Early Retirement Extreme: Can You Really Retire in 5 Years?

How long do you need to work to retire? Fifty years? Forty?

According to Jacob Lund Fisker, you may be able to retire in just five years.

One of the early popularizers of the modern FIRE movement (financial independence, retire early), Fisker published his book “Early Retirement Extreme: A Philosophical and Practical Guide to Financial Independence” (sometimes shortened to ERE) back in 2007. Some adherents have since used its practices to retire young. The concept has plenty going for it, but like all things extreme, it remains a fringe movement.

Before you start preparing for your early retirement, make sure you understand not just the math, but the more nuanced personal finance notions behind financial independence.

Early Retirement Extreme: The Concept

Although Fisker has since said he regrets using the term “early retirement extreme,” his ideas do strike most people as extreme.

His underlying premise: the average person in the developed world can retire in just a few years if they follow a few simple concepts: slash your spending to supercharge your savings rate, and invest that savings to create passive income.

Spend Less, Save More

Plenty of people think of themselves as “frugal.” But Fisker operates on a different level, living on only $7,000 per year.

He never eats out at restaurants, lives in a very inexpensive home, and splits the expenses evenly with his wife. Additionally, he grows some of his own food using a home garden, makes some of his own furniture, and scores free stuff from resources like Freecycle.

Fisker recommends other ways of cutting down costs, like borrowing Kindle books and audiobooks from a digital library rather than buying them on Amazon, and learning how to take advantage of “loss leaders” at grocery stores.

None of these concepts are earth-shattering; many college students apply a number of these methods to save money. Fisker just suggests extending that hyper-frugality a little longer.

By living cheaply and saving as much money as possible, you can retire much faster. It comes at the problem from both angles: you build wealth faster, and you require less replacement income to live on in retirement.

Invest for Passive Income

Saving money is all well and good, but the real magic happens when you invest that money to compound or generate passive income for you. With enough passive income from your investments, you no longer need to work full-time in order to pay your bills. It’s called financial independence (or financial freedom): you can cover your living expenses without a day job.

For example, I’m a real estate investor. I live on a fraction of my income, and save and invest the rest. Some of that savings goes into buying rental properties, which generate ongoing rental income for me each month. With enough rental income, I no longer need a day job — I can go travel the world with my family. (Which I do, spending 10 months of the year overseas.)

Pro tip: If you’ve been thinking about investing in real estate, you can purchase turnkey properties through Roofstock. You can also invest in real estate indirectly through platforms like Fundrise or Groundfloor.


The Math Behind Retiring Early

The concept is simple enough: build passive income streams from your savings, replace your day job. But how does the math look? Can you really retire in five or 10 years?

The short answer: you can, but it takes a (very) high savings rate. And a higher income certainly helps.

But before breaking down the math of early retirement, you need a few foundational concepts.

From Nest Egg to Passive Income

Most people start their retirement planning by asking the wrong question. They ask, “How much money do I need to retire?” when they should ask, “How much passive income do I need in retirement?” From there, you can estimate how much money you need to retire. But it starts with your target retirement income.

Retirees typically withdraw a certain percentage of their nest egg each year to cover their living expenses. They base that percentage on what’s called a safe withdrawal rate, which varies based on how long they need their nest egg to last. If you retire at 75 and only expect to live another 10 to 15 years, you can pull out money much faster than if you retire at 40 and hope to live another 50 years.

Many retirees follow the “4% rule,” taking a withdrawal rate of 4% of their nest egg each year. Historical returns on bonds and the stock market suggest that a withdrawal rate of 4% should leave your nest egg intact for at least 30 years.

Knowing your future withdrawal rate enables you to calculate how much you need to save for retirement. At a 4% withdrawal rate, you need 25 times your target annual retirement income as a nest egg (4% x 25 = 100%). So, if you wanted $40,000 per year in retirement income, you’d need $1,000,000 as a target nest egg.

Wrinkles and a Wrinkly Example

First of all, note that we can ignore Social Security income, since we’re talking about retiring young.

Now come two wrinkles. First, early retirees need their money to last longer than 30 years. Financial planner Michael Kitces demonstrates that a 3.5% withdrawal rate should theoretically leave your nest egg intact forever. That means early retirees can use a 3.5% withdrawal rate for their planning, regardless of how young they plan to retire. Which, in turn, means you can multiply your target retirement income by around 28.6 to reach a target nest egg. For a $40,000 retirement income, that comes to a nest egg of $1,142,857.

The second wrinkle is that withdrawal rates assume you invested all your nest egg in paper assets (stocks and bonds). If you invest in assets like rental properties, they generate ongoing passive income without having to sell off any assets. Plus you can leverage other people’s money to buy them.

Which means you can cheat on the withdrawal rate — if you develop the skills necessary to invest in real estate.

Continuing the example, say you want $40,000 per year in retirement income and aim for half to come from paper assets and the other half from rental properties. To collect $20,000 in income from paper assets at a 3.5% withdrawal rate, you need $571,429 in stocks and bonds.

Rentals are harder to calculate and require some assumptions. Say you’re buying properties at an 8% cap rate, which means an 8% annual yield if you buy in cash. For a $100,000 property, that means you’d pocket $8,000 per year after non-mortgage expenses. But you instead finance 80% of the purchase price, borrowing $80,000 at, let’s say, 5% interest for 30 years.

That drops your investment from $100,000 to $20,000, and drops your annual net income to $2,846 after your mortgage payments. That means you’d need to buy around seven of those properties to generate $20,000 in annual net rental income. In this example, seven of these properties come to $140,000 in down payments.

Your total combined savings target for both your paper assets and your down payments then comes to $711,429 ($571,429 + $140,000), in order to generate $40,000 in annual passive income.

How Much You Need to Save to Retire in 5 Years

Let’s say you’ve decided how much income you want in retirement, and run the numbers to calculate a target nest egg. You want to reach it in five years, then storm out of your workplace and retire.

For the next five years, you invest all your savings in an index fund that mimics the S&P 500. The S&P 500 has returned an average historical return of around 10% since its inception in the 1920s, so we’ll use that to calculate your future returns between now and retirement.

Here’s what you’d have to save and invest each month in order to reach the following target nest eggs in five years:

$500,000: $6,457 per month

$1 million: $12,914 per month

$1.5 million: $19,371 per month

$2 million: $25,827 per month

$3 million: $38,741 per month

So, could you retire in five years? You’d have to earn a pretty penny, and invest the bulk of it, but it’s theoretically possible.

How Much You Need to Save to Retire in 10 or 15 Years

Although still a challenge, it’s more feasible to retire in 10 or 15 years.

Here are the same numbers, with all the same assumptions, to retire in 10 years:

$500,000: $2,441 per month

$1 million: $4,882 per month

$1.5 million: $7,323 per month

$2 million: $9,763 per month

$3 million: $14,645 per month

If you give yourself 15 years, the numbers get even more feasible, although waiting 15 years starts to feel pretty remote to most of us. Here’s how much you’d need to save and invest each month to retire in 15 years:

$500,000: $1,206 per month

$1 million: $2,413 per month

$1.5 million: $3,619 per month

$2 million: $4,825 per month

$3 million: $7,238 per month


Financial Independence vs. Retiring Early

Financial independence means being able to cover your living expenses with passive income from investments (read: work optional). Retiring early means quitting your job and no longer working.

Responsible adults need to be financially independent in order to retire, but they don’t need to retire just because they reach financial independence. Because let’s be honest, as much fun as sitting on a beach sipping margaritas is, it gets boring after a week or two. Most of us don’t actually want to retire at 30 and never work again — we want the freedom to do work we love, even if it doesn’t pay well.

So, don’t get hung up on the “retiring young” component of the FIRE movement. Instead, focus on boosting your savings rate, investing to build your net worth quickly, reducing dependence on your job, and using your financial heft to help you design your perfect life. In other words, use FIRE tactics to help you with lifestyle design.

People love to criticize the FIRE movement for promoting laziness and encouraging young people to quit the workforce. In truth, the FIRE movement uses the “retire early” angle as a marketing gimmick, because everyone can intuit what that means. Most people don’t know exactly what “financial independence” or “lifestyle design” mean, so they make poor rallying cries.

But they’re where the meat of the FIRE movement lie.


Controversies and Criticisms of Extreme Early Retirement

Retiring young comes with real risks and downsides. Here are a few of the most common critiques of the concepts underlying the FIRE movement and early retirement in particular, along with my take on them.

Sacrifice, Delayed Gratification, and Low Quality of Life

Most middle-class people don’t want to live on $7,000 per year, and wonder why anyone would. They don’t want to sacrifice anything from their current quality of life.

Fisker addresses this issue at length in his book, which outlines not only the math behind his retirement strategy, but also the philosophy. In addition to extreme savings, Fisker recommends that a simpler lifestyle can create greater happiness. Forcing yourself to leave consumerism behind can help you learn how to be happy without constantly spending money.

My Take: The average person approaches every financial decision — from buying houses and cars to creating their budget — with the question, “What’s the most I can afford to spend?”

It’s the wrong question.

Instead ask, “What’s the least I can spend and still be happy?” Do you really need that giant SUV, that large suburban house? Does every adult in your household need their own car?

My wife and I no longer have a car at all. Or a housing payment, for that matter, as we found a way to house hack. We walk, bike, or Uber everywhere — and chose our city and home specifically to make that feasible.

You can frame budgeting and spending less as “sacrifice” or “minimalist” if you want. I don’t. I enjoy learning how to cook gourmet meals at home, enjoy using my own legs to get around rather than munching doughnuts behind the wheel of a car.

It’s all in your perspective. From my perspective, I live a fun, adventurous life making fast progress toward financial independence.

Health Insurance Is Expensive Without Employer Coverage

How can you possibly pay for health insurance without employer coverage?

Actually, many Americans get health care coverage without employer-sponsored insurance. But it does represent an additional expense for some early retirees.

When it comes to health insurance, Fisker recommends a high-deductible HSA-compatible plan to cover expensive medical emergencies. He also suggests maxing out contributions to an HSA until the account covers the high deductible on the plan.

My Take: Worst case scenario, you simply budget for health care as a living expense in retirement.

But you have plenty of other options as well. My wife and I live overseas, where health care costs less and we’ve never experienced lower quality care than we had in the U.S.

Or don’t stop working — just switch to a career you love that, ideally, includes health insurance. You can also look for a low-stress part-time job that offers health benefits.

Children Also Cost Money

It costs money to raise a child.

A study by the USDA estimated the average cost to raise a child at $284,570, factoring in inflation. That figure does not include college costs.

Critics contend that the FIRE movement ignores children, and early retirement is only attainable for people without kids.

My Take: First of all, children are an investment, not an expense. And I mean that not just figuratively, but also financially. My children are my insurance against superannuation: if I run out of money in retirement, my children can take me in or otherwise help with my care.

Fisker suggests keeping the costs of raising a child down by not giving them an allowance, encouraging them to save whatever money they get as gifts, buying children’s clothes at thrift stores, and encouraging them to go to a state school instead of an expensive private university. I don’t think you have to do any of that.

Nearly one-third of the cost of raising a child comes from larger housing. But you can avoid paying for housing through house hacking.

I have a child and hope to have a second, and still plan to reach financial independence within five years of when I started taking it seriously.

As for college education, there are many creative ways to help your kids pay for college. None of which require bankrupting yourself.

Only Single/Married/Rich/Educated/Privileged People Can Retire Early

The details don’t matter. The argument simply goes, “That other type of person might be able to retire early, but I can’t because I don’t have the advantages that they have.”

Single people say only married couples can achieve FIRE because they can share expenses. Married couples say only single people can achieve FIRE because they don’t have to worry about a spendthrift spouse. Which one is right? Neither, of course.

Everyone says, “Only people who earn more money than I do can achieve FIRE.” This pattern emerges no matter how much money they actually earn, because as they earn more, they simply spend more, in the never-ending cycle of lifestyle inflation.

And so it goes.

My Take: The average person stays average because they continue spending nearly every dollar they earn. They justify their lack of savings by saying, “I can’t save any more money, because I don’t earn enough. If I earned more, of course I’d save more!” Then when they get a raise, they immediately start spending more.

If you put all your considerable will into retiring young, you’ll find a way to do it. Most people don’t want it enough to do so, so they dismiss the entire concept as impossible.

It’s quite possible — but it does require tradeoffs that you may not be willing to make. Fisker lives on $7,000 a year, after all.


Final Word

Extreme early retirement makes for a sexy concept, but it’s all sizzle and little steak.

The real meat lies in more nuanced and mature concepts like lifestyle design. Learn how to live a happy, meaningful, fulfilling life without spending as much money. Save and invest more of your earnings to build wealth and passive income faster. Find work that you love, regardless of the paycheck.

The more the average person earns, the more they want to earn. There’s no such thing as enough money — people climb onto the hedonic treadmill and run ever faster, exhausting themselves chasing more-more-more. A bigger house. A flashier car. Trendy clothes. A second home. Ever more status symbols to show the world how successful you are and how great your life is.

But when you start looking at your life holistically, through the lens of FIRE and lifestyle design, your perspective shifts. The more wealth and passive income I accumulate, the less I need to earn. And the more free I feel to spend my waking hours doing, well, whatever I want.

Source: moneycrashers.com

How Do Employee Stock Options Work?

Perhaps you’ve been offered a job package with a combination of salary, benefits, and employee stock options. In order to make an informed decision, it helps to know how employee stock options (ESOs) work. Knowing the basics can be especially important if you’re considering taking a lower salary offer in exchange for ESOs.

Or maybe your current employer has already given you employee stock options, but you’re still not clear on how to exercise them. This is an incentive that could be valuable—so you probably don’t want to ignore it.

Employee stock options have the potential to make an employee some extra money, depending on the market, which may be a nice perk. Stock options can also give employees a sense of ownership (and, to a degree, actual ownership) in the company they work for.

Here is everything you need to know about ESOs—from how they work to the different types, and all the details in between.

What Are Employee Stock Options?

Employee stock options give an employee the chance to purchase a set number of shares in the company at a set price—often called the exercise price—over a set amount of time. Typically, the exercise price is a way to lock in a lower price for the stock.

This gives an employee the chance to exercise their ESOs at a point when the exercise price is lower than the market price—with the potential to make a profit on the shares.

Sometimes, an employer may offer both ESOs and restricted stock units (RSUs)—RSUs are different in that they are basically a promise of stock at a later date.

Employee Stock Option Basics

When talking about stock options, there are some essential terms to know in order to understand how options work. For investors who know their way around options trading, some of these terms may be familiar.

•  Exercise price/grant price/strike price: This is the given set price at which employees can purchase the stock options.
•  Market price: This is the current price of the stock on the market (which may be lower or higher than the exercise price). Typically an employee would only choose to exercise and purchase the options if the market price is higher than the grant price.
•  Issue date: This is the date on which you’re given the options.
•  Vesting date: This is the date after which you can exercise your options per the original terms
•  Exercise date: This is the date you actually choose to exercise your options.
•  Expiration date: This is the date on which your ability to exercise your options expires.

How Do Employee Stock Options Work?

When you’re given employee stock options, that means you have the option, or right, to buy stock in the company at the established grant price. You don’t have to exercise options, but you can if it makes sense to you.

Exercising your ESOs means choosing to actually purchase the stock at the given grant price, after a predetermined waiting period. If you don’t purchase the stock, then the option will eventually expire.

ESO Vesting Periods

Typically, employee stock options come with a vesting period, which is basically a waiting period after which you can exercise them. This means you must stay at the company a certain amount of time before you can cash out.

The stock options you’re offered may be fully vested on a certain date or just partially vested over multiple years, meaning some of the options can be exercised at one date and some more at a later date.

ESO Example

For example, imagine you were issued employee stock options on Jan. 1 of this year with the option of buying 100 shares of the company at $10/share. You can exercise this option starting on Jan. 1, 2021 (the vesting date) for 10 years, until Jan. 1, 2031 (the expiration date).

If you choose not to exercise these options by Jan. 1, 2031, they would expire and you would no longer have the option to buy stock at $10/share.

Now, let’s say the market price of shares in the company goes up to $20 at some point after they’ve vested on Jan. 1, 2021, and you decide to exercise your options.

This means you decide to buy 100 shares at $10/share for $1,000 total—while the market value of those shares is actually $2,000.

Exercising Employee Stock Options

You don’t have to exercise your options unless it makes sense for you. That may depend on your financial situation, the forecasted value of the company, and what you expect to do with the shares after you purchase them.

If you do plan to exercise your ESOs, there are a few different ways to do so. It’s worth noting that some companies have specifications about when the shares can be sold, because they don’t want you to just exercise your options and then sell off all your stock in the company immediately.

Buy and Hold

Once you own shares in the company, you can choose to hold onto them. To continue the example above, you could just buy the 100 shares with $1,000 cash and you would then own that amount of stock in the company—until you decide to sell your shares (if you do).

Cashless Exercise

Another way to exercise your ESOs is with a cashless exercise, which means you sell off enough of the shares at the market price to pay for the total purchase.

For example, you would sell off 50 of your purchased shares at $20/share to cover the $1,000 that exercising the options cost you. You would be left with 50 shares.) Most brokerages will do this buying and selling simultaneously.

Stock Swap

A third way to exercise options works if you already own shares. A stock swap allows you to swap in existing shares of the company at the market price of those shares and trade for shares at the exercise price.

For example, you might trade in 50 shares that you already own, worth $1,000 at the market price, and then purchase 100 shares at $10/share.

When the market price is higher than the exercise price—often referred to as options being “in the money”—you may be able to gain value for those shares because they’re worth more than you pay for them.

Why Do Companies Offer Stock Options?

The idea is simple: If employees are financially invested in the success of the company, then they’re more likely to be emotionally invested in its success as well and it can increase employee productivity.

From an employee’s point of view, stock options offer a way to share in the financial benefit of their own hard work. In theory, if the company is successful, then the market stock price will rise and your stock options will be worth more.

A stock is simply a fractional share of ownership in a company, which can be bought or sold or traded on a market.

The financial prospects of the company influence whether people want to buy or sell shares in that company, but there are a number of factors that can determine stock price, including investor behavior, company news, world events, and primary and secondary markets.

Tax Implications of Employee Stock Options

There are two main kinds of employee stock options: qualified and non-qualified, each of which has different tax implications. These are also known as incentive stock options (ISOs) and non-qualified stock options (NSOs or NQSOs).

Incentive Stock Options (ISO)

When you buy shares in a company below the market price, you could be taxed on the difference between what you pay and what the market price is. ISOs are “qualified” for preferential tax treatment, meaning no taxes are due at the time you exercise your options—unless you’re subject to an alternative minimum tax.

Instead, taxes are due at the time you sell the stock and make a profit. If you sell the stock more than one year after you exercise the option and two years after they were granted, then you will likely only be subject to capital gains tax.

If you sell the shares prior to meeting that holding period, you will likely pay additional taxes on the difference between the price you paid and the market price as if your company had just given you that amount outright. For this reason, it is often financially beneficial to hold onto ESO shares for at least one year after exercising and two years after your exercise date.

Non-qualified Stock Options (NSOs or NQSOs)

NSOs do not qualify for preferential tax treatment. That means that exercising stock options subjects them to ordinary income tax on the difference between the exercise price and the market price at the time you purchase the stock. Unlike ISOs, NSOs will always be taxed as ordinary income.

Taxes may be specific to your individual circumstances and vary based on how the company has set up its employee stock option program, so it’s always a good idea to consult a tax advisor for specifics.

Should You Exercise Employee Stock Options?

While it’s impossible to know if the market price of the shares will go up or down in the future, there are a number of things to consider when deciding if you should exercise options:

•  the type of option—ISO or NSO—and related tax implications
•  the financial prospects of the company
•  your own portfolio and how these company shares would fit into your goals

You also might want to consider how many shares are being made available, to whom, and on what timeline—especially when weighing what stock options are worth to you as part of a job offer. For example, if you’re offered shares worth 1% of the company, but then the next year more shares are made available, you could find your ownership diluted and the stock would then be worth less.

The Takeaway

Employee stock options may be an enticing incentive that companies can offer their employees: the chance to invest in the company directly, and possibly profit from doing so. There are certain rules around ESOs, including timing of exercising the options, as well as different tax implications depending on the type of ESO a company offers its employees.

For some investors, owning shares in their employer company may be just one aspect of a diversified portfolio. With SoFi Invest®, members can participate in upcoming IPOs, trade stocks, ETFs, and crypto—or start automated investing—as a way to diversify their portfolios based on their personal goals, risk tolerance, and other preferences.

Find out how to get started with SoFi Invest.


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Real Estate Crowdfunding – How These Investments Work, Pros & Cons

Real estate offers a fantastic counterbalance to stocks in your investment portfolio, especially in an era of low interest rates and bond yields. But not all of us have $300,000 just sitting around to start snapping up properties.

Enter: crowdfunded real estate investments. A relatively recent addition to the arsenal of investment options, crowdfunding allows thousands of investors to pool their funds, so each investor can invest a small amount of money in larger projects.

Like all investments, real estate crowdfunding has its own pros and cons, and comes in many flavors and varieties. Before you invest a cent in any asset, you must first understand the risks, rewards, and the role the investment plays in your portfolio.

How Does Real Estate Crowdfunding Work?

On the simplest level, real estate crowdfunding involves many people each contributing a small portion of the greater cost of a real estate-related investment.

But “real estate-related investment” can carry many meanings. Keep the following variations in mind as you explore real estate crowdfunding investment options.

Equity vs. Debt

When you invest money through a crowdfunding platform, does the money go toward the direct purchase of new properties, or toward loans servicing other people’s properties?

If you know publicly traded REITs, you understand the difference between equity REITs and mortgage REITs. The former buys and manages real estate; the latter lends money secured against real estate.

Crowdfunding works similarly. In fact, many real estate crowdfunding investments are REITs — they’re simply sold privately rather than on public stock exchanges subject to traditional SEC regulation (more on regulation differences shortly).

Many private crowdfunded REITs offer both equity and debt REIT options. As a general rule, debt REITs generate more immediate dividend income, while equity REITs include an element of long-term appreciation in addition to income. For example, Fundrise offers several broad basket portfolios weighted more heavily toward either real estate equity or debt investments.

Not all real estate crowdfunded debt investments come in the form of REITs, however.

Peer-to-Peer vs. Fund Investments

In the case of private debt REITs, you invest money with a pooled fund, and the fund lends money to real estate investors as it sees fit. The alternative model for crowdfunded real estate debt involves lending directly to the borrower.

Crowdfunding platforms that follow this model allow you to browse individual loans, so you can pick and choose which loans you want to put money toward. For example, Groundfloor caters to real estate investors — mostly house flippers — lending them money to buy and renovate fixer-uppers. As a financial investor, you can log into your account and review available loans, including details about the project and borrower, and then put varying amounts of money toward as many or as few loans as you like.

Your loan is secured by a lien against the property. If the borrower defaults, Groundfloor forecloses to recover all investors’ money.

Property Type

Some real estate crowdfunding platforms specialize in residential real estate, while others focus on commercial.

Within each of those wide umbrellas, there’s plenty of variation as well. Residential properties could mean single-family rentals, or it could mean 200-unit apartment complexes. Commercial real estate could mean office buildings, or industrial parks, or retail space.

Before investing, make sure you understand exactly what you’re investing in — and more importantly, why.

Availability to Non-Accredited Investors

Some crowdfunding services like FarmTogether only allow accredited investors to participate. Others are open to everyone.

To qualify as an accredited investor, you must have either a net worth over $1 million (not including equity in your home) or have earned at least $200,000 for each of the last two years ($300,000 for married couples), with the expectation to earn similarly this year. So, most Americans can only invest with crowdfunding platforms that allow non-accredited investors.

Before doing any further due diligence, check to see whether prospective crowdfunding platforms even allow you to invest. Otherwise, no other details matter.


Advantages of Real Estate Crowdfunding

These relatively novel investments come with plenty of perks, especially for everyday people with few other paths to invest in large real estate projects. I myself invest in several real estate crowdfunding platforms.

As you compare crowdfunding investments to other types of real estate investments, keep the following pros in mind.

1. Low Cash Requirements

Through crowdfunded real estate investing, investors gain access to expensive investments like hotels, office parks, and apartment complexes that would otherwise remain unavailable to them. I don’t have $5 million to buy an apartment building. But I do have $500 that I’m happy to invest in a private fund that owns apartment buildings.

Although every crowdfunding platform imposes its own minimum investment, some of those minimums remain quite low. Groundfloor, for example, allows investments as low as $10.

Other platforms impose minimums of $500 or $1,000, keeping the minimums within reach of middle-class earners. It marks an enormous advantage to investing in real estate indirectly: you don’t need a full down payment plus closing costs in order to diversify your investments to include real estate.

2. Easy Diversification

With crowdfunding investments, you can easily include real estate in your asset allocation.

And not just through publicly traded REITs, which often move in greater sync with the stock market than with real estate markets because they trade on public stock exchanges. You can invest money toward any type of real estate, residential or commercial, in any grade of neighborhood, spread across many cities in the U.S. or even around the world.

For example, I have a little money invested in commercial office space through Streitwise, and a little invested in residential real estate (equity and debt) through Fundrise’s REITs. I also have money spread among a range of individual loans through Groundfloor. All in all, these investments expose me to real estate in 15 states.

Imagine how much harder that exposure would be if I had to go out and buy individual properties in 15 states?

3. Strong Income Yields

Crowdfunded real estate investments tend to pay reasonably high income yields. Which is always welcome, whether you’re pursuing financial independence at a young age, looking to build more retirement income, or simply enjoy earning more passive income each month. Because when you have enough passive income to cover your living expenses, work becomes optional.

I’ve consistently earned income yields in the 8% to 9% range on my investments with Streitwise and Groundfloor. With Fundrise, I earn around 5% in dividend yield, plus long-term appreciation.

Not many stocks or ETFs offer those kinds of yields.

4. No Labor and Little Skill Required to Invest

As a direct real estate investor, I can tell you firsthand how much skill and labor it takes to find good deals, analyze cash flow numbers, renovate properties, hire and manage contractors, and so forth.

With crowdfunded real estate investments, you outsource all of that to someone else. You just click a button to invest your funds, and sit back and collect the returns.

Don’t get me wrong, direct real estate investment comes with many of its own perks, such as the potential for higher returns, greater control, and real estate-related tax advantages. But you have to earn those advantages with sweat and knowledge, much of it required before you even buy your first property.

This ease of investing through crowdfunding platforms comes with a side benefit: you can automate your investments. Set up monthly or biweekly investments to avoid emotional investing and build wealth and passive income on autopilot.

5. No Property Management Required

It takes an effort not to laugh out loud when tenants call you complaining that a light bulb burned out, and ask you to come over to replace it. Unless the call comes at 3 a.m. — that’s less funny.

Few landlords enjoy managing rental properties, between chasing down nonpaying tenants, hassling with constant repairs and maintenance issues, and all-too-frequent complaints from tenants and neighbors — “this person plays their music too loud,” “that one smells like weed when they pass in the hallway,” ad nauseum. It’s why so many landlords end up hiring a property manager to take the headaches off their plate.

You don’t have to worry about any of that when you invest in crowdfunded real estate investments.

6. Protection Against Inflation

“Real” assets such as commodities, precious metals, and, of course, real estate all have inherent demand. Regardless of the currency you pay with or its value, you pay the going rate based on the underlying value of these physical assets.

That makes these assets an excellent hedge against inflation. If rents drive inflation higher, rental properties only become more valuable, with higher revenues. If the dollar loses value, people pay more for housing and commercial space.

In contrast, investors actually lose money — in terms of real value — on a bond paying 2% interest when inflation runs at 3%.


Disadvantages of Real Estate Crowdfunding

No investment is perfect, without risks or downsides. Thoroughly review these drawbacks and risks before parting with your hard-earned money.

1. Poor Liquidity

It takes a few clicks to sell a stock or ETF. Investors can liquidate their holdings instantaneously, leaving them with cold hard cash.

Real estate is inherently illiquid. It takes months to market and sell properties, and for large commercial properties it can involve hundreds of thousands of dollars in costs. So investors usually hold them for at least five years, and when these investments are funded through a crowd of financial investors, that means individuals can’t easily pull their money back out of the deal.

Most crowdfunded real estate investments advise prospective investors to plan on leaving their money in place for at least five years. Some do offer early redemption to sell their shares, but not instantaneously, and usually at some sort of discount or penalty.

Don’t invest anything you might need back within the next five years.

One notable exception includes short-term peer-to-peer loans secured by real estate, such as those offered by Groundfloor. These loans usually repay within nine to 12 months. Even so, you still can’t easily pull your money back out before the borrower repays the loan in full.

2. Complex Regulation and Performance Transparency

The regulation on crowdfunded investments can quickly make the average investor’s eyes cross. For a quick taste, investors have to navigate between Regulation D investments that fall under either 506(b) or 506(c), and Regulation A and Title III investments — also known as Regulation Crowdfunding or Reg CF.

Regardless, investors can’t use the familiar brokerage account tools that they’re already familiar with to research these investments. The SEC does require crowdfunding platforms to disclose a wide range of information, but it will look and feel unfamiliar for many retail investors.

There is one huge advantage that crowdfunded private REITs have over publicly traded REITs: the flexibility to reinvest profits to buy more properties. Publicly traded REITs must distribute at least 90% of all profits to investors in the form of dividends. That leaves them with high dividend yields but poor prospects for appreciation and asset growth. Private REITs like DiversyFund can employ far more flexibility to build their portfolios.

3. Limits on Participation

The SEC puts limits on how much money non-accredited investors can put into crowdfunded investments each year. Those limits are as follows:

“If either your annual income or your net worth is less than $107,000, then during any 12-month period, you can invest up to the greater of either $2,200 or 5% of the lesser of your annual income or net worth.

“If both your annual income and your net worth are equal to or more than $107,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is lesser, but not to exceed $107,000.”

They provide a table by way of example:

Annual Income Net Worth Calculation 12-month Limit
$30,000 $105,000 greater of $2,200 or 5% of $30,000 ($1,500) $2,200
$150,000 $80,000 greater of $2,200 or 5% of $80,000 ($4,000) $4,000
$150,000 $107,000 10% of $107,000 ($10,000) $10,700
$200,000 $900,000 10% of $200,000 ($20,000) $20,000
$1.2 million $2 million 10% of $1.2 million ($120,000), subject to cap $107,000

Still, these speedbumps serve as reasonable cautions and protections for the average investor. These investments do come with an element of risk, and shouldn’t make up 70% of your retirement portfolio.

4. Less Protection from Default Than Other Real Estate Investments

When you own a rental property and your tenants stop paying the rent, you can evict them. You own the property, you can insure it against damage, and it comes with a certain amount of inherent value.

Real estate crowdfunding investments don’t come with these protections. You typically own paper shares of a fund, not all or part of a physical asset. Your investments aren’t even secured against the underlying properties with a lien in most cases.

Exceptions do exist, however. For example, when you invest fractionally in loans on Groundfloor, those loans are secured by a lien against real property. If the borrower defaults, Groundfloor forecloses in order to recover most or all of your money.

5. Lack of Control

Although stock investors have little control over the performance of their share prices, direct real estate investors do enjoy control over their returns and management. They can make renovations to boost the rents and property values, can tighten their tenant screening criteria to avoid deadbeats, can even insure against rent defaults.

But when you invest in real estate indirectly through crowdfunding, you surrender control to the fund manager. If they do well, you (hopefully) earn a strong return. If they mess up, you get stuck with the costs of their bungles.


Where Does Real Estate Crowdfunding Fit Into Your Portfolio?

While stocks belong in just about every investor’s portfolio, not everyone feels comfortable with real estate crowdfunding. Still, these investments offer a fine counterweight to stocks when used responsibly.

Your ideal asset allocation is personal to you, and depends on factors ranging from your age, target retirement horizon, net worth, and risk tolerance. I recommend thinking of crowdfunded real estate investments as an alternative to higher-risk, higher-yield bonds and public REITs.

For example, say you aim for an asset allocation of 60% equities and 40% bonds. Those equities include 57% stocks and 3% REITs, and your bonds include 30% low-risk government bonds and 10% higher-risk corporate bonds. You could take part of the 13% of your portfolio earmarked for REITs and higher-risk bonds and test the waters of crowdfunded real estate investments. If you like what you see, you can then move a little more, up to your comfort level.

However, real estate crowdfunding should not take the place of extremely low-risk investments in your portfolio, such as Treasury bonds or TIPS.


Final Word

With real estate crowdfunding, you have the luxury of investing small amounts to gauge the performance of your investments and your comfort.

These investments can play a role in any investor’s portfolio, but that role should start small. Don’t invest any money that would financially cripple you to lose, and do your homework on any crowdfunded investment’s past performance and risk management measures.

Most of all, always keep these investments in the perspective of your broader portfolio and asset allocation. These investments don’t exist in a vacuum — they play a role in a larger performance.

Have you ever invested in crowdfunded real estate? If so, what were your experiences?

Source: moneycrashers.com

The Stimulus Law Just Made it Way Cheaper to Buy ACA Health Insurance

There are times when it is extremely frustrating to deal with federal bureaucracy.

And then there are times when it works like a charm.

Eleven years after the passage of the Affordable Care Act, which gave every American the opportunity to acquire health insurance, the federal government found a way to make coverage more accessible. Thanks to the latest stimulus law, almost everyone who buys or has bought health insurance through the ACA exchange will see a decrease in their health premiums, according to a study by the Kaiser Family Foundation.

According to Health and Human Services, anyone earning $19,000 or less will not pay a premium at all, and people who make more than $19,000 will see a significant reduction in their premium, up to as much as $1,000 a month.

This change should help the millions of people who lost work due to the coronavirus pandemic — a staggering 20.6 million people, according to USA Today. While many people have managed to find work again, either with their former employer or a new one, millions remain unemployed or underemployed.

Here’s what you need to know about the latest changes to health premiums through the ACA.

What’s Changing and Who is Affected

This ACA coverage option will apply for 2021 and 2022, depending on your employment status. It does not apply to undocumented immigrants, or Americans who live in states that did not expand Medicaid under the Affordable Care Act. You will discover your coverage status when you apply for Obamacare.

The changes are also retroactive to Jan. 1, 2021, which means if you already have health insurance under the ACA, you will be refunded any amount you paid in the first three months of 2021 over your new, lower premium. Healthcare.gov warns that the changes to premium charges may take a while to get fully integrated into the system, so those who already have insurance through the ACA should continue to pay their current premium until the system updates, at which time refunds will be issued and a new premium will be established.

Health insurance under the Affordable Care Act covers the standard comprehensive benefits, which includes prescription drugs and mental health services.

What You Need to Apply

To apply for health coverage under the Affordable Care Act, you begin at www.healthcare.gov. But before you do that, you’ll need to assemble information you will be asked, and it is much like the information you assemble in order to file a tax return.

You will be asked:

  •  Your income from 2020. That includes your unemployment compensation. The online form you use to file certification for unemployment provides the information on the total amount you have received in unemployment benefits . Your income for the purposes of the ACA is identical to that listed on your tax form.
  • Less common income sources. If you withdrew money from a 401(k) or an Individual Retirement Account, that counts as income to the ACA as well.
  • Family information. You will also be asked for information about each person in your household, even those not applying for coverage under the ACA. This means you will need information on anyone who files taxes and any tax dependents in your household or in your care.

How the ACA Marketplace Differs from the IRS

The Internal Revenue Service asks for your tax information once a year, and changes in your tax status do not need to be reported until you fill out your next tax form.

But the ACA Marketplace is different in that regard. If, after you sign up for health care under the ACA, you get a job that offers you health coverage, you must contact the Marketplace immediately. Your premium will change if it is determined that your health care option from your employer is considered affordable (in today’s insurance market, that is not always the case).

Either way, you will be allowed to maintain your Marketplace coverage rather than take your employer-offered coverage. That will be a slightly complicated decision that is one of the benefits (or penalties, depending on how you look at things) of getting a job that offers health care coverage.

What if I am Paying for a COBRA Account?

COBRA is the federally guaranteed health insurance coverage program that allows workers who lose their employer-provided health insurance to extend coverage for a period of time.

Under the American Rescue Plan, your COBRA payments will be covered for six months.

Where to Ask Questions

Starting at www.healthcare.gov for answers about getting and paying for coverage under the ACA. There is also a toll-free phone number for Marketplace questions: 1-800-318-2596.

Unlike the IRS, getting questions answered about ACA coverage via a phone call is easy.

Kent McDill is a longtime journalist who has specialized in personal finance topics since 2013. He is a contributor to The Penny Hoarder.

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Source: thepennyhoarder.com

11 Real Estate Exit Strategies for Low- or No-Tax Investment Gains

The single greatest predictor of wealth in the U.S. isn’t education level, ethnicity, gender, or any other demographic descriptor. It’s whether or not you own real estate.

In the most recent Survey of Consumer Finances, the Federal Reserve found the median net worth of homeowners to be 46 times greater than that of renters. While the median renter had a net worth of $5,000, the median homeowner owned $231,400 in net assets.

Homeowners benefit from appreciation, forced savings in the form of principal repayment toward mortgages, and often lower annual housing costs compared to local renters. Those advantages get compounded by a tax code that favors property owners. Beyond simple homeownership, real estate investors can reduce their taxes through myriad strategies and incentives.

Still, when it comes time to sell, many property owners face sticker shock at their prospective tax bill. So how can property owners reduce — or better yet, eliminate — their taxes when they go to sell?

Common Real Estate Exit Strategies

Try these low- and no-tax real estate exit strategies to keep more of your real estate profits in your pocket and out of Uncle Sam’s grasping paws.

1. The Homeowner Exclusion

To begin, homeowners get an inherent tax break when they sell their home — with certain requirements and restrictions, of course. If you’re a homeowner selling your primary residence, chances are you won’t have to pay taxes on your profits from the appreciation of the home’s value since you bought it.

Single homeowners can exclude the first $250,000 in profits from their taxable income, and the number doubles for married couples filing jointly. Sometimes called a Section 121 Exclusion, it prevents most middle-class Americans from having to pay any taxes on home sale profits.

Any profits over $250,000 ($500,000 for married couples) get taxed at the long-term capital gains tax rate. More on that shortly.

To qualify for the exclusion, however, homeowners must have owned and lived in the property for at least two out of the last five years. They don’t have to be consecutive; if you lived in the property for one year, moved out for three years, then moved back in for one more year before selling, you qualify.

If you want to sell a property you don’t currently occupy as your primary residence, and want to avoid taxes through a Section 121 Exclusion, consider moving into it for the next two years before selling.

2. Opt for Long-Term Capital Gains Over Short-Term

If you own a property — or any asset for that matter — for less than a year and sell it for a profit, you typically pay short-term capital gains tax. Short-term capital gains mirror your regular income tax level.

However, if you keep an asset for at least one year before selling, you qualify for the lower long-term capital gains tax rate. In tax year 2020, single filers with an adjusted gross income (AGI) under $40,000 pay no long-term capital gains taxes at all — the same goes for married filers with an AGI under $80,000. Single filers with incomes between $40,001 and $441,450 and married filers between $80,001 and $496,600 pay long-term capital gains at a 15% tax rate, and high earners above those thresholds pay 20%.

Keep your investment properties and vacation rentals for at least one year if you can. It can save you substantial money on taxes.

3. Increase Your Cost Basis by Documenting Improvements

If you slept through Accounting 101 in college, your cost basis is what you spent to buy an asset. For example, if you buy a property for $100,000, that makes up your cost basis, plus most of your closing costs count toward it as well. Let’s call it $105,000.

Say you live in the property for 20 months, making some home improvements while there. For the sake of this example, say you spent $15,000 on new windows and a new roof.

Then you sell the property for $160,000. Because you lived there for less than two years, you don’t qualify for the homeowner exclusion. After paying your real estate agent and other seller closing costs, you walk away from the table with $150,000.

How much do you own in capital gains taxes?

Assuming you earn enough income to have to pay them at all, you would owe the IRS for $30,000 in capital gains: $150,000 minus your $105,000 cost basis minus the additional $15,000 in capital improvements. If you can document those improvements, that is — you need to keep your receipts and invoices in case you get audited.

In this example, your capital gains tax bill would come to $4,500 (15% of $30,000) if you document the capital improvements, rather than $6,750 (15% of $45,000) if you don’t.

4. Do a 1031 Exchange

Section 1031 of the U.S. tax code allows investors to roll their profits from the sale of one property into buying a new property, deferring their capital gains tax until they sell the new property.

Known as a “like-kind exchange” or 1031 exchange, you used to be able to do this with assets other than real estate, but the Tax Cuts and Jobs Act of 2017 excluded most other assets. However, it remains an excellent way to avoid capital gains taxes on real estate — or at least to postpone them.

Real estate investors typically use 1031 exchanges to leapfrog properties, stocking their portfolio with ever-larger properties with better cash flow. All without ever paying capital gains taxes when they sell in order to trade up.

Imagine you buy your first rental property for $100,000. After expenses, you earn around $100 per month in cash flow, which is nice but you certainly won’t be retiring early on it.

You then spend the next year or two saving up more money to invest with, and set your sights on a three-unit rental property that costs $200,000. To raise money for the down payment, you sell your previous rental property, and net $20,000 in profit at settlement. Ordinarily you’d have to pay capital gains taxes on that $20,000, but because you put it toward a new rental property, you defer owing them.

Instead of $100 per month, you net $500 per month on the new property.

After another year or two of saving, you find a six-unit property for $400,000. You then sell your three-unit to raise money for it, and again use a 1031 exchange to roll your profits into the new six-unit property, again deferring your tax bill on the proceeds.

The new property yields you $1,000 per month in cash flow.

In this way, you can keep scaling your real estate portfolio to build ever-more cash flow, all the while deferring your capital gains taxes from the properties you sell. If you ever sell off these properties without a 1031 exchange, you will owe capital gains tax on the profits you’ve deferred along the way. But until then, you need not pay Uncle Sam a cent in capital gains.

5. Harvest Losses

Invest in enough assets, and you’ll end up with some poor performers. You can sit on them, hoping they’ll turn around. Or you can sell them, eat the loss, and reinvest the money elsewhere for higher returns.

It turns out that there’s a particularly good time to accept investment losses: in the same year when you sell a property for hefty capital gains. Known as harvesting losses, you can offset your gains from one asset by taking losses on another.

Say you sell a rental property and earn a tidy profit of $50,000. Slightly nauseated by the notion of paying capital gains tax on it, you turn to your stock portfolio and decide you’ve had enough of a few stocks or mutual funds that have been underperforming for years now. You sell them for a net loss of $10,000, and reinvest the money in (hopefully) better performing assets.

Instead of owing capital gains taxes on $50,000, you now owe it on $40,000, because you offset your gain with the losses realized elsewhere in your portfolio.

6. Invest Through a Self-Directed Roth IRA

Want more control over your IRA investments? You can always set up a self-directed IRA, through which you can invest in real estate if you like.

Like any other IRA, you can open it as a Roth IRA account, meaning you put in post-tax money and don’t owe taxes on returns. Your investments — in this case, a real estate portfolio — appreciate and generate rental income tax-free, which you can keep reinvesting in your self-directed Roth IRA until you reach age 59 1/2. After that, you can start pulling out rent checks and selling properties, all without owing taxes on your profits.

Just beware that setting up a self-directed IRA does involve some labor and expense on your part. I only recommend it for professional real estate investors with the experience to earn stronger returns on real estate investments than elsewhere.

Pro tip: In addition to owning physical properties through a self-directed IRA, you can also use your self-directed IRA to invest in real estate through platforms like Fundrise or Groundfloor.


Hold Properties to Pass to Your Children

“Exit strategy” doesn’t always mean “sell.” The exit could happen in the form of your estate plan.

Or, for that matter, through methods of passing ownership of properties to your children while you still draw breath. There are several ways to go about this, but consider the following options as the simplest.

7. Leave the Property in Your Will

In 2020, the first $11.58 million in assets you leave behind are exempt from estate taxes. That leaves plenty of room for you to leave real estate to your children without them getting hit with a tax bill from Uncle Sam.

And, hey, rental properties can prove an excellent source of passive income for retirement. They generate ongoing income with no sale of assets required, which means you don’t have to worry about safe withdrawal rates or sequence of returns risk with your rental properties. They also adjust for inflation, as you raise rents each year. You can delegate the labor by hiring a property manager, and once your tenants eventually pay off your mortgage, your cash flow really explodes.

Plus, you can let your kids hassle with hiring a real estate agent and selling the property after you depart this mortal plane. In the meantime, you get to enjoy the cash flow.

8. Take Out a Home Equity Loan

Imagine you buy a rental property while working, and in retirement, you finally pay off the mortgage. You can enjoy the higher cash flow of course, but you can also pull money out through a home equity loan.

In this way, you pull out almost as much money as you’d earn by selling. Except you don’t have to give up the property — you can keep earning cash flow on it as a rental. You let your tenants pay down your mortgage for you once, all while earning some cash flow. Why not let them do it a second time?

You pull out all the equity, you get to keep the asset, and you don’t owe any capital gains taxes. Win, win, win.

You can follow the same strategy with your primary residence, but in that case you incur more personal debt and living expenses. Not ideal, but you have another option when it comes to your home.

9. Take Out a Reverse Mortgage

Along similar lines, you could take out a reverse mortgage on your primary residence if you have equity you want to tap into. These vary in structure, but they either pay you a lump sum now, or ongoing monthly payments, or a combination of both, all without requiring monthly payments from you. The mortgage provider gets their money back when you sell or kick the bucket, whichever comes first.

For retirees, a reverse mortgage helps them avoid higher living expenses while pulling out home equity as an extra source of income. And, of course, you don’t pay capital gains taxes on the property, because you don’t sell it.

10. Refinance & Add Your Child to the Deed

My business partner recently went to sell a rental property to her son for him to move into with his new wife. But the plan derailed when the mortgage lender declined the son’s loan application.

So they took a more creative approach. My business partner and her husband refinanced the property to pull out as much cash as they could, and they had the title company add their son and his wife to the deed and the mortgage note. The son and daughter-in-law moved into the property, taking over the mortgage payments. My partner and her husband took the cash, and while they remain on the deed, their ownership interest will pass to the younger generation upon their death.

In this way, they also streamline the inheritance, as the property won’t need to pass through probate.

This strategy comes with two downsides for my partner and her husband, however. First, they remain liable for the mortgage — if their son defaults, they remain legally obligated to make payments. Second, mortgage lenders don’t lend the entire value of the property when they issue a refinance loan, so my partner didn’t receive as much cash as she might have if she’d sold the property retail.

Of course, she also didn’t have to pay a real estate agent to market it. And any small shortfall in cash from refinancing rather than selling outright could be collected as a “down payment” from your child, or you could just shrug and think of it as a gift.


Other Exit Strategies

11. Donate the Property to Charity

Finally, you can always avoid taxes by giving the property to your charity of choice.

No clever maneuvers or tax loopholes. Just an act of generosity to help those who need the money more than you or Uncle Sam do.

By donating real estate you not only avoid paying taxes on its gains, you also get to deduct the value — in this case the equity — from your tax return. But bear in mind that the IRS looks closely at charitable deductions, especially house-sized ones, and you may hear from them demanding more information.


Final Word

Property owners have plenty of exit strategies at their disposal to minimize capital gains taxes. But don’t assume all of these options will last forever — with an ever-widening federal budget deficit, expect tax rates to rise and investment-friendly tax rules to suffer. Your taxes may go up in retirement, not down.

Whether you own a real estate empire or simply your own home, choose the strategy that fits your needs best, and aim to keep more of your proceeds in your own pocket.

What are your exit strategies for your properties? How do you plan to minimize your tax burden?

Source: moneycrashers.com

Erin Lowry of Broke Millennial on Navigating Tough Money Talks

Talking about money with your loved ones can feel uncomfortable. It can be awkward. It can be so difficult that you just avoid bringing up the subject altogether.

But you’re not doing yourself any favors by putting off the conversation. You’ll have a hard time saving up for a house with your partner if you can’t confront each other’s poor spending habits. You don’t want weekly outings with friends raising your credit card debt because you don’t want to mention you’re on a tight budget.

Erin Lowry, a financial expert and founder of Broke Millennial, focused her latest book “Broke Millennial Talks Money” on the topic of navigating tough financial conversations. She recently joined The Penny Hoarder for an online discussion where she shared tips and advice.

The following is an abridged version of that conversation, edited for length and clarity.

10 Questions With Erin Lowry of Broke Millennial

1. Why is it important for folks to be open to talking to people in their lives about money, even when it’s awkward?

You can do everything right to build your financial house, but if you cannot communicate effectively, if you can’t set healthy boundaries and if you do not know how to engage in these tough financial conversations, it’s going to start to slowly crumble the foundation that is your financial house. It’s useful that we learn how to navigate awkward money conversations, because they’re going to keep happening through our entire lives.

2. Why do you think it is so taboo to talk about money?

Judgment. I really think that that’s the word that sums it up. Oftentimes, we are fairly comfortable talking about money with total strangers. I’ve had many — pre-pandemic — fun conversations on the airplane with people about their financial lives, especially once they find out what I do. And there’s no risk there. I’m probably never going to see them again, so people get really vulnerable and open. On the flip side, I’ve had friends and family members not as willing to be open because there is this feeling of: “Oh, am I going to be judged?”

3. What should you do if you want to have a money talk with someone but they’re very hesitant?

It depends on who the person is and why you’re trying to initiate the conversation. There’s a big difference when you and your partner are getting really serious and about to move in together. That’s then a necessity to be having the financial conversation.

But every so often I get messages that are like: “My best friend’s pretty crappy with money and I want to have a conversation with her about how to be better.” Well, listen, if she doesn’t come to you, if she doesn’t ask, it’s — at the end of the day — not necessarily your business to offer guidance and advice.

You really need to allow this to be a very collaborative conversation. Maybe you share something about your own success and that can open the door to being asked questions to initiate more conversation. But sometimes, it is very much a “not your business” situation and if you overstep boundaries, people are also going to get uncomfortable.

4. How do you know when you’re in the right place in your relationship to start talking about finances?

While I would love it if everybody on the first date was super comfortable baring it all, that’s just not realistic. What you can do is to start taking notice of context clues that you’re being given along the way. This includes comments that get made, ideas for how much you should be spending on dates or trips or presents to each other, where that person lives and what kind of car they drive. All of these are giving you signals about how they value things, how they spend their money and either how much they’re earning or potentially how much debt they’re in.

Beyond that basic level, you should begin to get fully transparent with each other about money at the point where you look at that person and think, “I could spend the rest of my life with you.” When you realize that it’s that level of seriousness, you need to have the full conversation. That means sharing all of the information: salaries, credit scores, history of relationships with money, debt loads, investments, absolutely everything. It doesn’t have to happen all in one conversation. It can be an evolving conversation over time.

The other thing I really want you to know about your partner is their triggers when it comes to spending money — what makes them uncomfortable, what makes them want to spend, what their emotional relationship with money is and what they grew up around. Not just what their socioeconomic background was but how was money talked about and treated in their family, because that is eventually going to rear its head in your relationship dynamics.

5. Should you wait to get married when you’re both in debt?

No, not necessarily. My husband had over $50,000 worth of student loans when we got married. You need to understand the type of debt that it is and the laws in the state that you’re getting married.

I’m a big advocate of the prenup myself, so I do think it’s really important to consider going through the prenuptial agreement process. We truly need to reframe how we think of prenups and think of it more like marriage insurance.

A lot of times when I say the word, people get triggered, like: “Oh, you don’t love or you don’t trust your spouse.” No, that’s not true. Everybody getting married has a prenup. It’s the default laws of your state. If you create your own prenuptial agreement, you’re basically creating a slightly different system that you feel would be a fair and equitable division of assets or any debt.

Now all that being said, if you do have debt, depending on state laws and when the debt was created, you’re not necessarily liable for your spouse’s debt. I do think that if you are going to wait, it could be a decade or more before you’re then able to get married if you’re waiting for someone to be debt free.

And the other thing is I don’t think of debt as a red flag for a relationship. What is a red flag is how the debt is being handled today. If there’s credit card debt from five years ago, maybe there was a medical emergency, maybe something happened or maybe they just weren’t good with money at that phase in their life. But now they have a plan and they’re paying it off. If instead there’s a continual cycle of creating debt, that is a red flag.

6. What advice would you give about how to compromise in a romantic relationship before things lead to a bigger money fight?

One of my favorite pieces of advice that an expert told me when I was writing “Broke Millennial Talks Money” was that it’s okay to just let a person take the win sometimes. Say you and your husband want to buy a couch. You want to spend $3,000, and he wants to spend $1,000. Well, $2,000 would be the compromise, meeting in the middle. Instead, it could be that you get to spend the $3,000 on the couch and then at another point, he’s going to get to take the win on a money conversation.

The other thing, too, when you’re getting into a fight about money — especially with purchases that you want to make — is to come back to the original goals that you have set. And if you haven’t set any as a couple, take a minute to do so.

Pro Tip

Develop strong money goals by making them SMART goals.

Your goals are the north star of your entire financial plan. Anytime there is a big debate about how you’re going to spend money, you need to look at how this is going to have a ripple effect on everything else you want to achieve and that can help solve the problem.

7. Do you have any advice for people on navigating cultural norms when talking about money with family?

I do think it’s really critical that we start to have conversations early on about what is the expectation — particularly if you are living in America and you’re married to somebody who has a different cultural expectation of how to handle aging parents or a dependent sibling or a sick relative.

Also, you need to talk to your parents. You need to ask them early on what they want. For some parents, it’s going to be obvious that they expect to live with you in their later years if that’s your cultural norm. You probably have an idea that’s the expectation, but it’s still good to have a chat about it.

For others, your parents might tell you don’t worry about it. Just because they tell you that, doesn’t mean you’re not going to worry about it. I think a really easy way to turn the conversation around is to ask about what they see their retirement looking like. Over time though, it does need to start to become more of a real conversation about the finances.

8. How do you bounce back from a falling out with someone about money?

I think that depends on how necessary — and this is going to sound a little harsh — it is to bounce back from it. What one of the financial therapists in the book said, pertaining to friendship dynamics, is that not everyone is a lifelong friend. I do think that an important thing to consider is that there are friends who will be close friends with you only through seasons of your life. That doesn’t mean that anytime there’s any difficulty or strife, you say, “I’m out!” But it is an important thing to keep in mind.

9. How do you advocate for yourself when you and a friend have different values when it comes to spending money but you want to do things together?

Provide an explanation. It really does help provide context for why you keep saying no or keep pushing back. Now, just because you have different values doesn’t give you the right to belittle their values.

Let’s use an example of going out to brunch. Bottomless brunch is going to cost like 50 bucks and you don’t want to spend that much. You can say, “I really want to spend time with you but I’ll be honest, I don’t want to pay bottomless brunch money right now because I am trying to [insert thing here]. How about we grab a bagel and go for a walk in the park? Or how about you come over and I’ll cook us some brunch?” Provide some sort of alternative solution for the fact that you’re saying no.

Pro Tip

This list of 100 free things to do can help you find an activity to do together that won’t cost any money. 

Now remember, they’re free to do whatever it was they initially planned to do. Just because you’re removing yourself from the equation doesn’t mean that they have to adjust plans. Providing that alternative, however, maybe you can just set up plans for another time.

Another thing you can do is join later. I really love this for birthday dinners and splitting the check. You could join for dessert after or for a drink after. You’ll miss that whole part that’s going to cost the most amount of money. Just tell your friend you’re going to do that ahead of time.

10. Do you think this experience of living through the pandemic will help people become more comfortable talking about money?

I really hope so. I do feel that we certainly have had an unprecedented experience and unlike other recessions prior, most people did not have any level of personal culpability for what happened to them.

You could have had your financial house in totally great shape. You could have had six to nine months — even a year’s worth of emergency savings — but if you worked in an industry that got totally shuttered during the pandemic, that’s not on you.

I do think that, hopefully, people will feel slightly more comfortable having conversations about getting into credit card debt or being behind on bills or their credit score taking a hit because truly it wasn’t their fault in a lot of ways. So that might give us the flexibility to have less judgment wrapped up in some of these financial conversations.

Nicole Dow is a senior writer at The Penny Hoarder.

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Source: thepennyhoarder.com

This Tool Helps Find the Perfect Real Estate Agent for You

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As housing demand continues to grow and buyers are putting offers on homes as quickly as they come on the market, Homes.com wanted to create a streamlined process to make building your real estate team easier than ever before. As every homebuyer and seller knows, having trusted real estate professionals on your side is one of the most important steps in the homebuying or selling journey. But finding those professionals sometimes can feel overwhelming. In order to find an agent that best suits your needs, Homes.com has introduced, and upgraded, our “Agent Search” feature.

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Now, buyers and sellers can find an agent that’s most suitable for their specific needs. Not only can you find trusted agents in your area fluent in your language or with special knowledge of different real estate practices, but you can also identify agents with rapid response time, those who are Homes.com preferred, and even read through endorsements from other buyers the agent has worked with in the past. We’ve also introduced a “Search by Specialty” function to ensure you find the right agent for your journey. 

Search by Language

As a champion of diversity and inclusion, Homes.com introduced the “Search by Language” feature in order to provide buyers and sellers with a real estate professional who will be able to communicate with them clearly and in their preferred language.

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In addition to narrowing down your ideal real estate agent by language, you’ll also be able to identify those who are “Rapid Responders.” “Rapid Responder” eligibility requires an agent or office to have a dedicated specialist answering phones during normal business hours,” says Chris Horton, Director of Product for user experience. “For home searchers, what this “Rapid Responder” credential means is that they will easily be able to speak to their agent during their homebuying or renting process.” 

Search by Specialty

There are plenty of reasons people may be looking to move, so if you’re looking for an agent with a specific specialty, then this is the way to go. Homes.com provides its users with a way to narrow their agent search through the “Search by Specialty” feature. If you’re looking to sell your home, you can find trusted agents within that field. Service members can find agents who specialize in military family home search, and you can even filter by agents who specialize in finding senior communities for those who are searching for their retirement home. Other specializations include new construction, property management for those who like to invest, and luxury homes to make your team tailored to you.

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Start Your Home Search Journey Today!

With Homes.com, your home search has never been easier. We’ll be with you from every step of the way. You can start browsing available properties on our homepage, search for the ideal real estate team using our new search functionality, find the best lender near you to assist in your home financing, and even visit our How To section to find an entire step-by-step guide on the buying, selling, renting, or financing process.


Content Marketing Assistant at Homes.com | See more posts by this author

As Homes.com’s content marketing assistant, Sydney gets to combine one of her favorite pastimes with her job– keeping up with pop culture. Outside of work, she enjoys stepping away from her phone and computer and spending time with her friends, whether it’s just hanging out or traveling. Trying new foods, going snowboarding, and long road trips are some of her other favorite things to do, but what does she loves the most? When people read Homes.com’s blog articles, of course!

Source: homes.com