a business and does the cash flow make sense? For me, that was an aha moment for me. So I'm going to stop talking, let you actually run with this since you're the expert. So rental real estate, like how do you, what's the elevator pitch for? How you describe that to people like as part of this massive framework of yours.
- [60:55]
B
Okay, so the elevator pitch for rental real estate is that you have a stream of residual income coming in and rental real estate. So any asset makes money in two ways. There's the appreciation on the asset and then there's the dividend or the income stream that it pays out. Rental real estate biases towards that dividend or that income stream. So you can compare rental real estate investing to essentially a high dividend investing strategy or an income oriented. The reason I mentioned rental real estate in the context of why I don't have bonds is you can think of rental real estate as your supercharged bond strategy. Right? Because bonds are an income oriented asset. For me, in lieu of having bonds, I instead have rental properties. And that means I have an income oriented asset in my portfolio. That way outperforms bonds And I know that it's, I can hear the financial planners who like waving their fist at the, you know, because you're like, well, it's not a perfect analogy because you can't harvest some of the.
- [62:01]
A
Right, the additional yada, yada, yada, yada. Yeah, I hear you. But nevertheless, I certainly understand.
- [62:06]
B
Yeah, it's a, it's a framework. It's a, it's a framework for how you think about the position of this asset in your portfolio and with rental real estate. So I am very much a proponent of not speculating as to future appreciation. I like to use very conservative assumptions when it comes to appreciation. There are two sets of assumptions that I recommend that my students use. The more conservative assumption is to just assume that it's going to keep pace with inflation and nothing more. You know, that's the most conservative possible assumption. So historically that's been around 3% if you ignore the last couple of years. So that's one assumption that you can make. The other assumption you can make is that historically real estate in the United States nationwide has appreciated over a long term annualized average at around 5% annually. So that's the 3% of inflation plus a 2% premium on top of that. So if you want to use a conservative estimate, you can use 3% as historic inflation. If you want to use a slightly more aggressive estimate, you can use 5%, which is its historic appreciation rate. I don't care which one you use. Use 3%, use 5%, split the difference and call it 4. I don't care. You know, but anywhere in that 3 to 5% range I think is a very, very reasonable appreciation estimate. I don't instruct people to buy real estate for the purposes of appreciation, but take that estimate, keep it in your back pocket. And now turn the focus to the cap rate. And the cap rate on a property is a measure of its unleveraged dividend. What does that mean? It means what kind of a dividend would that property pay if you were to hold it free and clear? And the reason that we look at this number is because we don't want to conflate the financing arrangement on a property with the intrinsic value of the asset itself. What does that mean? That's a bunch of big fancy words. All right, let's imagine that you're buying a stock. You're buying a share of Coca Cola stock. Okay? You have two decisions to make. Decision number one, should you buy a share of Coca Cola stock? Yes or no. And you're going to look at at the stock itself and at the financials around the stock in order to make that decision. Then decision number two, should you borrow money to buy that stock? That's a totally separate question. And you're going to be looking at all of the considerations around the financing as you consider question number two. You never want to conflate those two questions. And in the world of stock investing, that's obvious. But in the world of real estate investing, because financing is so common, those questions often get conflated. And so the first thing that I do is I tease out, let's, let's ignore financing. That's question number two. Question number one is, do you want to own this thing? You know, is it even worth owning at all? And the other way to think about it is, 30 years from now, when this thing is paid off, do you want your kids to own it free and clear? Because there are some assets that are just not worth owning even if they're free and clear. So if this asset is not worth owning free and clear, I often tell my students, if you wouldn't hold it free and clear, then don't borrow money to buy it. And there are a lot of real estate investors who will use this metric called cash on cash return, in order to assess whether or not you should buy a property. Cash on cash return measures the return that you're getting relative to the amount of cash that you put into the deal. So it purely looks at the financing arrangement, which means you could buy a garbage asset. Right. But because you've used financing to buy it, the fact that you used financing now justifies the fact that you own this garbage asset, which makes no sense to me, because if it's not worth holding free and clear, if you don't want your kids to hold it free and clear, then why would you borrow money to buy it? So I take cash on cash off the table entirely. And that, that is what separates me from a lot of other real estate investors. It's a very controversial move. I take cash on cash return off the table entirely. And I start the conversation with what is the cap rate on this property? Because if that property produces a strong unleveraged dividend, right? Then that dividend plus a reasonable rate of appreciation, as we just talked about, somewhere between 3 to 5%, that dividend plus that appreciation is the unleveraged total return on the property.
- [66:41]
A
Yeah, Paula, I love how you separate this, because I think there's so much funny business. As someone who looks at the real estate investing community from afar, there's so much funny business in terms of the benefits of taxes and the leverage. And it's always like, there's always some fantastical thing that they want to throw at you. And to your point, it's like, but is the asset good? Like, would you, would you actually want to own this thing? Come on, guys.
- [67:09]
B
Yeah.
- [67:10]
A
And it's just the fundamentally wrong place to start, right?
- [67:14]
B
Yeah, exactly. Well, the asset is garbage, but my financing is great and the tax deductions are amazing.
- [67:21]
A
It's amazing. Yeah. It's just, I think for long term thinkers, that's not the way to, not the way to look at any type of investment portfolio. And, and that's not to say, of course you're going to get people who's going to, who are going to yell at both of us saying like, oh, but I, in my anecdotal experience, I did great. And like, that's fine. Nobody's saying that it can't work. We're just saying like, all things equal, look at the asset. And as Paula so beautifully said, like, does this make sense on paper if you didn't have to borrow money to buy it? If it does, okay, well then wonderful. Then you, then and only then can you think about, do I want to add leverage to this? That's fine. But if it makes sense, buying it in cash, well, then you have some options, but you need to start from that fundamental place. So yeah, Paula, that's really wonderful. I love that. I absolutely love that. And frankly, that's what you taught me years ago, that I had forgotten when I was bumbling around five minutes ago and I actually went up buying the two pieces of property in cash. They were both very low cost properties. It helped pass the sleep at night test for me. And that was another aspect for me that it was like, okay, look, even if these things aren't rented, I'm doing okay. Is that the most sophisticated strategy in the world? No, but it helped me sleep well at night and that's all I was going for. That's what I was maximizing. And yeah, I mean, they really worked out beautifully and actually interesting. I recently sold both of them. But it was just part of my overall strategy changing. There was some additional things that actually wound up becoming part of the Fi Co housing community down in Warner Robins, Georgia that Stephen Boyer from Camp 5 fame is spearheading. So again, there's some additional circumstances with my. And Paula, you look like you have 75 questions.
- [69:00]
B
Are you, are you moving? Are you moving to Warner Robinson?
- [69:03]
A
No, no, no, no. I'm not, I'm not. I'm not. Sorry. Thank you. Stephen put together, he lives in Warner Robins, Georgia and he found this community years ago that there were 99 homes basically bounded by two main roads. And he was able to, I think last count it was something like 21 or 22 of those 99 were purchased by people in the FI community with the hope of eventually turning this into a FI co housing community. And now this is not some commune or anything. It's just people own their individual.
- [69:33]
B
We've gone full cult.
- [69:34]
A
Yes. It's funny because this is what we were talking about before of like living with friends, right? It's like, I think I just blew your mind here, Paul. Everybody owns their own individual place, but it's just, hey, you have friends nearby. It's similar to what they're doing in Longmont, just that that's more organic. So I actually sold my rental properties to two people who actually wound up moving down to this community. So the first people have actually started to move into it. So it's becoming real.
- [70:02]
B
Wow. Wait, so your two rental properties were both in Warner Robbins, Georgia?
- [70:06]
A
They were, they were.
- [70:07]
B
Oh, okay.
- [70:08]
A
Ah, yeah, yeah, yeah. So I think Stephen has a website. I'll see if I can dig it up. But it's the Eagle Co housing community in Warner Robbins, Georgia. So you can, if you're listening to this, you can Google it, but yeah, this is real. So anyway, my rental real estate is a little different than most, but nevertheless it was a really wonderful experience and it was time that I wanted to sell anyway. And yeah, it worked out perfectly.
- [70:30]
B
Wow, that's incredible.
- [70:31]
A
Not bad. Not bad.
- [70:32]
B
Yeah, yeah. But so I love that you bought those two in cash because it underscores exactly what I was just talking about where there's so many people, you know, if you, if you Google the world of people who teach real estate investing online, unfortunately the vast majority of voices online are really drinking the financing Kool Aid in a big way. And I'm not Dave Ramsey, I'm not on some anti debt crusade, but I think that it is very disingenuous for people to make their money by saying you can put no money down and make lots of riches. You know, you're promising right there. You know, goes back to what we talked about earlier. What's the promise? And a lot of people online, unfortunately, they make these big promises that you can achieve enormous wealth by putting zero or very little money down. And the way that you do that is, is through heavily financing your projects. And the way that they convince you of that is by showing you the math on cash on cash return and the way that the cash on cash return formula is set up, the inherent construction of the formula is such that the less money you put in, the higher your returns are relative to the money that you put in. So if you put $0 in, then your returns would be infinity, Right?
- [71:56]
A
Oh, goodness. And thus breaks down the analysis, right?
- [72:00]
B
Yeah.
- [72:02]
A
Oh, my God.
- [72:04]
B
So a lot of people sell the dream of real estate by highlighting the financing aspect. And a big part of my mission in what I teach is to say, you know what, we can talk about financing. Sure. But before you decide to borrow money to buy Coca Cola stock, let's first decide whether you want to buy that share of Coca Cola stock or instead do you want to buy Pepsi Cola or do you want to buy Apple or Nike?
- [72:32]
A
That's their energy. Yeah, we'll stick with the beverages. Yeah. Let's be clear here. Paula clearly put real estate as one of her five pillars and she is a real estate investor. So by no means are we anti real estate here at Choose a Vi and obviously Paula is not. But it's just looking at it differently than most people do in the real estate community. And I think that's. There's so many get rich quick schemes that I see. And I think that's a turn off to people who a, are not that aggressive and B, who can think critically. And it's, it just, I think your approach is just dramatically better as a starting point. So I, I absolutely love that. Paula, I think we should move on. You're quite welcome. And let's move on to entrepreneurship, which is near and dear to both of our hearts. I think yours more so than mine because you just, this is really what lights you up is what I see.
- [73:26]
B
It does, it does so entrepreneurship. And it took me a long time to figure this out, but there is a distinction. I used to conflate self employment with entrepreneurship so many, many years ago when I was in my 20s and I kind of started along this road. I believed mistakenly that if you derived your income from 1099 work, if you didn't have a boss, didn't answer to a boss, and you, you know, cobbled together your income through client work, that that meant that you were an entrepreneur, but in reality it meant that you are self employed, you are trading your time for money, but you don't fundamentally own any underlying asset. And that is the distinction between self employment versus entrepreneurship. And so this is where it diverges from, you know, we talked earlier about increasing your income. And in increasing your income, you can have these side hustles. And we talked about the three tiers of, like, side hustles. You know, if you look at a spectrum, it starts with gig economy, uber, doordash, dog walking, babysitting. Right? That's kind of the gig economy stuff. And it's money in the door right now. And if you, if you are in an emergency situation, and I want to be very compassionate about the people who are. Some people are like, look, I don't have time to optimize. I need $500 by Friday. You know, and if you're in that boat and you need $500 by Friday, then babysitting, dog walking, Uber, like, that's going to get you $500 by Friday. So there is a time and a place for that. But the next gradient is selling your services. And that is self employment. You know, that is, that is the stuff that you do outside of your normal day job, often in the evenings or in the weekends or whenever you're off work. But you're fundamentally trading time for income. And so entrepreneurship is elevating to that next stage. It's owning some type of underlying asset, such that that asset produces an upside that is independent of you and it's independent of the time that you put into it. Fundamentally, what you're doing with entrepreneurship is you are separating time as an input from compensation as an output.
- [75:46]
A
Yes. I love this distinction. And it wasn't altogether clear to me, actually, when we were talking about increasing income earlier in the first of the double eyes, when you were talking about all these side hustles and such, I think my natural inclination is to complete the two. So at that moment I'm like, oh, I wonder why we're not talking about this in entrepreneurship. But now it's very, very, very apparent, clearly. So, right. It's scale to some degree. Scale and leverage. I think that's what's so beautiful about entrepreneurship is like. Like you're saying it's not a one for one. It's not one minute equals X dollars.
- [76:19]
B
Right.
- [76:20]
A
We both, we are in a tiny minority of people who have successful podcasts, but nevertheless, like, we can talk into a microphone and it have outsized results and you can have episodes. I mean, we still get downloads on our very first episode. Now, interestingly, I don't get compensated directly when someone downloads my podcast, but there are ways to make money from that. If someone signs up for something, we had an affiliate link for that we mentioned I could have recorded this episode nine years ago, and I could still potentially earn some money from that. And that's really intriguing.
- [76:54]
B
Right, right. And so what you're talking about is a podcast, in this example, is fundamentally a digital asset. And that asset produces an income. And that's what entrepreneurship is. It's amassing assets that produce an income. And one thing that I think is really cool is, you know, there are digital assets, and that's where a lot of attention has gone over the last decade. Now there is a greater turning of attention to physical assets, real world assets. Owning a vending machine, owning a laundromat. You know, there are physical, real world assets that are accessible to many people that don't require any type of specialized knowledge or skill. You know, you don't need an engineering degree, for example, you don't need medical training. You know, you don't need some kind. There's no, like, high, high barrier to entry that requires some type of a licensure or certification. But by virtue of owning these assets, whether digital or real world, these are the assets that generate capital, ultimately with minimal input from you. Now, that being said, all residual income is front loading the workload. Right. And it's finding ways to add value and create operational efficiencies. So this is very much the long game. But ultimately, entrepreneurship is, I think, the most fun part. In my opinion, it is the most fun part of the Double Eye Fire framework.
- [78:23]
A
Yeah, I agree. And it's been part of both of our journeys for over a decade now. And it's interesting to be able to put time and effort into something that can grow beyond just those inputs. And I think there's something magical about that. And like you said, no matter what, no matter how it is, it doesn't have to be a digital asset. Obviously, that's just the most obvious that come to mind for two people talking on a podcast. But there are so many ways to do this. And I think like you said at the outset, this is not required. Real estate certainly is not required. Entrepreneurship is certainly not required. But man, entrepreneurship is fun, Paula. It's so much fun. And it's so. Right, like it's, it's doable for people and it's, it's part of a life where you're constantly learning. And to me, that's what's most fun about it.
- [79:13]
B
Yeah. Yeah. So a lot of people think that the pursuit of fire, like, again, a lot of people conflate financial independence with early retirement. And so even. I was just at fincon, which is a conference for digital creators of personal finance content. And somebody there asked me, they were like, oh, you know, do you, do you want to be financially independent? And I was like, well, I am financially independent. And they were like, oh, why are you still working? That's typically the immediate follow up question. And I think that that mindset often comes from people who their only experience of work has been a thing that they do for a paycheck. You know, not a thing that provides intrinsic joy in and of itself, but rather a means to an end. And if you have the opportunity to experience the type of work that brings you intrinsic joy, you know, where you're constantly, you have mastery, you have autonomy, and you have purpose. And the reason I say those three things is because there have been studies done that show that those three attributes, mastery, autonomy, and purpose, correlate with a person's overall work satisfaction. If you have mastery, autonomy, and purpose, you are likely to be satisfied with the work that you're doing. And entrepreneurship, I think, provides the opportunity for all three of those. Yeah, it's not the only thing that does, of course, but it certainly does provide that.
- [80:45]
A
Yeah, it absolutely does. And yeah, there are ways to get into it, into some type of entrepreneurial venture for very little money. And we've had Alan Donegan on for years who talking about a framework where you don't have to spend, you don't have to do the old school things, the let's get a business plan and let's get business cards and let's like, what if you could actually prove out a business? What if you could sell before you created it? What if you could iterate? What if you could test like, of course this is not saying this is the only way, but there are so many ways now, Paula, to get into entrepreneurship where it doesn't have to be an all or nothing. Risk your entire life savings on a restaurant or something that has a 95% chance of failure, you can play around with it. I mean, I've talked for so many years here on the podcast about how many different entrepreneurial ventures I had. Most of them digital, certainly, but nevertheless, most of them look like failures on paper. But damn if I didn't learn every single time and damn if that didn't push me forward. And I just wouldn't have been ready for the success that was travel miles 101 and obviously much more. So choose a 5 had I not gone through all of those years of what looked like to the outside, a failure. And I didn't view those years of toil as failure. I viewed it as, wow, I'm learning something all the time and I still use some of that skill set today. Even just rudimentary SEO and HTML, like, I mean, a decade later, this is crazy, but I use conversion rate testing and a B split testing. All these things like that I learned 12 years ago, I still think about and use today. And it's like I have a skill set. Also with my CPA background, I think that's what a lot of people like, you have a day job also. You have skills. You can tie that into your entrepreneurial venture and you can have a skill set unlike anybody else on earth in your own unique way. So while this clearly isn't required, and Paula has said that repeatedly, like it's something that's really fun to try and I think there are outsized benefits from pursuing it. So, Paula, I love this framework. I love it.
- [82:51]
B
Thank you. Thank you.
- [82:53]
A
I'm so glad we spent this time on it. I think this was really valuable. It was valuable for me. I know it's valuable for the listeners, for the community. So thank you as always.
- [83:01]
B
Of course. Thank you. Thank you for inviting me on to share Double I Fire.
- [83:06]
A
Heck yeah. So like I said at the outset, Afford Anything. Just hit subscribe please. The podcast is fantastic and we talked about how to negotiate your next raise or ask for a raise. We'll have that link in the show notes. Paul, is there anywhere else?
- [83:20]
B
We have a Double Eye Fire cheat sheet. So if you want a synopsis of everything that we just talked about, what is Double I Fire? What are the core pieces of it? What do you need to remember if you are talking to a spouse about it or if you are talking to a a friend or a colleague and you want to share these ideas and you want a compact condensed like, boom, this is what Double I Fire is. Come join me on this Double Eye fire journey. Afford anything.com doubleifire. You can download the Double I Fire cheat sheet absolutely free.
- [83:53]
A
Okay, so that's/fii r e. Exactly.
- [83:58]
B
Affordanything.comfiifire I love it.
- [84:03]
A
I love it. Paul, as always, thank you for being here and to you listening. Thank you for being on this journey with us. I know you got a lot out of this episode. Check out Paula's podcast. Check out the resources that she just talked about. And until next time, thanks for being part of the choose of I community. Thank you for listening to today's show and for being part of the Choose a Vi community. If you haven't already, the best ways to get involved are first subscribe to the podcast. So you're listening to this on a podcast player. Just hit subscribe subscribe and then subscribe to my weekly newsletter. I actually sit down every Monday and write this by hand and I send it out Tuesday morning. So just head over to choosefi.com subscribe and it's really, really easy to get on the the newsletter list right there and I would greatly appreciate it. It's the best way to get in touch with me. You can actually just hit reply to any of those emails and it comes directly to my inbox. So that's the way that I keep a pulse of the community and and how we keep this the ultimate crowdsourced personal finance show. And finally, if you're looking to join an in real life community, we have choose a fi local groups in 300 plus cities all around the world. So head to choose a vi.com local and you'll find a list of all of Those cities in 20 plus countries all across the world. And if you're just getting started with FI or you have a family member or friend who you think would be interested in two easy ways, choose a phy. Episode 100 is kind of our welcome to the FI community. And even though it's a couple years old at this point, it still stands up and it's a really great just starting point to get an understanding of what is financial independence. What are we doing here? Why are we looking to live a more intentional life where we save money and use it as a springboard to live a better life? And then choose if I created a Financial Independence 101 course that's entirely free. Just head to choosefi.comfi101 and again, thanks for listening.