Financial Firsts
11/29/19 - Even as an adult, big decisions that involve money can provoke anxiety, uncertainty and seem so far away and inaccessible. In this episode, we demystify two big adult money moves: buying a home and investing money. Real estate agent Aiesha Bailey Mannle and financial expert Paco de Leon help guide us.
Transcript below.
Listen on Apple Podcasts | Stitcher | Overcast | Pocket Casts | Spotify.
CREDITS
Producer: Gina Delvac
Hosts: Aminatou Sow & Ann Friedman
Theme song: Call Your Girlfriend by Robyn
Composer: Carolyn Pennypacker Riggs.
Associate Producer: Jordan Bailey
Visual Creative Director: Kenesha Sneed
Merch Director: Caroline Knowles
Editorial Assistant: Laura Bertocci
Design Assistant: Brijae Morris
Ad sales: Midroll
Photo credit: AAG (cc by-sa)
LINKS
Real Estate
Aiesha Bailey Mannle real estate
Aiesha’s tips:
contact your lender to see what kind of loan you qualify for
make sure you’re on the same page as your real estate agent
spend some time considering your emotions and assumptions about where you’ll live
think about where your friends live if you’re looking to buy in a further neighborhood
consider income-earning housing like a duplex
Investing
Paco’s newsletter
Financial education course
If you have an employer-sponsored 401k or 403b you can contact your plan representative to learn about your options
Traditional brokerage firms include: Vanguard, Schwab, Fidelity
Robo-investing companies include: Aspiration, Betterment, Wealthfront
Compounding interest is your friend
It’s worth it to start saving once you have your emergency fund (3-6 months of cash) and retirement in progress, even if you can only put away $5 per month
TRANSCRIPT:
[Ads]
(0:40)
Aminatou: Welcome to Call Your Girlfriend.
Ann: A podcast for long-distance besties everywhere.
Aminatou: I'm Aminatou Sow.
Ann: And I'm Ann Friedman.
Aminatou: What're we talking about today?
Ann: Money, money, money.
Aminatou: [Laughs]
Ann: I mean would you characterize it differently?
Aminatou: I mean when are we not talking about money on this show? Subtext. [Laughs]
Ann: It's true. Money changes everything. Shout-out to you Prince and Cyndi Lauper. Money underpins everything we talk about.
Aminatou: I also -- this is making me think about for some unfortunate research reason we went and read some of our iTunes comments recently, a thing that in the five years that we've done this podcast I had never done before. There is one comment that it was not the best comment but it was spicy, it made me laugh. It was somebody who said now that we're rich we're out of touch. [Laughs] I was like first of all I am not rich. Maybe out of touch. But also the reason it made me laugh is we continuously talk about money to be more transparent about what money means and how emotional it is for so many people.
Ann: And how the show makes money.
Aminatou: And how the show makes money or whatever. I'm like I'm doing this for transparency's sake so it is very LOL to me that someone is like ugh, she's just talking about money because she's a rich bitch now. I'm like inshallah one day. And when that day comes I will not be doing this podcast. Just kidding, I will always talk about money. But, you know, it's like it makes people uncomfortable.
(2:05)
Ann: Right. Right, and I also think that there is no way to talk about money without exposing yourself to criticism. No matter how you talk about it, no matter who you are, I think some people come in for more criticism than others. But I don't know, we are here to just continue . . . we're here to continue talking about it.
Aminatou: We are. I'm fascinated by money, like amounts, things you can accumulate, access, the whole thing. So I'm actually super-excited about today's show because it's about some very real concrete stuff that we've danced around but never actually addressed.
Ann: Right. On our agenda today we're talking about some big financial firsts including buying your first home and investing 101.
[Theme Song]
(3:14)
Ann: Our first guest is a friend to you and me, a person we wanted to have on this show for a long time. Aiesha Bailey Mannle is a real estate agent and designer who lives in Los Angeles. What else do we have to say about Aiesha?
Aminatou: 100% the person who I want to sell me a house when I'm ready to buy a house. I don't care what planet it's on, what like . . .
Ann: I love how she's going into intergalactic real estate. [Laughs]
Aminatou: Oh no, she is. When I buy my Venus home she is going to be there bringing the sign home with me. You know, but also someone who is -- like I am so stupid about home ownership. Like truly I still barely understand it. It seems like a . . . I don't like owning anything that is bigger or more expensive than my computer for emotional reasons and so just knowing that there's someone in the friend family that knows so much but also can talk about it in a way that is both knowledgeable and acknowledge that it's also an emotional decision that people make I think is something that for me was new, because I always think about real estate agents as either grimy people on Bravo shows . . .
Ann: Wow. [Laughs]
(4:20)
Aminatou: Or just, you know, former Miss South Carolinas who become real estate agents.
Ann: Like a face on a bus bench kind of, yeah.
Aminatou: Right. And so just, you know, I think really thinking about oh no, this is a real job and people who do real things and there are people who care a lot about how buying a home -- like what it signals and what it means and also how it can change a neighborhood or it can change a city and all of the implications that come with home ownership from the money aspect to the gentrification aspect to the you name it we're here. It's something that that's very heartening to me that there are people who sell homes who think about that because if you read a lot of stories in the news about home ownership a lot of people are being exploited out there and most of the people are people of color.
Ann: Yeah. And I will say this about Aiesha too and also just to prepare you to listen to the conversation that she and I had, you can kind of Google "Oh, I'm buying my first home. What does my credit score need to be?" Or you can find a calculator for what kind of mortgage loan you're going to be able to get or something like that. But the questions that you have to ask yourself about where you want to live, about negotiating the buying process with not only your realtor who you're probably going to have but also if you do have a partner you're buying with the complications that arise there, Aiesha is really good at the kind of like okay, yeah, you've done the first page of Google results on how to buy a home and we're going to go deeper than that with what you really need to know.
Aminatou: Right, right. I'm excited to listen to this one Ann.
[Interview Ends]
(0:55)
Ann: Aiesha welcome to Call Your Girlfriend.
Aiesha: Thank you. I'm so excited to be on.
Ann: Oh my god, it is such a thrill when you know that your friends are experts then you can tap that expertise for the fucking podcast. I'm so excited to have you here. Okay, so today we're talking about buying your first home.
Aiesha: Yeah, it's a big deal.
Ann: It's a big deal. I wonder if you could start out with the sorts of things a person should be thinking about before they even get to that I'm shopping for a home stage. Before you get all excited and download Zillow what are the criteria you should probably meet before you think about becoming a homeowner?
Aiesha: Yeah, you know, the fun part is the looking part because it's like who doesn't want to look at pretty homes? It's very exciting. The homework I always advise my clients where to start is to contact a lender and kind of really establish your budget.
Ann: So like call your bank basically.
Aiesha: Yeah, you can call your bank. There's private lenders who offer a plethora of different loan programs that you might want to talk to, so I think there needs to be a bit of research there. Sometimes your bank's the first place to start. You already have an established relationship with them and they see your credit, they see your debt. They see all of that stuff. They see your insides. [Laughter] And so they can kind of, you know, kind of sum up what kind of interest rate or loan program they can offer you so I think that's a great start.
Before you even start to look at neighborhoods and homes I would figure out your budget because you're pretty much just window shopping with a credit card that may not be able to afford . . . yeah.
Ann: Declined. Yeah. [Laughs]
Aiesha: Yeah, it will decline. That embarrassing moment, you don't want to be caught in a situation like that.
Ann: Totally. And what about like -- I'm someone who when I get a notion that I'm going to own a house in the near future I will use one of those online calculators that will tell you what your price range is. That is not like an expert at a bank. Are those bullshit?
(7:52)
Aiesha: For the most part they are because by the time . . .
Ann: Dang it.
Aiesha: I know, I know. They kind -- you know, it's kind of like What to Expect When Expecting. So it's not like a really accurate guide.
Ann: It's like an average or something, yeah.
Aiesha: Yeah, just like an average and then your interest rates will be affected by your FICO score. So unless you know exactly what that is. Also your reserves which is what you have in the bank, your down payment. That will all factor into what you'll end up getting as your interest rate and what will be your mortgage. So it's kind of hard to just go based off of that but it gives you a general idea.
Ann: Right. But I should basically just go to some kind of financial institution and actually ask? Okay.
Aiesha: Yeah, and let them pull your credit and give you a pre-approval. I do not advise my client to even start looking until they're pre-approved because they're just kind of wandering without any kind of boundaries and that doesn't always help people. Maybe there's a neighborhood you want to buy into and you can't afford it and you need to kind of know that and manage your expectations and go hey, I'm not willing to pay X amount of dollars to live in said neighborhood and that gets shut down and that makes the search so much easier. It kind of opens your eyes and kind of guides you to places you didn't think you were going to end up in.
Ann: Right. And what about other factors that go into being ready to own a home? Like outside the pure financial.
Aiesha: Okay, that's a really good question. Obviously we're going to look at your finances to see if you're financially ready but there's also an emotional and psychological component. Home ownership's kind of been talked about and it's a certain . . . it represents a certain level of achievement. It also is going to take you down a road because you're dealing with like your shelter at a very like basic level.
Ann: Right, your refuge. Yeah.
Aiesha: Yes, it's like a big -- and it's also a big statement and it costs a lot of money. You know, especially where we reside it's expensive.
Ann: We live in one of the most expensive cities in America, yeah.
(9:50)
Aiesha: Yes. So all of that comes into play and kind of how you envision yourself and, you know, where your friends gather and where you can possibly start a family or start a community. So all of that kind of factors in. That's something you need to be prepared for too. And also the time commitment. It's a full-time job you know?
Ann: And not just for you. [Laughs]
Aiesha: No, not just for you. If you have a partner you're going to be spending a lot of time with your realtor. All of a sudden you're making new friends and you're possibly in your 30s or 40s which is like your realtor and you're spending a lot of time talking to your lender and settling your property. So being kind of emotionally ready for that, and also the investment aspect of it. You've possibly saved all this money and now that money is being transferred from this very safe place to this place that you're not sure.
Ann: Right, it's risky. Yeah.
Aiesha: Yeah, it feels like a risk. So I think having a talk with yourself about that is a great way to kind of prepare yourself emotionally for that journey.
Ann: Yeah. You know, also just like benefits of being your friend, I get to hear you talk a lot about the ways that people haven't really thought that much about their practical everyday needs in a home right?
Aiesha: yes.
Ann: There's sort of like this vision board version of your home.
Aiesha: Yeah.
Ann: Capital Y, capital H, Your Home.
Aiesha: Yeah.
Ann: But then there's also practically how are you going to use the space? And I wonder if you have questions or things that you talk to your clients with right when you start working with them that are about those types of things. You mentioned having kids or entertaining or those types of questions.
Aiesha: Yeah, it's funny that you said that. I had some friend clients and we were looking for a home and I kept saying "Oh, is there a tub? Is there a tub? Because babies poo a lot so you're going to need a tub or a big sink." I'm like "Is there a farm sink?" And he's like "Why do you keep mentioning that?" He'll know who I'm talking about.
Ann: [Laughs]
(11:50)
Aiesha: We were kind of talking about family planning so like just having a shower wasn't going to necessarily work for us because of the five-year plan and the location that they were purchasing in, it wasn't going to work in that sense. But yeah, initially when I meet someone I either meet them for coffee or I go to their home to kind of get an understanding of their style and their vibe and then we go down the list of must-haves. And whether it's going to be their primary residence or it's going to be an investment property I always like to come back to is it a place that you'll live in? If you lose everything will you call this place home? And I usually don't like to sell to first-time homebuyers a place that they're not going to inhabit because they don't really have the expertise and the emotional maturity to kind of deal with something like that and I think it's just safer.
But room count, is it going to be okay if mom and dad come visit? Do you have an animal? How important is how walkable is the neighborhood? Parking which comes up a lot. A lot of homes in certain price points parking is not included or it's street parking. Also a big one is where do your friends live? Because if you find a house for instance in El Sereno and your people are on the west side that's a shift and changes the dynamic a bit.
Ann: Right. For people who don't know LA geography that is like other side of the moon.
Aiesha: Yeah. [Laughs] Talking about the west side in general, I'm like I don't have any friends in Venice.
Ann: We don't go there.
Aiesha: Yeah, we don't go there. [Laughs] Unless there's a good sale, maybe an estate sale will like . . . even then.
Ann: The beach, you know? But yeah.
Aiesha: Yeah.
Ann: It's vacation. It's not like part of my everyday life.
Aiesha: Yeah, it's a commitment so you kind of want to factor all those things in. Schools. We talk about if somebody's planning . . . I hate to get like -- I don't want to ask people when they're having kids but it comes up.
Ann: It's a factor.
Aiesha: It is a factor. If you're single, if you're -- all those things kind of . . . if you're single and you're like hey, I'm happy, maybe we start you off in a smaller home. All those things I try to go down that list to get a real understanding of where they could be happy for the next five years at least.
(14:05)
Ann: Right, and that was my next question because I think I get hung up sometimes on being like okay, in 50 years am I going to want to live . . .
Aiesha: Yeah, yeah.
Ann: When my parents moved into the house they owned now my dad was like "They're taking me out of here in a box."
Aiesha: Oh yeah, yeah.
Ann: You know, I come from people who are like we just stay put.
Aiesha: It's my forever home, yeah.
Ann: Exactly. And, you know, to hear you say like five years what is the rough time estimate that you give people?
Aiesha: Well most people think that they're going to move sooner than they are so I take that in but I don't use that as my guide. I'm like okay, what can they kind of grow into? So whether it's like . . . we look at things with a big lot size where we could possibly add like ADU or . . .
Ann: What's ADU?
Aiesha: It's an accessory dwelling unit.
Ann: Oh yeah, so like a little in-law . . .
Aiesha: Yeah, like -- so maybe or parents live out of town. Like I try to factor all those things in, like how do we if the market continues to go up the way it is how do I protect these people and allow them to grow in this hold if we can't afford the trade-up?
Ann: Yeah.
Aiesha: So I try to factor those in like room size all within budget. I think you should buy a place that you're okay staying in for at least five to ten years because it just usually, unless something really big happens in your life financially, a lot of times it's kind of . . . even if you have equity it's a little hard to trade up and stay in the same neighborhood. So if you're okay . . .
Ann: Without really uprooting your life, yeah.
Aiesha: Yes. So it's like if you're okay with Silver Lake for instance, if you bought a house here 20 years ago, even if you sell it everything else has gone up so you might have to move to Altadena to get what you want. So I try to be honest about that.
Ann: Right.
Aiesha: Unless you hit the Lotto.
Ann: Unless you hit the lottery, right.
(15:45)
Aiesha: Or sell an app or something.
Ann: At which point your questions in life are totally different.
Aiesha: Oh yeah, very different. You're like "Can I get a yacht?" [Laughs]
Ann: Yeah, exactly. Buying your first yacht is a different episode.
Aiesha: Which is like a whole -- I have an opinion on that. I was like okay, ridiculous.
Ann: So what should our listeners look for in a realtor?
Aiesha: Someone that their name starts with an A.
Ann: I only go with people whose names end in esha.
Aiesha: Esha, yeah. There's not a lot of us.
Ann: Start with A and end in esha.
Aiesha: Esha. So I think experience doesn't always show itself in age. I'm not just saying that because of my age. But I think someone should really research the reviews of the agent. You can also see their transactions and see like what type of homes they sell, where they sell homes, and see if you kind of vibe with what they do.
Ann: Is that on Zillow or something?
Aiesha: Yes.
Ann: Okay.
Aiesha: You should be able to see everything they do. I think sometimes a big mistake that happens is you get referred someone from grandma and grandpa who is great, you're looking for loyalty and you're looking for a fighter. You want someone who's going to have your best interests. But they might be out of touch in that area or an out-of-area agency. So you want to make sure that where you're looking that that person's actually active. I think you should meet with them and see if you connect because you're going to be spending most of your -- tell your friends bye-bye. You'll be hanging out with your realtor on the weekends and doing private showings and texting them and talking to them and emailing them so you just want to make sure there's a connection and you can communicate your wants and needs to them effectively so I think that really kind of matters.
You know, you want someone who's going to fight for you because things come up in these transactions that require someone who's not afraid of pissing people off at times, especially if you're the buyer's agent and so you want someone who's not going to -- who's going to make sure you're number one.
Ann: Yeah, who's going to prioritize you.
Aiesha: Yes absolutely.
Ann: Yeah. I'm not quite sure how to ask about this but I know it's something that you think about a lot and we've talked about which is that a lot of times when people are maybe buying a first home they are in a position of potentially being a gentrifier.
Aiesha: Oh yes.
(18:00)
Ann: Or the options they have for where they would like to live might come with some uneasy realities in terms of what their entrance as a homeowner in that neighborhood really represents. And I'm curious about how you think through some of those questions both openly with your clients like in conversation if they express they want to talk about it and also how you think about it as a person of like power and resources in this industry.
Aiesha: Yeah, that's actually a really good question. It obviously comes up a lot because of the cost of living and how expensive certain neighborhoods are. Part of the issue of gentrification I feel is this kind of -- I think it's the way you enter the neighborhood that can be offensive. It's like you kind of show up. You bought something. You feel like you technically own it and so you feel like you sometimes own part of that community and you don't.
Ann: Ah.
Aiesha: So I think people need to tread lightly and be respectful because prior to you thinking that neighborhood was cool you don't know what everyone's gone through that lived there. It was talked about or kind of dismissed or degraded in a way so now it's hot so everyone's cool and they're all kind of running to it. But I try to have real conversations with my clients about their letters or the way they express themselves when talking about these properties or these neighborhoods.
Ann: What do you mean letters? I don't know what that is.
Aiesha: So a lot of times when someone wants to buy a house they'll write a letter kind of introducing themselves to the owner. And the realtor, they send it to me and I include it in their offer to the listing agent. And it's kind of interesting, the verbiage. So there has to be conversations about that at times whether it's you're buying in a predominantly black neighborhood and you're talking about safety or just there's ways to kind of have a bigger conversation or me kind of preparing them. Like hey, if you're moving to a certain neighborhood you might hear this kind of music or these might be kind of behaviors you're used to. You need to just deal with it and just watch yourself, you know? And kind of be grateful that you're accepted.
(20:10)
Ann: Right. Don't stomp through like you own the community just because you bought a piece of property.
Aiesha: Yes, and I think a lot of people kind of have that mentality so I have those conversations frequently with clients. Yeah.
Ann: And finally, I think this is maybe a semi-controversial question because this is your business. This is your line of work.
Aiesha: Yes.
Ann: But should home ownership even be a goal for everyone listening to this or every American?
Aiesha: I know it feels like you're almost at the door and you can't quite push it open because wages are stagnant and costs of living has increased in a crazy . . . but when you look at it historically most wealth is generated through land ownership, property ownership. So in that sense if we're really talking about acquiring wealth it kind of goes hand-in-hand.
Ann: Right, and the kind of generational wealth that some people have been shut out of systematically in this country. Yeah.
Aiesha: Yes. So that's directly connected. And the bigger theme is what you're losing out by renting. I know it feels safe to certain people but it's really not safe. Yes you take out a mortgage for possibly 30 years. There's an end date. With renting there isn't an end date. And even though there's rules and regulations in regards to renting you really don't have any rights and if the neighborhood goes up or the property appreciates you're just now someone who they kind of want out so they can increase the rent and put someone new in there. So you kind of get left behind. You don't really have anything to pass on. There's nothing really tangible.
(21:50)
So I think when people realize what they're losing by renting then home ownership really makes a lot of sense. It feels like some -- yes, it's not a blood oath. You don't have to do it forever. Your circumstances change. You can always rent it or sell it. There feels like a way out. With renting it doesn't always feel that way. But I also understand that it feels like there's a big hurdle to go from being a renter to a home owner.
Ann: Yeah, and there is a big hurdle in cities like ours. Yeah.
Aiesha: Yeah, there is a big hurdle and I don't think everyone's kind of sharing all the information that can kind of make that hurdle not feel so big, whether that's buying a duplex for your first home and renting out half of it and that's still considered a single-family residence if it's your primary.
Ann: Ooh, hot tip, buy a duplex for your first home.
Aiesha: Yes, have someone help you pay your mortgage. So there's a lot of it that may not be as sexy in a way and give you the kind of independence you want but when things start to shift you don't want sexy, you want reliable. [Laughter] Like yeah, it's really nice you want your own private patio but I need someone to help me pay for that and maybe your tenant can. So there's tips like that. But just overall like I'm not coming up with some new concept to say hey, home ownership kind of goes hand-in-hand with generating wealth. It's kind of a proven fact.
Ann: Yeah.
Aiesha: And the sooner you can . . . in a smart way. Not just like you live in Los Angeles and you're going to go buy a house in Arizona that you know nothing about, you know no research. But like a thoughtful purchase and really treating it like an investment I think is something that people should buy into.
Ann: Ugh, we love a real estate queen.
Aiesha: Thank you. [Laughter] You can find me at my website baileymannlehomes.com. You can see all the work I do and there's email so if anyone has any questions or wants to follow-up that's where I can be found.
Ann: Aiesha thanks so much for being on CYG.
Aiesha: Thank you.
[Interview Ends]
Aminatou: Wow. One more step emotionally closer to home ownership. Financially who knows? [Laughs]
Ann: Oh my god.
[Ads]
(26:50)
Ann: Our next guest is also really great at thinking holistically and offering advice about financial matters beyond just the like first page of the Google results. I think I became familiar with Paco de Leon's work because you turned me onto it.
Aminatou: 100%. I am such an evangelist for Paco's newsletter which is usually whenever there's any kind of inbox -- email in my inbox that has to do with money, whether it's a newsletter of someone I don't know or my own accountant writing me -- my blood pressure just immediately rises and this newsletter does the exact opposite of that. It's like money Xanax.
Ann: The newsletter is called Hell Yeah and Paco is the founder of the Hell Yeah Group, a financial firm focused on inspiring people to be engaged with their finances. So like opening that email, like you're already doing the work Paco. The fact that you want to open the email is like it's working.
(27:45)
Aminatou: Yeah, another interview I'm excited to listen to.
Ann: Yeah, so here's me and Paco.
[Interview Starts]
Ann: Paco welcome to Call Your Girlfriend.
Paco: Thank you so much for having me.
Ann: So the big adult first we're going to be talking about today is first investment.
Paco: Exciting, exciting stuff. I bet you a bunch of people jumped out of bed this morning and said "Oh my god, I cannot wait to examine my 401k options." So I'm glad to be here to help facilitate that.
Ann: Okay, that's true but maybe they did leap out of bed and think I cannot wait to get more money. [Laughs]
Paco: Yes, doing kind of nothing.
Ann: Okay, so you're selling it. You're selling it already. Where should one begin? Let's say I have a little money that I am not needing to live on and I want to put it to work for me by investing it in someone else's business.
Paco: So you've got a couple of options. I would say the most common first option and first way that people invest is by participating in an employer-sponsored 401k plan or if you work for a non-profit or something like that or if you're a teacher often they're called 403b plans. All of these names are incredibly creative and exciting and they correspond to the place in the tax code where the rules are so that's why they're called those. If you don't have an employer-sponsored plan you can contribute to what's called an individual retirement account also known as an IRA. You have to have earned income in order to do that. And all of . . .
Ann: What does that mean?
Paco: Earned income means you have to earn income in some way, shape or form.
Ann: Hey!
Paco: Yeah, you can also do -- we're already getting down to the weeds right now. So all these accounts are forced retirement, forced saving accounts for you in the future. Just imagine your cute, old, adorable, shorter, shrunken, cute self and care about your old, adorable, cute self. That's what these plans are for. There's all these rules about how much you can contribute and when you can pull the money out. That's basically because the government doesn't want to have to take care of you when you're old. They don't want to . . . [Laughter]
(30:02)
Ann: Interesting, the government doesn't want to take care of people. Interesting.
Paco: I know you're shocked by this information. So they create incentives by creating all these laws. That's the real boring, dry everybody should start investing at age 18 answer. And if you're already like "I'm awesome Paco and I already contribute. I max out my 401k. I'm amazing and I have an IRA." The other thing you can do is just go into the risky, risky market by opening what's called a brokerage account.
Ann: Okay wait, can I pause you right there?
Paco: Absolutely.
Ann: [Laughs] I'm like this is 101, okay?
Paco: Yeah.
Ann: So say for example that I am on staff somewhere and I -- there is a 401k program through my employer but I am feeling like, you know, I want to be a little more active or step it up. Is that something I should be contacting my HR department -- how would I usually go about that if I might already have something but I'm looking to kind of be more active?
Paco: Yes. I would start with your HR department and what usually happens is all 401k plans have somebody who is in charge of them called the -- it's probably just the financial adviser, and the HR person will generally direct you to that person. And you can call that person.
Ann: What?
Paco: Yeah. And they don't want you to call them usually because they're like -- as somebody who has worked in financial planning and has worked for people who have managed 401k plans it's the easiest money there is for advisers. You just show up every quarter, sit down, answer some questions, and roll some people into a 401k plan and then collect your checks and say goodbye. But every once in a while somebody will call and we're like "Who the hell are you and what do you actually want? You want to talk about your plan options? Oh, you're making me work for this." So you can actually call that person and you can discuss what your plan options are. Full disclosure I am not a financial adviser who gives investment advice therefore this is not investment advice.
Ann: Right, it's the meta, kind of how to go about it. Yeah.
(32:00)
Paco: How to go about it, yes. But generally speaking most people just need to invest into what we call a target date fund and a target date fund is basically a portfolio that is already allocated for the amount of risk that you should take. Stay awake Ann. I know it's boring. It's boring. [Laughs]
Ann: Uh, as soon as you used the words "allocated risk" I fell asleep immediately.
Paco: Let's use an analogy. So think about risk as like spiciness and think about your portfolio, like the amount of money that you're investing, as a dish of food. And the older you get the less spicy your tolerance is. You have to take on less risk. With a target date fund or a target -- yeah, it is called a target date fund plan -- all you do is you invest money over time. As you're employed you put money with every paycheck and it rebalances itself. So it goes from spicy when you're young and over time it just gets bland and less spicy. It's called set it and forget it. You don't have to worry about it.
Ann: Ooh, now that is a phrase I like. [Laughter] Okay, so that is sort of if I want to be a bit more attuned to where I might already be invested through my employer in my retirement fund.
Paco: Sure.
Ann: And then you were about to launch into but if you want to kind of go it alone.
Paco: Yes. Not if you want to go it alone. It's if you want -- I mean you can go it alone. You can go to vanguard.com, open up a Vanguard account, and you can buy an ETF and invest your money that way. There's people who enjoy that level of nerding out. But this is something you can do in addition to retirement.
Ann: Okay.
Paco: So in a perfect world everybody gets paid enough money to save for the future and they're saving for retirement and they're maxing it out.
Ann: You're laughing at my facial expression where I'm just nodding sadly about the fact that this is not true in the United States of America right now. Yeah.
(33:52)
Paco: Right. And you're maxing out your retirement and you feel great and you feel good about your cute, adorable, old, shriveling self in the future and you're like wow I also -- but I've already saved enough in my emergency fund which is three to six months of cash that you have on hand. I have extra money because I'm amazing. And where could I put it? And you could put that in what's called a brokerage account.
Ann: Okay.
Paco: And a brokerage account is basically like -- it's like a bank account but instead of just putting cash inside of it you first put cash inside of it then you use the cash to buy stocks or bonds or mutual funds or what are called ETFs.
Ann: Okay, my head is spinning already.
Paco: Can we back it up?
Ann: I would love that.
Paco: Okay, let's talk about why one would invest.
Ann: Oh great. I knew there was a reason we had you, a learned expert, on the show.
Paco: Why the hell would anyone invest?
Ann: When I could just put my money in a mattress.
Paco: Yes. So there's this thing called inflation. Inflation is when the cost of things go up over time. So everyone call their mom this weekend and say "Mom, how much was your lunch at school growing up? How much was a bag of chips? How much was gas when you first started driving?" Or think for yourself, hey, what does gas cost today and what did it cost when I got my driver's license? What did lunch cost for me growing up and what does it cost for my kids now? And you'll see that the price of things goes up over time.
So if you think about retirement and let's say you retire in a perfect world, you retire like at 67 and in a perfect world you're like 80-something when you kick the bucket, that's 20 years of money that you need to have saved up to help you live.
Ann: Yeah.
Paco: And if you just kept all that money in cash it just won't be worth that much over time. So if you put $100,000 in a mattress when you're 23 years old and you try to go and tap it when you're 67 years old it's just going to buy you less things.
Ann: One month's rent. [Laughs]
Paco: Exactly. A week of college.
Ann: Ugh, yes.
(35:52)
Paco: So you want to invest because what happens is when you put your money in the market the market is supposed to do well right? Generally what happens is it goes up and it goes down. But the general trend over long periods of time is it slowly goes up and your money then keeps apace or grows faster than inflation.
Ann: Right, which is why you can set it and forget it.
Paco: Exactly.
Ann: Got it.
Paco: So let's say inflation grows at, I don't know, 1 to 3 percent. Your return on your money is between 3 to 6 percent. So great, we're not losing money over time.
Ann: You're ahead of the mattress. [Laughs]
Paco: There it is. We should call all the experts and say that's the new phrase.
Ann: Aheadofthemattress.biz. As soon as I learn anything about this maybe I'll set that up.
Paco: Awesome.
Ann: Okay wait. So then you stopped me from getting ahead of myself but I was asking okay, let's say I -- as you said I'm doing all the things you described. I'm maxing out my retirement contribution. I've got my savings cushion for what I need in the short term. I'm like I still want to put some more money into the market.
Paco: Yeah, usually you would put it in a brokerage account.
Ann: Okay.
Paco: There are a few platforms that you can go to to open up a brokerage account. The main players are Vanguard. Vanguard is a great main player. Fidelity. Those are the classics. Schwab, another classic. You have some of the new kids on the block, what we call robo investors or robo advisers. Betterment is one of them. Aspiration is a great one.
Ann: Whoa.
Paco: Aspiration, yeah, they are interesting because you invest in their fund. It's all socially responsible investing. There's no fossil fuels and no weird we hate mother earth types of things to invest in. So if that's what you're looking for Aspiration is great.
Ann: Can I pause you there and ask you a question about that?
Paco: Absolutely.
Ann: Is that usually associated with a lower return on your investment if you're going socially responsible?
(37:48)
Paco: Historically I would say it used to but that has then since changed. I mean it's really pretty obvious what's going on and a lot of millennials are inheriting their parents' wealth, one, and two, the baby boomer's wealth, are actually using their money to vote. Are starting to make a change and really change the tide.
So I come from financial planning and wealth management and I remember this had to be maybe 2010 and I remember talking to some your clients and they're like we want to do socially responsible investing. And I'm like the junior on the team, right? We have a financial planner meeting with all the senior planners. I'm like "Hey guys, we should probably consider socially responsible investing." Pretty much got laughed out of the room. Everybody's like "Sit down kid. You don't make any money with that. What do we want to do that for?" But yes, long-winded way to say no the returns are not lower. In fact they have been outpacing not socially responsible returns.
Ann: Socially irresponsible. [Laughs]
Paco: Exactly.
Ann: Yeah. You were saying there's robo investors?
Paco: Yes. So Betterment is a great platform. Aspiration is another great platform. Wealthfront is another great platform. One big thing you have to think about is if you're investing money outside of retirement it's hard to figure out how much risk you can take unless you know what the money is for. So if you just have a pile of cash and you're like I'm not really sure then you're not really sure how much risk you can take right? Because if you need it in seven years for a down payment on a house or if you need it in 18 years for a kid's college fund you're going to invest those differently.
Ann: Got it.
Paco: So spend some time thinking about what this excess cash is for. It could also just be supplemental for retirement, so maybe you want to take more risk with it. And then the other thing to really consider is the fees associated. And this is something to consider even with your requirement accounts because gosh, investing is weird because like when you go to the store you look at a bag of chips or a bag of baby carrots and the price is pretty damn clear. But with investing it's super weird. They're like it's 1% of the balance billed every quarter. What the hell does that mean?
Ann: Yeah.
(40:00)
Paco: And it makes sense intellectually I guess if you think about it because if somebody's managing your money and they're telling you how to invest it then they are incentivized to help you grow it because they'll get paid more.
Ann: Right.
Paco: But I would say anything more than a fraction of a percent is going to really have an impact on your returns. So there's some statistics that are very alarming. Something like if you pay 1% of a management fee over something like 20 or 30 years you end up giving up around 27 or 28 percent of your returns.
Ann: Ahh!
Paco: That's crazy right?
Ann: Yeah.
Paco: And depending on how much actual dollars it is, I remember looking at the example and being stunned because it was something like pretty close to the six figures I think of how much you would be giving up in returns.
Ann: And where would you find that percentage? Like let's say I'm trying to decide where -- which robo investor to use or what I'm doing with Vanguard. Where does that percentage live?
Paco: So the thing that I like about robo investors and platforms like Vanguard is generally what you do is you invest in what are called ETFs which are called exchange-traded funds. Exchange-traded funds are -- exchange-traded funds are a way for people to pool their money to get the most bang for their buck without having to pay a bunch of nerdy people sitting at a long table trying to predict and win against the market.
Ann: Okay.
Paco: So you've heard of the S&P 500 or the Dow Jones Industrial 30. You've heard those things on Marketplace. Da-da-da-da, the numbers.
Ann: Literally my primary context for this is that. Thank you, yeah.
Paco: [Laughs] So what they're doing is they're reporting on what we call an index or indices. And an index is just a fancy way of aggregating a bunch of data to put your finger to the pulse in terms of the economy and say like cool, Dow Jones up? Yay, happy face. Dow Jones down, sad music. So the S&P 500 is 500 of the US's strongest companies all lumped together and now we have this number that shows us how the economy is doing.
(42:10)
So before ETFs and before mutual funds, like Wolf of Wall Street style, you would buy individual stocks and bonds which is really, really risky. The one thing all people in the investment world can agree on is we have to diversify, don't put all your eggs in one basket, and the way that they found to do that is through mutual funds and recently the most recent technology is through exchange-traded funds. So they just copy whatever the S&P 500 is investing in. They just copy it so no one is thinking. No one is predicting. If no one is thinking, if no one is predicting, it's going to cost really, really low.
Ann: Oh my god, Pack of Sheep of Wall Street. [Laughs]
Paco: Exactly, exactly, exactly.
Ann: Amazing. That sounds much better than Wolf of Wall Street to me.
Paco: Well yeah. It's definitely if you can't beat them, join them right? Because it's like if you literally can't beat the market just buy the market. If you're investing in the benchmark you'll always be okay.
Ann: Got it.
Paco: Which is like a hilarious way around it.
Ann: Yeah.
Paco: Right?
Ann: It's surprisingly -- we're talking about the literal functioning of capitalism. I'm like oh, it seems so warm, fuzzy and collected. [Laughter] You know, it's a funny thing.
Paco: Oh there's some dark stuff.
Ann: Oh my god.
Paco: There's definitely some dark stuff.
Ann: Tell me more about socially responsible investing. [Laughs]
Paco: Right. Exactly, exactly. So with ETFs you're going to pay a fraction of a percentage and that's pretty much going to be 1) a way to diversify and 2) a way to keep your costs down and keep your returns.
Ann: Okay.
Paco: Yeah.
Ann: So I have like $200 to invest.
Paco: Okay.
Ann: I know I have this thing about a percentage point in my head of I'm not going to go above that. I'm going to go open up -- create a login at one of these robo investors.
Paco: Yep.
Ann: And are my options going to be pretty clear from there?
Paco: Yeah. So with the robo investing platforms they make it really easy to take your money, like in a good way.
Ann: Okay.
(44:00)
Paco: When I was working at the finance firm there would just be a giant stack of papers I would have to touch. Eww.
Ann: I thought you were going to be like a giant stack of money. [Laughs]
Paco: That too. Just like a giant stack of papers and I'd have to figure out how to get 16 signatures from the client to open up this account. And now you just login and it's adorable and it's like beautifully-designed and there's like a graph and the graph is like based on your age and how much money you have and when you told us you want this money here's how you can invest it. So they make it really simple to see what you're invested in. And of course you can override it and say like "Put it all on black" or if you want to temper it you can be more conservative.
Ann: And I know I just kind of picked this number, 200 dollars, out of the air.
Paco: Yeah.
Ann: But is there a number where you're like that's silly. Why would you invest a number that small?
Paco: No.
Ann: Yes! I love hearing this.
Paco: I would say put five dollars in a month if that's all you can afford. Just start now. Because what's really important is to form the habit. Once you have the habit you're like cool, five dollars maybe doesn't really hurt that much. And then you're like whoa, 12 months later there's money here! Then they gave me free money? They email you. They're like "Your dividends of $1.31 have been reinvested." You're like oh crap, that's free money. So I think it motivates people, one, and two, you already formed the habit. So once your income starts to rise you can hopefully invest some of the difference in terms of how much more you're making.
Ann: Amazing.
Paco: Yeah.
Ann: And then what did you say you wanted to get to eventually? Not the why but . . .
Paco: I want to talk about compounding interesting.
Ann: Oh yes. Oh.
Paco: Or just compounding.
Ann: Yeah, let's talk about it.
(45:45)
Paco: Okay. So the reason why you're . . . it's basically the same exact reason why student loan debt can grow into something gnarly is the same reason why your dollars in the market can grow into something big. It's called compounding. And I always like to illustrate this with an example. So here is the example. Ann, I'm going to give you option A and option B.
Ann: Okay.
Paco: Option A is I will give you one million dollars today.
Ann: Okay.
Paco: Option B is I'll give you the balance of a penny doubled over the next 30 days. Which option do you choose? [Hums Jeopardy Theme]
Ann: The balance of a penny?
Paco: Yeah, isn't that -- it's weird.
Ann: I don't even understand. I'm like I'm literally in my head trying to cut a physical penny. I really -- yeah.
Paco: So it sounds like a trick question because it is.
Ann: It does sound like a trick question. Okay.
Paco: So if you take a penny and you double it over 30 days I believe you end up with something just north of five million dollars.
Ann: Okay. Wait, I don't understand. [Laughs] I'm like okay, uh-huh.
Paco: We can link to this.
Ann: Okay, please.
Paco: And it'll show you like a little calendar and it'll show you the balance every day. So one penny doubled is two cents.
Ann: Got it, got it.
Paco: Two cents doubled is four cents. Four cents doubled is eight cents. Then after 30 days it's something insane, millions of dollars. That's not exactly how the market works.
Ann: Right.
Paco: But it's to show you that compounding, it's exponential growth, not like geometric or arithmetic growth. It's huge.
Ann: Got it.
Paco: And it's the same reason why -- it's the same reason why student loan balance can be $60,000 right out of school. You ignore it for many, many years. You look at it and you're like oh crap, this is much bigger than I could've ever imagined.
Ann: I love this frame of thinking about making even a small investment as allowing that principle to work for you rather than against you.
Paco: Yeah. I mean you have to -- all the finance people say start early and save often.
Ann: Yep.
Paco: That's like the phrase. And really it's true, you have to start as early as you can. If you haven't started early it's okay. Start now. Start where you are.
Ann: Today is the earliest day you can start.
Paco: Exactly. Exactly.
Ann: Great. So what snacks do you like?
Paco: I love chips.
Ann: Me too.
(48:00)
Paco: Chips are so delicious. They're processed weirdness.
Ann: Are you a kettle chip? A traditional Lays?
Paco: All of them. I do not discriminate against chips.
Ann: Great.
Paco: I have an open mind.
Ann: What is your number one? Like if I were to send you a thank you gift basket of chips what would your number one chip be?
Paco: Oh my gosh. I think it changes over time. Right now I'm into those tortilla chips from Laguna Beach. I forget what they're called.
Ann: Rusties?
Paco: They look like Rusties but they're not. But I like Rusties.
Ann: Do you like a Casa Sanchez? That's a really good tortilla chip, oh man.
Paco: I don't know if I've had a Casa Sanchez.
Ann: Actually I have a bag that I might send you home with as a thank you. [Laughs]
Paco: Amazing.
Ann: And then lastly where can people find you on the Internet? Find your many musings, your wisdom.
Paco: My wisdom? You can find me at thehellyeahgroup.com. I also have an online DIY personal finance course and you can find that at howtonotfreakoutaboutfinance.com.
Ann: Ugh, you're the best.
Paco: [Laughs] My pleasure.
Ann: Thank you.
Paco: Of course. Thank you.
[Interview Ends]
Aminatou: You know what I really love about Paco's work is that for me it finally bridges that gap of so much financial advice seems that it's like -- one that it's inaccessible for either vocabulary reasons or for weird class like . . . class warfare reasons, and also emotional reasons where you just don't want to go there. And so again I was like oh, here's a real human being who talks about money in real human being terms that I, you know, a dumb about money human being can understand.
Ann: Another real human being. [Laughs]
Aminatou: Right, another real human being can understand. And so I feel like I keep saying this over and over again but I think that this is so important because a lot of this advice is already out there but does it reach the people that it's supposed to reach? No.
(49:50)
Ann: Right. And in terms that they can really engage with and want to engage with. Yeah.
Aminatou: Mm-hmm. And so that makes me happy. Thanks Paco.
Ann: Financial first, demystifying money.
Aminatou: I love it. Let's keep talking about money. It's not bragging to talk about money. We're just all trying to get free together and share a little bit of information with each other. It's all cloaked in so much secrecy and weirdness and also if you're like me and anxious about it it just never feels pleasant and I'm just happy that there's real humans who can tell me how to live my life. Love it.
Ann: Love it. All right, I'll see you on the Internet.
Aminatou: See you at the bank boo-boo. You can find us many places on the Internet: callyourgirlfriend.com, Apple Podcasts, Spotify, Stitcher, we're on all your favorite platforms. Subscribe, rate, review, you know the drill. You can call us back. You can leave a voicemail at 714-681-2943. That's 714-681-CYGF. You can email us at callyrgf@gmail.com. Our theme song is by Robyn, original music composed by Carolyn Pennypacker Riggs. Our logos are by Kenesha Sneed. We're on Instagram and Twitter at @callyrgf where Sophie Carter-Kahn does all of our social. Our associate producer is Jordan Baley and this podcast is produced by Gina Delvac.