5 Questions: The 4% Rule, Staying Financially Motivated and Passive Income

Updated on July 8, 2019 Updated on July 8, 2019
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Table of Contents  
  1. 5 Questions
  2. Thanks, Everyone!
  3. Show Notes

We get dozens of emails a week asking financial questions. Sometimes we get a question so good, we want as many people as possible to hear it and the answer. That’s how 5 questions episodes were born. We have questions about the 4% rule, staying financially motivated, and making passive income. Let’s answer some questions.

5 Questions

We’re covering a wide range of topics today. We’ll cover car down payments, diversification, retirement investing, passive income streams, and sustaining motivation.

Question #1 – Buying a Car

I have a question about saving for a car. You have a rule of saving at least 20% before buying a house to avoid PMI. Is there any similar rule of how much to save for a car?  Should I try to save the full cost of the car to avoid taking out a loan? Or does it make more sense to invest some of that money and use a loan to finance the rest?

Kelly

What a timely question! Check out our recent episode on the time value of money and you’ll have your answer. To address the question more specifically, take a look at this chart which shows how much a car depreciates over time. See that steep downslope? That’s the reason we recommend back-to-back three year leases over buying a car.

20-year depreciation

The car loses an average of 15% of its value each year. But the average return you can expect over time is 7%. So if you simply lease a car, you can use the money you would have spent buying a car to invest instead.

Where should you invest? We always recommend an index fund like Betterment but if you want to take some of that car money and invest it in individual stocks, invest in companies that are currently developing self-driving cars.

Self-driving cars are no longer a futuristic idea. Companies like Mercedes, BMW, and Tesla have already released, or are soon to release, self-driving features that give the car some ability to drive itself.

We’ll see them very soon so investing now can mean getting in before the masses. Buy low, sell high. 

Question #2 – Diversification

What are the pros and cons of using Fundrise to invest in real estate? At what step in your financial goals should you consider using it (ex: invest in 401k first, general market investing/Betterment second, etc.)? Is it for long-term or short-term investing? Also, how does it stand up to other user-friendly investment companies like Betterment? 

Amanda

Fundrise is meant to be a long-term (10 years or more) investment as the money invested only becomes liquid quarterly. Andrew and Laura have 85% of their money invested in the general stock market (excluding the money they have invested in rental properties and their businesses). Another 10-15% is invested in real estate like Fundrise. Fundrise allows you to have some real estate in your portfolio and gives you some diversity as well as providing a source of passive income. It should never be above general investing (like Betterment) but the two should be in tandem.

Currently and largely due to what is probably a recession around the corner, they are investing twice as much into Fundrise as they are in the general market. For general investing, they like the Golden Butterfly portfolio which you can basically mimic if you set your Betterment allocation to 40/60 stocks and bonds.

Question #3 – The 4% Rule

Hey guys, listening to the show this weekend and heard the 4% retirement rule comes up a lot. I also hear you say it might be 3.5%, some say its 4.5%. I had run across two articles recently that say it might be much higher depending on your timeframe. Would love for you guys to summarize your thoughts and planning behind the rule. 

Jason

The 4% rule is a retirement saving strategy that is meant to be a rule of thumb and as such, there is some wiggle room. Less than 4% is more conservative, more than 4% is more aggressive. If you’re pessimistic about the current state of affairs, lower than 4% is better.

None of us can predict the future so apply the right logic to the scenario. In a bull market, you could bump it up to 4.5%, in a recession, you might bump it down. You can withdraw and spend more when times are good and you can withdraw and spend less when times are bad.

Betterment has a great retirement planner that can help you determine the best number based on the various circumstances you might experience. 4% rule.com also has a great calculator you can play around with.

Question #4 – Take the Cash or Passive Income Stream?

My wife and I currently live in a neighborhood in Southwest Denver. We plan to move back East next March.

Our dilemma is this: on one hand, we believe we could sell the house and pocket a decent chunk of change (maybe in the $60 – $80k range depending on how the market is next spring). On the other hand, we’re interested in renting the house. Rentals in our area for the size of home we have is roughly $2,000 per month. Our mortgage is $1,725.

If we decide to rent it out, we’re considering doing a refi as our rate is 4.875 and we can get it down to roughly 4% with about 18 months to recoup based on the savings. We don’t need the cash to purchase another home as we’re just going to be moving back into a rental unit I have in Delaware.

While we wouldn’t be making a killing, I’m trying to look at the house as a passive income stream. It’s in a decent neighborhood, the house was renovated before we moved in, lots of people moving to Denver, and I currently have a rental so I do have an idea of what it takes to manage one of these.

So do we sell and take the cash and invest elsewhere or do we rent this thing out and turn it into a passive income stream?

Jim

We recently did an episode that updated Andrew and Laura’s rental property situation. They currently own three rental properties. The properties earn $1,000 a month in cash. But that cash-on-cash number is the tip of the iceberg. It’s what’s going on beneath the surface that matters.

Rental Property Analyzer

With the cash-on-cash, appreciation, gains in equity, etc, those properties are generating $3,800 a month! Yes, in your situation you would “only” be making $250 a month but small streams of passive income add up incrementally over time.

You already have experience owning a rental property so you know what to expect. You might consider a streamlined refinance to increase your margin of error when calculating the income stream from the Denver rental property.

Question 5- Staying Financially Motivated

Our biggest challenge is wading through immense student loan debt and managing that with a toddler. My husband is a veterinarian and I work in clean energy, so we both make good salaries. But we still pay a large amount of our post-tax income to student loan debt and childcare (minimum $3,700 a month). 

Are there any tips for how to stay motivated on the long journey towards financial stability? We celebrate small wins, but paying off debt is way less exciting than saving for a rental property! We hope to be student loan debt free in 5-7 years, so it would be great to hear about ways to stay on track and make the experience a positive one versus feeling like a slog. 

Elizabeth

The fact that you’re even asking this question means you’re ahead of the curve. You are actively thinking about money and trying to make the best decisions. Because you have “the money mindset,” reaching milestones actually won’t be that exciting because your brain is already on the next milestone. 

By the time you’ve paid off the student loans, you’ll already be plotting your next move. It’s like winning a playoff game in sports. Yes, it was a great win and you feel good. But the next game that takes you one step closer to the finals is just around the corner. That’s where your mind is.

Appreciate that you’re on the right track. Look at those student loans as the cost you paid to have the well-paying jobs you have now. An expense that paid off and will continue to pay off.

And celebrate all of your wins, not just the financial ones.

Money is a vanity metric of happiness.

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Your kid took his first step? Celebrate! You finally cleaned out that closet? Celebrate! Life should be full of celebration.

Thanks, Everyone!

We really appreciate the thoughtful questions you all send in. And the compliments that usually accompany them!

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Show Notes

Gose Dragon’s Milk-White: A  white stout.

Matt’s Home Brew: A Kolsch.

 

Candice Elliott - Editor-in-Chief Candice Elliott is a substantial contributor to Listen Money Matters. She has been a personal finance writer since 2013 and has written extensively on student loan debt, investing, and credit. She has successfully navigated these areas in her own life and knows how to help others do the same. Candice has answered thousands of questions from the LMM community and spent countless hours doing research for hundreds of personal finance articles. She happily calls New Orleans, Louisiana home-the most fun city in the world.
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