The Plot Thickens
Episode 135R
Episode Guide
Episode Summary:
Episode Timestamps
ChooseFI Podcast Episode Show Notes
Episode Summary
In this episode, the hosts, Jonathan Mendonsa and Brad Barrett, explore the debate of paying off a mortgage early versus investing, while incorporating listener feedback. They discuss a case study of a young couple leveraging real estate through house hacking to achieve financial independence, emphasizing strategies like the BRRRR method—Buy, Rehab, Rent, Refinance, Repeat. The importance of unconventional financial choices and reaching critical financial milestones is highlighted throughout the discussion.
Key Takeaways
- Mortgage Payoff vs. Investing: The discussion dives into the nuances of whether to pay off a mortgage early or invest the extra funds.
- House Hacking: A powerful strategy for financial independence involving living in a multi-unit property.
- The BRRRR Method: Real estate investment strategy discussed as a means to build wealth, especially for those with lower incomes.
- Importance of First $100K: Achieving this milestone can significantly impact one’s financial journey.
Timestamps and Topics
-
Introduction to Mortgage Payoff vs. Investing
- Brad and Jonathan introduce the topic and set the stage for the discussion.
-
Listener Feedback and Case Study Introduction
- Dive into feedback from the community regarding mortgage payments and investment strategies.
-
Real Estate and House Hacking
- Discuss the concept of house hacking as a method for generating income to offset living expenses.
-
Strategies for Financial Independence on Low Income
- Tips for individuals with lower incomes to achieve financial independence, including practical real estate investment approaches.
-
Rounding Up Listener Insights
- Incorporating listener insights and summarizing the effectiveness of their shared experiences.
-
Wrap-Up and Community Feedback
- Finishing thoughts and sharing additional community feedback.
Actionable Takeaways
- Implement a house hacking strategy to reduce living expenses while saving for future investments.
- Review and understand the BRRRR method for effective real estate leverage.
- Regularly track your net worth to motivate financial growth.
- Establish a solid emergency fund to prepare for unpredictable job loss.
Key Quotes
- "You can't predict you're going to lose your job, but you can prepare for it."
- "The first $100,000 is the hardest."
- "High income and paycheck-to-paycheck living often leads to financial fluff."
Related Resources
Discussion Questions
- How can you incorporate house hacking into your financial planning?
- What are the most significant barriers to achieving the first $100,000?
- How does the BRRRR method compare to more traditional real estate investing?
- What precautions do you take to prepare financially for job loss?
Action Items
- Create a point-in-time net worth statement for tracking your financial progress.
- Research local loans available for first-time homebuyers with low down payment options.
Conclusion
The episode provides listeners with tools and strategies to decide between paying off a mortgage or investing while highlighting the importance of unconventional financial choices in the journey toward financial independence.
The Financial Independence Blueprint: Strategies for Success
In the journey towards financial independence, making informed decisions about managing debts, investments, and lifestyle choices is crucial. This article draws insights from the latest episode of ChooseFI, focusing on practical advice on paying off mortgages, leveraging real estate, and preparing for financial security in uncertain economic climates.
Understanding Mortgage Payoff vs. Investing
When considering whether to pay off your mortgage early or invest your funds, it’s essential to evaluate both options critically.
-
Consider Your Goals: If achieving financial independence quickly is your priority, you might lean towards investing. Historically, investments have outperformed mortgage savings due to the power of compounding over time. For instance, consider the impact of investing the money you would otherwise allocate to your mortgage.
-
Evaluate the Math: Research suggests that if your investment return exceeds your mortgage interest rate, investing may yield a net benefit. This can be framed as a question: "What investment vehicle do you want to commit to, considering your long-term financial goals?"
The Power of the BRRRR Method
Real estate investment strategies have proven effective for many on the path to financial independence. One popular approach discussed is the BRRRR method—Buy, Rehab, Rent, Refinance, Repeat. This strategy allows investors to build wealth through real estate while minimizing upfront cash expenditures.
Steps to Implement the BRRRR Method:
- Buy: Find a property that requires minimal capital while offering great potential for appreciation.
- Rehab: Improve the property to increase its value. This could involve renovations or minor repairs.
- Rent: Rent out the improved property to generate income that covers mortgage payments.
- Refinance: Once the property value has increased, refinance to extract cash for further investments.
- Repeat: Use the funds from refinancing to invest in additional properties.
By smartly leveraging debts through real estate, you can secure a compound advantage similar to that of mutual funds and stock investments.
House Hacking for Financial Independence
One of the most effective strategies within real estate investing is house hacking. This involves living in a portion of the property while renting out the remaining units, effectively lowering your housing expenses or eliminating them altogether.
Benefits of House Hacking:
- Reduced Living Expenses: By renting out part of your home, you can generate enough income to cover your mortgage payments, supporting your financial independence goals.
- Asset Building: A successful house-hacking strategy not only lowers living costs but also helps build equity as property values appreciate over time.
- Flexibility for Growth: The income from house hacking allows for easier savings on your path towards making larger investments or transitioning into full-time financial independence.
Targeting the First $100,000
Reaching your first significant savings milestone, such as $100,000, can be a pivotal moment in your financial journey. This threshold is critical as it often represents the threshold for compounding; with this amount, investment returns can grow exponentially.
-
Tracking Progress: Regularly monitoring and adjusting your savings as you approach this milestone can ensure you stay on target. Using tools like net worth statements enables a holistic understanding of where you stand financially.
-
Discovering Compounding: Once you reach the $100,000 mark, leveraging it with smart investment strategies can propel your financial growth significantly. This is where your understanding of compound interest as a growth engine becomes paramount.
Preparing for Financial Uncertainty
The financial landscape is unpredictably influenced by market conditions, employment status, and personal circumstances.
-
Multiple Income Streams: Diversifying your income can provide a buffer against job loss or financial downturns. Exploring side hustles, passive income opportunities through real estate, or investments can ensure your financial health remains resilient.
-
Emergency Funds: Building and maintaining an emergency fund equal to three to six months of expenses can help weather unexpected financial storms.
-
Risk Management: Understanding your risk tolerance and evaluating the potential that unexpected expenses have on your financial wellness is key. This proactive approach to finances will provide greater control over unexpected challenges.
Conclusion: Building Toward Financial Independence
Achieving financial independence is an attainable goal that requires strategic planning, informed decisions, and community engagement. As shared insights from ChooseFI illustrate, the path involves calculating the benefits of various investment strategies against immediate financial obligations like mortgages. By utilizing methods such as BRRRR and house hacking, you can leverage real estate to secure a brighter financial future.
Stay firm in your commitment to education, community support, and strategic financial planning, and watch as your efforts lead you toward your financial independence milestone.
Jonathan and Brad discuss life hacks and take another look at whether you should pay off your mortgage or invest.
[elementor-template id="143609"]Spam Caller Life Hack
Jonathan gave a quick shout out to an Andriod life hack that blocks spam callers. Basically, Google has the option for a call screening service. When you see a call, you have the option to screen the call. An automated Google voice will ask the caller to state why they are calling and you will see the transcript immediately. At that point, you will have the option to either report the call as spam, block the call or take the call.
If you are inundated with spam phone calls, then this could be a huge win!
Frugal Win Of The Week
Brad's solar panels are up an running! Not only will that have a huge impact on his electricity bill, but it also allowed him to gain some travel rewards.
He paid for the solar panels with the Barclaycard Arrival Plus and hit the minimum spend in one swipe. The bonus was around $1,000 in free travel.
Unfortunately, the Barclaycard Arrival Plus is no longer an option. However, you still have many ways to achieve similar travel rewards results. One of the best options is the Capital One Venture Rewards Credit Card. With this card, you can
Check out our full review of the Capital One Venture Rewards Credit Card here.
If you are looking for more ways to maximize your travel rewards, then check out our free travel rewards course here.
Life Hack For Small Business Owners
With the end of quarter two, many small business owners are preparing for tax time. If you are a small business owner then you may be able to save time by sending in your quarterly tax payment electronically.
EFTPS is an easy way to pay your federal taxes online. Depending on your state, you may be able to pay both federal and state taxes through this site.
Net Worth Check-In
If you think in terms of quarters, then you may think it is time for a net worth check in. Jonathan checks his net worth once a year on Personal Capital which he likes because he can use the software to look back and see his net worth at any point in time. You can get started with Personal Capital here.
Brad checks his on a quarterly basis. Brad uses a spreadsheet to track his net worth and can look back at his historical data easily.
How do you track your net worth?
Achieving FI On A Modest Income
Joel shows us that it is completely possible to create a solid financial future with FI in sight on a modest income. It is unrealistic to think that everyone will have the same path to FI. The amount of income you earn will have an impact on your path. However, Joel showed us that with a willingness to hustle, anyone can make FI happen.
He had a plan. And in order to reach that goal and succeed with that plan, he had to hustle.
It is not easy to hustle. Joel was working full-time, commuting, and power washing houses in the mornings. It takes determination to hustle.
With his lower income, Joel had to be creative. He needed to find ways to create some financial space in his life to achieve his goals. For example, he found a reliable car to buy in cash and searched for a house that would serve as a home for his family and an investment property.
If you put your due diligence in, if you do your research, this will transform the trajectory of your financial life regardless of what your income looks like.
Joel found ways to put money into things that he understood. Real estate was one of those things, but he had to learn from somewhere. Perhaps he learned from Bigger Pockets BRRRR strategy or another source. Either way, he learned what he needed to build a better financial future for himself and his family.
How To Prepare For The Road Ahead
Joel made a great point about taking action to be prepared for whatever life throws your way. Wherever you are at now, you have the option to prepare for your future.
You have to be prepared that even if you are the best worker in your entire department, you could lose your job tomorrow.
Be realistic about the future and prepare yourself. If you prepare for a change, then you will thrive when it happens.
Listen to the full episode with Joel here.
Should You Invest Or Pay Off Your Mortgage?
As a hotly debated question in the FI community, Brad and Jonathan share some feedback from the listeners. Many readers pointed out other considerations that were discussed on today's episode.
Mortgage Deduction
It is correct to mention this in the debate. However, most people just take the standard deductible of $24,000 for married couples and $12,000 for individuals. Unless you are able to improve on the standard deductible, then you would likely not make this a line item.
For most middle-class home, the mortgage deduction will not be a big player in this equation.
Capital Gains
Depending on how long you left your investments in the market, you would be required to pay differing amounts of capital gains.
If you sold the stock after owning it for less than a year, then you would pay regular income tax on the gains. If you sold the stock after owning it for more than a year, then you would receive preferential tax treatment.
The capital gains should be factored into your individual equation. Listen to the Capital Gains Harvesting episode if you would like to learn more.
Guaranteed Vs Speculative Return
As Sean Mullaney, the FI Tax Guy points out the question boils down to your risk tolerance. If you prepay your mortgage you are guaranteed a rate of return of the mortgage rate interest. However, if you take the speculative approach through investing the money then you cannot guarantee the return.
If you are younger with a long path to FI, then you may prefer the growth over a guaranteed return. If you are older and close to FI, then the guaranteed return may be more worthwhile to you.
Resource From Glenn
If you are interested in solar panels, then Glenn has the perfect resource for you. He has recently installed solar panels and documented the whole experience. The resource will be coming in the newsletter soon. Make sure to subscribe to the newsletter to receive this resource from our community member.
Related Episodes:
- Should You Invest Or Pay Off Your Mortgage?
- Capital Gains, Losses, And The Roth Conversion Ladder With Go Curry Cracker
- The Milestones Of FI
New to FI? Be sure to check out Episode 100: Welcome To The FI Community!