Listener Q&A: Investments, Buying a House for Cash, and Swapping Money for Time at Work
June 30, 2021
By Matt Miner, MBA, CFP®
Listeners call with their questions for Matt. Don’t miss your invitation for the next listener Q&A event. Sign up at workpantsfinance.com/resources.
TRANSCRIPT
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[00:00:01] Matt Miner: Last week's Q&A was so big I couldn't fit it all in. Today, listeners are back with questions about the investment strategy, home buying for cash, and a framework for how to exchange money for time in your work life.
Hey, and welcome to the Work Pants Finance podcast where I serve up hard-won wisdom about work, life, and money. I teach you how to be a debt-free millionaire in your 30s 40s or 50s and build a life where money works for you, not the other way around. I'm Matt Miner, your money guide. For the last decade, my family and I killed debt, built wealth, and then started teaching other people how to do the same thing. In 2018, I stepped away from corporate work to serve clients full-time as a fee-only fiduciary financial advisor. Work Pants Finance is the show for MBAs, entrepreneurs, and other high-income professionals who want a financial plan that works as hard as they do. This episode is all about you in answering your questions about life and money.
If you enjoy today’s show and would like to be invited the next time I record listener Q&A, sign up at workpantsfinance.com/resources. This is Listener Q&A: Investments, Buying a House for Cash, and Swapping Money for Time at Work. Find more at workpantsfinance.com\32.
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[00:01:21] Moses: I have recently relocated from Long Island, New York to the Triangle area of North Carolina. I do have a house in Long Island that is under the contract that I hope will close in the next week or two. I'm trying to figure out what to do with the equity that I have in that house. It is probably $200,000. I'm thinking since I'm renting right now here in North Carolina when my lease is up because the monthly rent is more than I feel comfortable with to keep paying on an ongoing basis. Should I buy a very modest home for our family in cash, or should I do something else?
The reason I asked that is because I don't think I will qualify for a total mortgage at this time because I'm in a career transition, I don't have verifiable income. That's the situation I'm in. Do you have any thoughts on that?
[00:02:20] Matt: Yes, it's almost more than we can handle on a phone call, but I have a few thoughts for you. The biggest concern about buying a home for cash before you have the next thing fully up to speed would be that you are totally putting your liquidity locked up in a home. The bad thing about bad things is that they often seem to come together. If there would be a general recession that would reduce your ability to launch your new career, it would also probably coincide, perhaps, with either depressed real estate values or greater difficulty in liquidating the thing. God forbid you had to move again, unexpectedly, for whatever reason, you would never want it to become a boat anchor.
One way that it might make sense to look at this would be to ask the question if I don't buy now, but instead, wait until I've started my next full-time thing and have an income and can qualify for conventional mortgage financing, what is the amount that I'm going to spend that is excess relative to this cash. Given extremely low savings rates, I suppose, it's almost fair to just compare your rent payment to, then you would put on the other side of the balance, at least the maintenance costs and the property taxes costs and the homeowner's insurance costs of the house.
At a minimum, you've got that plus your Goldman Marcus savings account pays 50 basis points right now so you can add that into the mix of what your opportunity costs are if you go park this money in a home. Then, just compare those two monthly outlays. If we imagine that you're paying $2,500 a month in the place that you're at right now and the comparable monthly outlays for the home that I've just described are $800 a month, what's $1,200 a month difference? Sorry, it's not. It's a $1,700 a month difference. Then, it's $1,700 x 12 for another year, what is this rent, theoretically, costing me?
Also, of course, just my own familiarity with the real estate market in this area, I know that whatever you could buy for cash for the number that you described is going to be less house than you have right now. To the extent, there's any enjoyment or value in where you're living in terms of how your wife feels about it or hospitality that you're able to do things like that would be worth taking into account. There's not a super easy answer. The only other thing that I can think of is to try to find some way to alter your income picture in the meantime, either through some regular part-time work or some consulting, that would just allow you to feel a little bit less bad about the rental expense.
Then, the last thing is just since you have some big goals for this career transition, in the meanwhile, you wouldn't want to get distracted with homeowner projects or unexpected repairs that might take your attention away from the things that are more important to you over the next couple of years. I don't know. How does any of that sit with you, Moses? Any follow-ups?
[00:05:57] Moses: It's just, we're talking about pretty big decisions. I am trying to collect information, collect viewpoints, and try to assess what my options are. I'm not in a rush since I started this lease. I don't like to waste money. I'm trying to think ahead for what do I do when this lease is up?
[00:06:19] Matt: You got where you are by not wasting money. That's a good characteristic. The thing that you can think about is if you can calculate that opportunity cost between what you could do in cash and this, you can almost think of that as a flexibility premium. What's it worth to have $200,000 in cash versus a house? On the one hand, especially in this environment, the cash is losing ground to inflation. On the other hand, owning a house at the wrong time can be something quite a bit less than a blessing can make it really hard to execute the things that you want.
Then, the last thing is assuming that the house that you're going to buy for this will not be your forever home, you're also baking in the cake, another move, unless you make this thing a rental, which maybe it would be perfect for that. To the extent that you're going to require at least a move and maybe a move and a house transaction in order to get the equity back out of it. There are some pretty significant costs, both personally and financially, in planning for an extra move.
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[00:07:24] Matt: William, I'm glad you can also be here with us today. What questions do you have for me?
[00:07:29] William: Thanks for taking my call.
[00:07:31]Matt: Totally.
[00:07:31] William: First-time caller, longtime listener.
[00:07:34]Matt: [laughs] You've been waiting your whole life to say that.
[00:07:36] William: I have. [chuckles] My question is, I'm trying to think through the implications or ideas of asking my employer for me to work less hours for less money. Essentially, I am a fairly well-paid tech worker. I make more money than I have time. I would love to be able to adjust that exchange rate. At the end of the day, I have a lot of flexibility. For the most part, I have to be in front of my computer 40 hours a week. I'd love to figure out a way to change that. I know there's a lot of implications to doing something like this.
I feel like right now I'm in a highly sought-after position. I have a lot of flexibility and negotiating power to go to an employer to ask them about something like this. I wanted to pick your mind, get your thoughts on what would be the implications and how to make a compelling offer to my employer?
[00:08:29] Matt: That's a great question. One that's near and dear to my heart. It's a not totally dissimilar change to something that I executed a few years ago. Although, one thing that's interesting is, as I find myself getting deeper into my new profession, some of the time freedom that [chuckles] I discovered a few years ago is coming under pressure. Even if you successfully execute something like that, it's not always perpetual. I guess my first question back to you would be, is there a specific model for this at your employer? Have you seen other people do this successfully?
[00:09:06] William: That's a good question. I have not exactly seen this done by my peers. I have seen my employer emphasizing rework programs where they bring people who have not been in the field to come back. There's an emphasis on a lot of worker flexibility right now. There are considerations for employee sabbaticals and taking off time to take care of family and children. I haven't seen someone do this exactly. I don't know that they would advertise it necessarily.
I think part of this is I don't know that I would want to be a part-time worker. I think it'd be more of a negotiation like I'm going to work 30 hours a week and you can pay me less money. How that would be executed in practice? I'm not sure.
[00:09:49] Matt: All right. I think that one thing that you could consider, and I think this exists, though I can't point you to the exact place, would be whether there are employee forums-- I mean, Glass Door comes immediately to mind but there may be others where you could try to start a conversation around this topic to establish a precedent. If nothing else, that would be helpful to learn whether they've ever said yes to anyone else.
From there, I think that the next thing that you could think about would be how much risk you're willing to take in this ask and so you can game out in some worst-case scenario where they say either they say yes, and this is in fact, a glide path to a layoff at an indeterminate future time or they say no, and now you're looked at as somehow not a team player or something like that.
Always ask yourself, what's the fallback? If you've got a 12-month emergency fund or a 24-month emergency fund, then it's clear to you that, as you said, your skills are in demand in many places in the marketplace. If you didn't work here, then there is some comparable employer that at least it would be no worse than the current thing. Then, that would be something to take into consideration with your ask as well.
Besides all those considerations, I understand that I've not yet come to your question, which is, how would you make this compelling to them? I think that in that regard, it's similar to any other type of requests that you might make or goal that you might have as far as promotion or increase pay. It's constantly demonstrate the value, indicate how you're going to still be available and do the most important parts of your job, but that you want to take, whether it's one full day off per week.
The other thing I would be leery of, for example, would be this coming down to now your responsibility is only to work six hours per day, for example, or something like that, because it's going to be very difficult to manage that in a way that consistently gives you the 10 hours per week off that you want which highlights maybe this can be asked for as 4 10 hour days, something like that.
Then I guess two last other ideas, I'd love to hear your responses back, if there is precedent for sabbaticals, but not for this. The other thing that you could do is try to schedule a sabbatical, whether that's four weeks or eight weeks, and just see how you feel after that maybe you come back rejuvenated and ready to get back in.
The other one, which I think you have to be careful of how you're doing this with integrity, but is to think of yourself as truly self-employed to determine that there is a certain set of tasks or a certain quantum of value that you're going to deliver to your employer, and then just determine that you're going to deliver that amount of value in 30 hours per week and not [chuckles] work the other 10.
Last thing, and I'll be interested to hear any responses from you on all this, would just be to consider whether, in your industry, there's an opportunity to go out on your own. Obviously, that incurs a lot more risk, but you may well be able to exert more control over your schedule, possibly raise your hourly rate if there is a mechanism for you to either work as a consultant to this industry or provide some other service to this industry. Anyway, I thought of all those things though. How do you respond to?
[00:13:29] William: There's a lot there. [chuckles] There's a multifaceted question. One of the last things you were talking about, just in terms of thinking about it, your work in terms of what value you're providing and reducing the time you spend delivering that value. That is something I consider and I think that's probably the most doable aspect of it. I think my company and many in this space would have some core working hours, which are not eight hours a day because you're accommodating different time zones of workers. If I were to just simply block off a couple of hours, on my calendar at the beginning of the end, that would achieve this purpose in some fashion.
I'm not sure that would do it for me mentally on this mental idea of no, I'm only giving my company this much of my time because the rest of it is mine. That's something I have to work out on my own. One other consideration that I had is, I'm given to understand, at some point, you transitioned from a full-time employee to a part-time employee and that triggers perhaps benefit considerations. Is that something you're aware of and is that something I should steer clear of mentioning? Because I would like to keep all my benefits, obviously. That's part of this.
[00:14:46] Matt: Of course, that's discretionary on the part of the company. In general, if employees are regularly expected to work more than 30 hours, then if the company has benefits, then they usually provide those benefits in that situation. You would be correct that if you asked for halftime, that would be more likely to come into play.
Of course, there are also many situations in which employers choose to make their full benefits package available to those who are working limited hours and that just becomes part of the attraction and retention program that they have in place for somebody that they want. I think that, whether you pursue this within the framework of your employer or as a consultant, a step that would be a great one to take no matter what would be to understand the value that you bring to the organization or what you're capable of through your skills training and experience.
Then, to overlay that with those things that you find most enjoyable or congenial in your life, those tasks that sit at the center there are going to be the ones that are both a pleasure to do and also really the things that you're being paid for. Then, whether it's as an independent contractor or a small business owner or whether it's as an employee to the extent that you can put your time into doing the tasks that are in that part of the Venn diagram overlay the best. That's so easy to say, I know that's not easy to do, at least since Genesis 3.
[00:16:24] William: Talk is cheap. [chuckles]
[00:16:26] Matt: Yes, but I still feel like that's the concept that would help you either have the conversation or think about a different approach to your work. If you were going to set yourself up as a consultant, these are the things that you would like to do.
[00:16:42] William: Right, and that's a fair point. I had not considered the consultation approach of essentially saying, I want to be my own boss and I'm going to sell my services back to you. I'll do the same work, but let's change how the pay structure works. Honestly, that might be the most practical approach because there is a precedent for doing-- We have a precedent for hiring contractors. I think that would be a pretty normal thing for the business.
[00:17:06] Matt: The biggest deal there, of course, then for sure, you're providing your own benefits. Secondarily, your tax rate goes up as you're paying both sides of the self-employment tax equation. At that point, usually, it would be good to see something like a 25% to 30% boost to your hourly rate, just to break even in a situation like that, and then, of course, the other thing to remember that while you can potentially now sell your services for a higher rate, could potentially sell it to multiple clients as opposed to a single employer that you're definitely first on the chopping block for any expense reduction or things like that. Employers have whatever degree of loyalty they have to their employees, it may not be very high, but they certainly have a lesser degree of loyalty to their consultants.
[00:17:55] William: Yes. As I mentioned, the hot labor market certainly motivates this question somewhat because I feel pretty confident that I can find employment easily.
[00:18:06] Matt: Yes, and just knowing something about your background professionally, I think that's likely to continue to be the case, but on the other hand, my skills as a prophet are-
[00:18:20] William: In question. [chuckles]
[00:18:20] Matt: -not perfectly developed.
[00:18:22] William: I appreciate your time there on that one.
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[00:18:54] Matt: Makoto, it sounded like you had one more question for us. Go ahead with that.
[00:18:58] Makoto: Yes. A different question. More about investing in investment strategy. It seems like traditional advice, what you see a lot of people say is you should invest most or some people say all in on VTI or a total stock market index in terms of just getting a broad coverage of the whole market, you can never pick winners.
You can't be actively managed funds of professional traders, but I've heard recently some people talk about, I don't know if it's correctly called the barbell strategy or this idea of it's almost contrary or opposite of what people say. I'll just put everything into a VTI, but that you have concentrations on very conservative investments, and then a large concentration on something that is more higher risk, potentially a higher return. Then, you have less in the middle section. I don't know if I'm making sense with my question?
[00:20:07] Matt: Yes. It's an interesting question. I think the term barbell strategy is used to describe different things. A lot of times, in financial planning, that's used to describe having a large bucket of either cash or very short-term bonds that a retiree is going to draw from for the first several years of retirement so that you can minimize what's called 'sequence of return risks.'
Normally, in traditional equity investments like VTI or globally diversified equity portfolios like I managed for my clients, the idea there is if these diversified equity portfolios do very badly or very volatilely during the first portion of retirement, that doesn't matter. You're just going to be spending this cash or very short-term bonds for that period of time anyway and give the stocks a chance to recover or to see the volatility come back down so that you're not selling it on advantageous times.
It can also refer to, what you said, having perhaps very conservative bond investments on one side, and then selected high-risk investments on the other and maybe what that means is that, in some sense, you're thinking of your diversified global equities as the conservative portion of your portfolio and then you're trying to pick these winners on the other side.
Just a couple of things there. The first thing is, like I said to Rowan earlier, you have to have an investment thesis for finding these particular investments. You have to develop a valuation for them based on some theory that you have about those investments. Then, you have to actually acquire them and be successful with them. At least some of the time where you'll see this applied is by VCs, their idea they're going to back 10 companies and they think that 8 are going to fail out. The 9th would be a break-even and they're hoping that the 10th will offer a big return that will more than make up for their losses on the 8. Maybe it's viable in a very unique and shallow market like the venture capital world.
I would be a lot less certain that you could do it by picking and investing in single stocks. It's also different if you can do it the way Warren buffet did it, which was typically either acquiring whole firms or at least acquiring sufficient interest in whole firms to basically control the board. If you can take over a firm and direct the management of it, then maybe you can do something amazing, but what you're doing there is implementing business skill alongside your investment skill.
The last thing, again, would maybe relate back to that investing budget that I was talking with Rowan about, which is the idea that if you want to try to swing for the fences and if you have some particular investment thesis, if you want to dedicate 5% to 10% of your portfolio to these very risky bets in a hope that you find something special there, then maybe that's okay. As long as you understand that it might mean that your lifestyle is either 10% lower or that you need to save 10% more in the other part of your portfolio in order to achieve whatever the income that you think you need from your portfolio is in the future. That's how I think about that.
[00:23:48] Makoto: That sounds good. I'm a big fan of J. L. Collins' The Simple Path to Wealth. I'm definitely a subscriber to just keeping things simple and you can't time predict the market. When I hear about these different ideas, I'm always curious to know how other people think about it so appreciate your thoughts.
[00:24:13] Matt: Sure. I just say to people all the time good investing is boring investing. The corollary to that is money comes too hard to waste it. The last thing I would say is if you're the person for whom this advice does not apply, then you're not going to listen to me anyway. I'm not the voice.
Warren Buffett is not calling me for advice and he shouldn't be, but what I have to share is applicable for the vast majority of savers and investors. It's the way that I invest my own money. It's just as Jim Collins named his book, it's The Simple Path to Wealth and it's boring and it respects the fact that money comes hard and goes easy. We have a calling to be good stewards of that to help ourselves and others.
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[00:25:12] Matt: Thanks for joining my callers and me on this Q&A show. If you'd like the chance to ask your questions in the future, go to workpantsfinance.com/resources to sign up. This Friday, I release an interview with Jay Money loaded with down-to-earth stories from his journey in internet entrepreneurship including trying a lot of stuff and learning things he doesn't like. Until then, this is Matt Miner encouraging you to make a financial plan that works as hard as you do.
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[00:25:40] Voice Over: Matt Miner is a fee-only fiduciary financial advisor and founder and CEO of Miner Wealth Management, a North Carolina registered investment advisor for Matt provides personalized unconflicted advice to clients for a fee. He's also my dad so please be nice when you talk to him. Matt is a certified financial planner professional and holds a Series 65 securities license. He earned his bachelor's degree in finance from Arizona State University. His MBA from Duke University's Fuqua School of Business.
Work Pants Finance is Matt's financial media business where he talks about work entrepreneurship, kids and money, taxes, investing in other personal finance topics. Workpantsfinance.com exists to share wisdom and provide general financial information. It is not financial tax or legal advice. You are an individual and probably need personal advice for your specific situation. You should consider building relationships with helpful, caring, and competent professionals who understand your unique context can provide advice that is tailored to your needs.
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