Sarah wants to refinance her owner-occupied triplex, but she’s torn between a 15-year and a 30-year option. Which is better in her situation?
Amelia is worried that she and her husband are under-insured. Should her husband get a short-term disability policy, even though it’s expensive and they’re unlikely to need it?
Steven just discovered the financial independence (FI) movement in July 2020, and he wants to reach FI in 11 years. He has $30,000 in cash and $26,000 of student loan debt. How should he use his cash given his FI goal?
Annalis and Mike are hunting for their first rental property, but they haven’t found anything nice that meets the one percent rule. Should they purchase a mansion and rent the rooms on Airbnb?
The South American Anthropologist wants to make a career change. His baby daughter has inspired him to become an example of living life on your own terms. Will his financial independence plan sustain him and his family for years to come?
My friend and former financial planner Joe Saul-Sehy joins me to answer these five questions in today’s episode. Let’s dive in.
Sarah asks (at 2:49 minutes):
I’d like to refinance my triplex. I’m able to get a primary residence mortgage as I occupy one of the units. I have three options I’m considering:
- A 30-year loan at 3.375 percent, where I don’t have to buy any points.
- A 30-year loan, I would buy one point, and the interest rate is three percent
- A 15-year loan, I’d buy ¾ of a point, and my interest rate would be 2.62 percent
I plan to move out within the next five years, at which point I’ll rent out the third unit. I have no plans to sell, nor do I have any time-dependent goals.
What makes the most sense? Based on my analysis, it seems like option two might work best, but I’m not sure about the 15-year versus the 30-year. I can easily afford all of these options, but there’s a clear opportunity cost that comes with a 15-year loan. When you couple this with the fact that I can write off a portion of the interest on my taxes, I’m wondering which makes the most sense.
Amelia asks (at 20:35 minutes):
I’m worried that my husband and I are under-insured. I have a term-life insurance policy and a disability policy through my workplace, but my husband doesn’t, and we haven’t purchased one for him.
We could live off of one income, so I’m not too worried about life insurance as we have no dependents. That may change in the future as we want to have a child.
I had my husband take an assessment for what short-term disability insurance might cost, and it was quite high. Insurance companies categorize him as high-risk since he’s considered obese and has asthma. We’re pretty sure that he’s healthier than insurance companies think he is, and we don’t want to pay that much since we think there’s a slim chance of having to redeem this policy.
Are there alternatives to pricey insurance that provide the same benefits, like a specific savings account or brokerage account? What can we do?
Steven asks (at 33:43 minutes):
I’m 29 years old and I discovered the FI movement in July 2020. Before that, I routinely spent my entire salary on living expenses. I lived in NYC, and my rent alone was $16,000 per year. I decided to move back in with my parents to cut my monthly spending down to $1,500, and I have $30,000 in liquid cash that I want to use to get myself closer to FI.
For background: My only debt is $26,000 of student loans with a 6.25 percent interest rate, and I recently opened a Vanguard Roth IRA with $1,000. My FICO score is 777. I made $30,000 from a W2 job in 2019, and an additional $12,000 from my own business. My business tripled its income in 2020, and my W2 gave me a $10 raise but furloughed me in March 2020.
If my goal is to reach FI by age 40 with $50,000 of yearly income, what’s the best use of my cash? Should I max out my IRA, start and max out an HSA, and then invest $20,000 in a mutual fund? Should I put $30,000 into an investment property? (If I do, my parents will gift me $15,000, so I would put $15,000 of my money in for the downpayment for a total of $30,000.) Or should I wipe out my student loans, start from zero, and go from there?
Part of me wonders if I should move to a lower cost of living area. The tradeoff is getting paid less, but the upside is being able to househack an investment property. What should I do?
Annalis and Mike ask (at 56:43 minutes):
We want to buy our first rental property, but we live in Santa Fe, NM and properties that meet the one percent rule are a bit disastrous. We’re also hesitant to invest out-of-state since this is our first rental. We’d like to see the property in person before buying it, and we want to get hands-on experience managing it.
We’ve come up with a potential alternative: buying a mansion, and going the Airbnb/VRBO route.
This seems promising, given that hotel blocks aren’t doing well right now. Long-term, it would be great to have a four-bedroom property – with each bedroom having two beds, you hit sixteen percent guest capacity. This allows us to meet the one percent rule and then some, even at a low occupancy rate.
However, we’re probably missing some angles, so what are your thoughts on this plan?
(By the way, we’re about to get married and we’re worth $500k combined.)
The South American Anthropologist asks (at 1:08:57 minutes):
I’m 43 years old and married with a daughter. I lived in the United States for several years, but now I’m living and working in the Caribbean. I want to switch careers from anthropology to something that allows me to live freely. I want to be a good example for my daughter, and I want time to write.
I have two apartments by the seaside in my home country. I plan to live in one and rent out the other. I also have $300,000 invested: $180,000 in CEFs (closed-end funds), earning seven percent after taxes, and $120,000 in S&P 500 ETFs and some individual stocks.
I plan to work a couple more years to get closer to $500,000 invested (on top of the two apartments). I used the cFIREsim calculator, factored for a two-year sabbatical, and input work income of $12,000 a year, plus the rent from one of the apartments. It says this should work out fine for the next 50 years.
I have assessed different foreign currency scenarios given that my invested dollars need to support our life in a foreign country. I will make a bit less than a third of what I need from my rental property, so we will need $16,000 – $28,000 per year from my U.S. investment portfolio, depending on the exchange rate.
My daughter will be four when we move back to my home country in 2023, and I’m about two years from retirement. My question is: how should I invest my savings from now on? Do I keep buying CEFs and stocks and trust the four percent rule and cFIREsim calculations? Do I buy stocks and ETFs until I retire from this profession? Or do I buy ETFs up until this year and then buy bonds? The CEFs have been the income part of my location strategy up until now.
I planned to put together a cash bucket for the first couple years of retirement to complement the CEF income up to our expected yearly expenses — should I invest it all instead?
Resources Mentioned:
- The Pandemic Has Resulted in Record U.S. Savings Rates, but Only for Some | NextAdvisor
- Changes in U.S. Family Finances from 2016 to 2019 (newest) | Federal Reserve
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