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Becoming debt free, how to cut your living expenses, saving for retirement, and investing

Jonathan Mendonsa is the co-founder of the ChooseFI podcast. Jonathan started his career as a pharmacist with $168,000 in student loans. He aggressively paid off the loans in 4.5 years and using the tenets of Financial Independence to cut his life expenses significantly, and left his corporate job to focus on full-time entrepreneurship 9 months after starting the podcast. In this episode, we talk about becoming debt free, how to drastically cut your living expenses, saving for retirement, investing, and why Financial Literacy can be the key to freedom.

Transcript and show notes can be found here



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Jonathan Mendonsa 0:00
The average car payment in America is like over $500 now. I just found out. If you can get rid of a $500 car payment, pay cash for a car or bike or walk to work because it's close because you've designed your life around this lifestyle. You want to live your life already, you've slashed the cost of your lifestyle by four, you've immediately baked in a 40% savings rate.

Jay Clouse 0:19
Welcome to Creative Elements, a show where we talk to your favorite creators and learn what it takes to make a living from your art and creativity. I'm your host, Jay Clouse. Let's start the show.

Hello, welcome back to another episode of Creative Elements. I could not be more grateful that you've chosen to spend the next 45 minutes or so with me. Now, to be honest, a few times per week I'll check the show's ratings and reviews on Apple podcasts and I'll admit it makes me feel good to read what you guys are saying about the show. One recent review from Matthew Gattozzi says, Jay has done a phenomenal job of getting A list guests on the show, while creating an incredible storyline from start to finish. If you're a creative entrepreneur or someone who likes stories, this podcast is for you. That is deeply appreciated. So Matt, if you're listening, thank you. And if you haven't left a rating or review on Apple podcasts yet, please do so. I brought this up not only to brag, but because when I go on Apple podcasts, it will recommend to me the top business careers podcast because that's the category that Creative Elements is in. And since launching this show, the number one careers podcast has been ChooseFI. ChooseFI stands for choose financial independence, and it blends personal finance, entrepreneurship and personal development into a strategy for optimizing your life for intentionality, freedom, community and happiness. Those are all things that I can get behind. And today on the show, I'm talking to the co founder and co host of ChooseFI. Jonathan Mendonsa. Jonathan started his career as a pharmacist with $168,000 in student loan debt. He aggressively paid off those loans in just four and a half years, using the tenets of financial independence to cut his life expenses significantly. You heard that right. He had $168,000 in student loan debt and paid it off in less than five years. Don't worry, we'll dive into how he did that in the interview. Jonathan left his corporate pharmacy job to focus on ChooseFI full time nine months after starting the podcast. ChooseFI has nearly 1 million monthly downloads and more than 200 local ChooseFI chapters throughout the world. They're one of the leaders in the financial independence movement, and I'm excited to have Jonathan here on the show. A friend once told me that you can view money as something to be afraid of, or you can choose to view money as a tool that you can leverage. And I think viewing your money as something to leverage is one of the most important things you can do as a creative or business owner. So this episode is going to be a little bit different. We'll still talk to Jonathan about his path to online success, or we're going to spend a lot of time digging into personal finance. We talked about becoming debt free, how to drastically cut your living expenses, saving for retirement, investing, and why financial literacy can be the key to freedom. Now all along the way, I'm going to try to break things down and keep things simple so that you can understand them and follow along. But I have to put a disclaimer here that this episode is intended for informational purposes only. And this is not financial advice. We don't know your specific financial situation. So you should do your own research and diligence before making any major financial decisions. I have to say getting comfortable with my finances has been huge for me and it's a lot easier than you may think. Personally, I'm a big fan of Wealthfront, which is an investing platform that makes saving really easy. Listeners of this show can use my affiliate link jayclouse.com/wealthfront to get their first $5,000 managed for free. That link will be in the show notes, and you'll understand why getting your money managed for free is a big deal later on in the interview. Send me your thoughts and questions on this episode as you listen. You can find me on Twitter or Instagram at @JayClouse, give me a follow shoot me a note. And without further ado, let's hear from Jonathan.

Jonathan Mendonsa 4:39
It's kind of interesting. So we're, you know, on this podcast now, we're talking to creative people that want to really explore the entrepreneurial passions and really kind of build a life for themselves around something that they're incredibly interested in. And my backstory is, is that that was the opposite. I saw starving artists everywhere, right? You can you can either be an artist or you can get paid. It's one, it's one or the other. And so I wanted like a very safe guaranteed paths. And so I remember I'm in my high school english class years 1999. And Google's just kind of rolling out, right? It's like it's competing with Ask Jeeves. And my high school English teacher is suggesting to us that we can use Google to do a little bit of research. And I realized that I could use Google not just for, you know, my high school English paper, but to like, ask other questions. And one of my most basic questions were top 10 paying professions right? Now, I want to make sure I have a safe income for myself and my future family one day. And so I mean, it's kind of cliche, but it's not too far off to say that I did that Google search, and that started the next 12 years, and I decided, you know, on that list, pharmacy was there and then from there, I had tunnel vision, right? I was like, Alright, well, I need to find out more about this profession. You're asking your friends and neighbors, you're getting all sorts of bias for the answer you want to find. And then you're off to the races and I pursued pharmacy and that career trajectory ended up 12 years later, four years of high school four years of undergrad, I graduate and now I'm a practicing pharmacist, making an entry level 6 figure salary great. I also have $168,000 in student loan debt not so great. And find out pretty quickly, that one, it's a lot harder to pay back the student loans that is to take it out. Two that after taxes an entry level six figure salary doesn't look like a six figure salary. And three man, that was a huge time investment for something that I was not incredibly passionate about. And if I look back, maybe I could say at various points, I was passionate about it. But I think it was through the lens of well, this is just what you do. As opposed to the question, well, what could I do? That's kind of an interesting framework for us to kind of work from to kind of flesh out this next bit because I very much realized at some point on there, I think my ladder is on the wrong wall, right? I am. This is not where I want to be 60 years from now, looking back and saying, Oh, it's good run. No.

Jay Clouse 6:49
I remember those lists. There's also things like petroleum engineer. Was that a push from your parents at the high school or were you already just kind of ahead of the curve thinking about you know, life after college? Because when I was in high school, I had no idea what I wanted to do. I didn't know if earning was even on my radar. Like, I just wanted to not be in my parents' house anymore.

Jonathan Mendonsa 7:08
Yeah, well, I think not being in my parents house was a big part of it. Right? You know, making sure that I had an income to be able to afford a certain lifestyle do better than my parents did. And I'm oldest of five kids. My father's a community college professor, my mom was a stay at home mom with a big household, right? So I mean, we had enough to meet our needs, but we didn't have a whole lot more than that. And the cut of the money advice that I was given for my parents was just like, don't go into credit card debt. We didn't really have conversations about student loan debt. In fact, it was just education, education, at any cost, the degree will always be worth it. And if a bachelor's degree is good than a doctorate is great. You know, it's great. That's kind of that's kind of the setup for this now, you know, this is one of these interesting conversations, in that while life is linear in the aspect that tomorrow you are going to be older than you are today. You're not limited to one charted course you can kind of add additional information to your portfolio to your knowledge base long before you're actually ready to use it. And, you know, if I was driven to get this this job by making sure that I had a secure paycheck, even though I knew that I was going to pay down those student loans before I could really enjoy, you know, the margin that that paycheck would provide. I was already thinking, Well, what else can I do? What does it look like to do better with my income do better with my investing do better with my time. And so that led me down two courses kind of parallel, one was wanting to pay off the student loans. And that's pretty easy to map out, you just have to spend far less than you make. And then you need to like put that difference to your student loans and you don't stay the course and not let your eyes wander and get, you know, upgrade to the to a new car into a larger house and whatever if you can just kind of, you know, maintain a reasonable lifestyle. You can pay off the debt. So for me 168 K, took me about four years to pay off that student loan debt. But what's interesting is, I knew long before I got debt free that I was going to get back to debt free, right?

Jay Clouse 8:54
How did you avoid even just like the crippling fear and the crippling anxiety It comes with that level of debt and build a plan so quickly to pay it off in such a short period of time.

Jonathan Mendonsa 9:05
Got to love my spreadsheets, I just kind of mapped it out. I knew what I had post taxes, I knew what our life so this is actually a big part of this. I actually knew what my life cost. When you have bill after bill after bill hitting your life, your life is complicated, and it's stressful. You don't know if the balance where it says you have a couple grand in the bank account, you don't know if that's actual money that you have, or really just money You have until the mortgage and all the associated payments land. I didn't have any payments. I had a very inexpensive mortgage. And I had no car debt, no credit card debt, nothing else, right. gastrula. That's key for this. In my case, it was around, you know, $40,000 a year $30,000 to $40,000 a year, including the mortgage. And that was really a key to this because that means that you were able to then put aside effectively $40,000 to $50,000 a year towards the student loans and then honestly the key so my dad's kind of an extreme example, I am not claiming the award of most student loan debt people have beaten me, but when you have six figures didn't learn that you have to know how much your life actually cost. And then you want to simplify it wherever possible. So if that means you have payments for your couch or your blinds, like clean up the small stuff, get it out of the way, and then roll that into your larger payments. From there, look for the small wins because this is not something you're not going to get that quick hit in two or three weeks, you have to stay the course. And so you have to look for the small wins in between. So in my case, it was a spreadsheet when I started $168,000, it looks like well over $1,000 a month in interest is what it looked like on my on my student loan payments. And so I actually noticed when I would send $2,000 or $3,000 off that my daily interest would decrease by, I don't know 30 or 40 or 50 cents a day, something like that. And I would actually make note, all right, each time I'm doing this I'm actually getting a small raise, right forever, that money is now going to pay down principal and I could just keep leaning into it. And the spreadsheets. It looks like micro at first. But over time, it starts to look like a macro view. You know, you realize wow, I'm really making a dent in this thing. In my case what it would look like for me at the I would basically I'm a spender this just kind of interesting thing behind all this, I love my gadgets, I love to spend money. So it's It was challenging but I could I could maintain intense focus if I had a goal. And my goal was paying it off, but because I knew it was gonna take me four years to do that, what I would do is I would get home after a two week shift. And a lot of times I would have had four or five shifts in a row, it's Sunday night coming back after 8 or 10 hour shift. And I before I even gave my wife a hug, I would just go upstairs, this office room had this whiteboard, this whiteboard was broken off into 100, checkboxes, each checkbox represented a pay period where I was making the choice that pay period to send every extra Penny I could to those student loans, and I was doing it before spending the rest, right, I'm not going to give myself a chance to spend it. I came up with an idea of what my life would cost. And then I figured out how much would be left and instead of actually having something left, I would pay it first. I'll spend the rest, but I'll pay it first. And if you can look at those checkboxes man when you check off one box and you realize you have 99 more of left and that represents a two week period of time. That sucks. But when you're like 46 going to 47 and you about to be halfway done, you look back at all those checkboxes where you made the choice to pay down your debt first. It feels good, and it feels like what you're buying is your future freedom. And it's coming faster than you think.

Jay Clouse 12:12
When we come back, we'll find out how Jonathan went from pharmacist to entrepreneur, and dive deeper into how you can start planning for your own financial future right after this. Welcome back to Creative Elements. Jonathan was just telling us about his own battle with student loan debt. Student loans are one of the biggest burdens that have been placed on our generation. In return for the ability to practice pharmacy, Jonathan left with $168,000 in student loan debt. I'll say that number one more time $168,000 in debt. Now, Jonathan went down this path because he thought it was the most financially viable way to earn a living. And it's due to his own financial literacy, that he was actually able to pay that off within a very short amount of time. And once he was debt free, he realized that his ability to command his finances opened up a lot more doors than he even realized.

Jonathan Mendonsa 13:06
And so from there, I was like, well, what else can I do debt free. I mean, I was literally. I was broke at the age of 18. Now I'm almost 30. I'm almost back to broke again. So what do I want to do? And I was just kind of charting this out. And I stumbled across this community called the financial independence community. And individuals like mister money mustache back in 2012, really leading the charge on this and talking about how they've been able to save a ridiculous percentage of their income, close to 50% or more. And by doing that, for a period of about 10 to 15 years, they basically gotten to the point where working is optional. And so I looked at my co workers around me and there were individuals working right next to me as a pharmacist in their mid 50s, mid 60s. They looked horrible, they looked like death for over like, right. I mean, I was like, This is not what success looks like. If I can just do this for another 30 or 40 years. This does not look like happiness. So I'm starting another course and I'm like, Alright, my baseline, my absolute baseline of what I'm gonna do is I'm just gonna figure out how to save, you know, close to 50% of my income. So I've got the student loan debt gone, I clearly was paying a lot of money to get rid of it. Now, if I can just reduce the amount of inflation in my lifestyle, and make sure that whatever raises you can get to can go towards your savings rate, bonuses, etc, then I could chart out of course, be at the point where working is optional within 10 to 20 years, not 30 or 40 years, which is kind of that 40 year working career that we think about and and to kind of show you the math on that, Jay, if you're a paycheck to paycheck right now, you can never retire, right? You need that paycheck to make it to the next pay period. If you're saving 1% of your income, that means that every 99 years you work, you could afford to take a year off, but I mean, you just can't run very many of those cycles. If we had eternity then great, but no, and we could just keep scaling that up. And that's where you start talking about the savings rate of 5, 10 percent 25%. If you're saving 25% of your income, that means every three years you work you could afford to take a year off and then now you see the power of this 50% savings rate, if you could get there every single year you work, you could afford to take a year off. And then you can amplify those results. If you can invest in common sense, investing strategies using broad base low cost index funds, just try to keep up with the market, we're not talking about a secret or you're trying to beat it or you know, kind of time in or go in and out or you have to have a quick hit stock. If you could just keep up with what the market has done over any 30 or 40 year period. That's going to basically look like you getting to the point where working is optional 10 to 15 years.

Jay Clouse 15:27
Okay, I'm going to stop Jonathan right there because I think I could hear your eyes glazing over. Listen, I know that finances can be hard to understand. They're boring, and they're scary. But if there's one thing that I've learned over the last few years, is that you need to care about them. Student loan debt doesn't go away by accident. You won't have money ready at retirement without intentionally putting it away. So let's break down a little of what Jonathan just shared. Let's pretend you earn $60,000 per year, and you can survive on $30,000 per year. If you say that other 50% of your income Which is $30,000, you could use that money to live on next year without worrying about any additional income. That's not a perfect example due to considerations like taxes, but you get the point. That's what Jonathan is talking about when he says that if you can save 50% of your income, you can take one year off for every year that you work. So if you're saving half your income for 20 years from age 20 to 40, you may be able to live from 40 to 60, without any additional income. And if you're investing that money, you can earn money on those savings too, which buys you even more additional years. Now, Jonathan also mentioned broad based low cost index funds. These index funds like a Vanguard index fund, spread your money across a diversified portfolio of investments, you're essentially buying a small amount of 500 of the biggest public companies in the United States. The goal here is to lower your risk that any one investment could tank your portfolio. Most retirement funds, including 401K's are built on index funds. And over any major time horizon 10, 20, 30 years or more, the market has always returned some positive amount, you're going to make money when you invest in these index funds over the long term. So you don't need to be a genius at picking individual stocks to earn money on your savings. Okay, still with me? Let's get back to Jonathan, who was just telling us that he realized he could save money and retire early.

Jonathan Mendonsa 17:32
So once I saw that, it's like, Oh, okay. Well, that means I have I have, I have three options with how I tackle this and I'm not limited to really one. So do I want to earn more? Do I want to spend less and now that increases the difference what I want to do with it, how can I invest better and so that's what I realized, in my own story, even that business owners business ownership, when you have savings on your side, right when you have a low cost of living and you understand just the basics of how to save money, how to invest your money, you take what seems like risk for so many other people. And you can turn that into opportunity, right? When you're paycheck to paycheck, you can't really afford to look for opportunity, you can't, when you can get a little bit of space, dial yourself back a little bit, and realize that wow, because I've been saving 50% of my income. And I've had that invested. Because I've been saving 20% or 30%, I realized I have several years of expenses saved up. So I can take a "risk". But for me, I could go two or three years before I ever need to earn another dollar. And I have time to flesh out this business idea. I have time to dive into this new skill set on how I can actually build my business, right? And what you find when you really look into those studies. Small business owners often fail, but they embrace failure. They embrace failure as an opportunity to iterate. And that next business model is actually much better because it's built on the lessons learned from that business failure. So that actually changes how you look at failure inside you're saying, Let's fail fast. Let's fail small and let's fail forward. If you can get to the point where working is optional is great. You never need to work for $1 again, but it's not binary You get some of the power long before you hit this number that says you never need to work again, we just illustrated how this person that has several years of expenses saved up, they can do what they want for the next two to three years, right? That gives them some space. In my case, as I was actually documented my own story to pay off all my student loan debt, and I and I'm latching on to these ideas that are lighting me up and blowing my mind on a daily basis. And I'm seeing people that are reclaiming decades of their life, I want to talk about it right. I want to have a conversation about it. And so I propose to a friend that we start a podcast together and the podcast really brings in our thoughts and our community's thoughts and it blows up. It blows up beyond my wildest dreams. I'm doing it as a side hustle. While I'm working as a pharmacist. I'm a pharmacy manager with a large retail chain. And it was not a business model on day one. It was just a passion project. It was just a hobby. But I remember when it made like 30 cents while I was sleeping one night, I was like, Oh wow, you can actually make some money while you're doing this. And then I remember as we realized what it could be and that it could actually start to bring in some income. There was a point where I It wasn't replacing my income. But it was starting to replace like my core expenses, right. And I've actually now got several years of savings saved up, I've paid off all my student loan debts. And three interesting things happen, that we're all coming together. Now, we had a documentary that wanted to come film with us to talk about this community that we were highlighting, we wanted to go to a conference in our niche. And lastly, and most importantly, like I was due to go visit my wife's family in Zimbabwe. And so that poses an interesting dilemma. I'm in corporate America, you get like 16 to 20 days, like max, you know, and you can't take them all together. And I was like, I calculated it, like three weeks. So I went to my boss, and I said, I checked our policy, and it looks like you can give me a conditional family leave of absence. And I got all this going on. Is that okay? And he said, to be honest with you, I don't think it's in the company's best interest for us to let you do that. And because of what I just kind of laid out for you several years of savings, pretty low cost of living lifestyle, a side hustle which had become a business because I was able to take something that maybe would have been risky in a vacuum, but basically just viewed as an opportunity with no downside. And I was basically able to say to him, I don't think it's in my best interest to stay. And that's when I left and you could always go back, you can always go back there is no risk. It's just an opportunity. And that was the best thing ever in the podcast and the community in the business has grown from there. But before you're ready to execute on your vision on your dream, how can you make sure you have a glide path to take risk and turn into opportunity?

Jay Clouse 21:25
I love this. I love this combo of save more, spend less, that's a big part of the ChooseFI charter, right? So if I am if I'm listening to the show, and I'm an artist, and let's say I don't even have much debt or any debt, but because I want to spend time on my creative work, I've got a part time or not that great paying job. Maybe, maybe I'm a barista. Maybe I'm making $30,000 to $40,000 a year. How could I get to this 50% savings rate if my living expenses are somewhere between $30,000 and $40,000 a year.

Jonathan Mendonsa 21:59
Yeah, so that's a great question. And what I love about it is you've already laid out your options, right? You can either earn more, you can spend less, if you're saying, I can't earn more, which we don't know if that is true, like if you're actually being abrasive because of the lifestyle benefits it gives you because you're developing your side hustle on the side, it's not really 100% that you can't earn more. It's just saying that what I can count on is my base, right? Then now we're talking about spending less. And then the question is, well, what are you willing to do? If your life cost $40,000 a year, that means that well over 50% of what your life cost is eaten up by the cost of housing, or the cost of transportation and the cost of food. Those are the Big Three, especially on a 40K. I know because I can look at my own budget to tell you that I mean, it's it's pretty obvious. You have to ask what am I willing to do, right? But if you're if you're saying I'm not willing to do anything, and I'm not going to make more and I'm paycheck to paycheck, well, we know where this story ends. If you do want to get to a 50% savings rate without making more I can tell you how to do it. So since we know that the big three in this particular individuals case are housing, transportation, and food, there's a tactic that's worth the Google search all of these things, consider everything we're talking about here. Just little things to poke, you know, just start to plant a seed you can these are all individual questions that you can go look up find answers to let's talk about house hacking. This is a fancy way of saying let's get a roommate but beyond that, to dial it up a little bit. When you go to purchase your first home, you can just get a house for yourself, whatever and you can get that great financing. first time homebuyer financing. 3.5% fantastic. You just get a single family home. Maybe you could get a family home that has two bedrooms, you know, and then you could rent out the second room but let's say we wanted to go dial it up even further. When you're talking about house hacking. You realize that single family homes count they can be a single unit a duplex a triplex or quad any of those qualify for primary residence and all the preferred rates that you would imagine that you would get. If you were to get a duplex or a triplex you could live in one unit and you could run out the others with a triplex live in one unit run out the other two quad. You can see the same thing. Many individuals have used this and consider this the most powerful way. Because what happens is, when you move in, you do the math, you're not just buying in and you're doing it where the numbers work out. I know two individuals that purchased two duplexes here in Richmond, and I thought you couldn't even do it, I thought it was location based. And here in Richmond, it wouldn't work. I can tell you, if you're looking for it, you'll find it. And you have advantages. Because when you're talking about doing house hacking, you're getting those preferred rates that can make these numbers work, because you're going to be moving into that place that time. That means that investors, they don't have access to those same benefits, they don't have access to those same rates, a lot of times they have to bring cash, they have to bring much bigger down payments. Because you're moving in yourself. It gives you a lot of flexibility. If you can create a situation where you're living in one unit, you're renting out the other one, two or three units, they are covering your mortgage, you are now effectively living for free. If you compare that house hack that we just described with a house hack that is close to your place of employment, you can probably get rid of your car payment. And I know and just and I just want to set this up. I'm describing this in the context of the country. Find that we just described. But to be fair and accurate, I know multiple individuals that have done this, as it's their first investment. And because of it, they're at the point where working is optional in their early 30s. I mean, like late 20s, early 30s, it's insane. Those are just two things. So it definitely can be done right there. If you were to do that, you're talking about 30 40% that some everybody else, all your friends are paying for housing, you're not paying anything. In fact, you're probably bringing in profit. And if you really want to go extreme, the average car payment in America is like over $500 now I just found out. If you can get rid of a $500 car payment, pay cash for a car or bike or walk to work because it's closed, because you've designed your life around this lifestyle. You want to live your life already, you've slashed the cost of your lifestyle by four, you've immediately baked in a 40% savings rate. We haven't even gotten to the food yet. We can talk about that later on. Or it can just kind of be a setup for another piece. But those three, if you optimize those three, in the context of what we just described as what this person can do, they can hit a 50% savings rate and it's To say that everybody needs to do house hacking, or everybody needs to bike or walk to work. But for every single person that says I can't, what they might mean is I won't, I don't want it bad enough, I'm not willing to do that no matter how bad an individual listen to this might have it, you know, their own unique circumstances. My point of encouragement is that there is somebody out there that had it far worse than you have it just objectively not not make light of your situation. But as a point of encouragement, they have it worse than you have it. And because they were willing or able to look at the problem a little bit differently, they're getting dramatically different results. You don't have to do everything, but you're gonna have to do something if you want to change your financial situation.

Jay Clouse 26:42
After a short break, Jonathan and I will get specific about more steps you can take to change your financial situation. Welcome back to creative elements and my conversation with Jonathan Mendonsa of ChooseFI. Jonathan has been sharing with us some of the core tenets of the ChooseFI mindset, in an effort to help us with our own financial literacy. He's been advocating for earning more spending less, and saving more, which sounds obvious, but he was illustrating how impactful it can be if you save up to 50% of your income. So I asked him, if we're ready to start saving now, what does saving actually look like? Should we hoard our money in jars in the backyard? Or underneath our mattress? Where do we actually put this money that we're saving?

Jonathan Mendonsa 27:29
Let's see. So is this individual they have their own business? Do they? Are they a W-2? Well, you don't need to answer the question, but I think we should recognize that like people are in different places. So as an employee, almost all of us have access to a 401k through our employer, if you do, then you should go look into that. 401k and then our general advice is we just want to keep up with the market. I don't I can't tell you which stock is going to crush it next year in which one is going to fail. I just have no idea. Tesla is on a tear Amazon's on the tear. Do regulations come down to some big scandal come out Who knows? So I don't really try to figure it out, I don't spend any time thinking about I just know that over time, like a company, a single company, if I were to give you that my sweet picks for next year, a single company absolutely can go to zero, it really can, it can disappear. And it will not it won't be on the map anymore. But the market can't go to zero, because if it happens, Armageddon has already occurred. It was Armageddon, we all lost didn't really matter what your bank account was banking system is shut down anyways. So in that case, let's just try to keep up with the market and let's do it at a low cost as possible. If someone has a, you know, an advisor and a financial advisor and that advisor is charging them assets under management fee, their guy or gal is charging them 2% for assets under management, and then they have funds that are very expensive to own. What that basically means is, that advisor takes a percentage of the assets that you have managed with them regardless of whether or not your portfolio goes up or down. Every single year one or 2%, maybe it's a half percent, you just have to find out what it is with with your person. And what that means practically is if you are paying 2% in assets under management fees and expense ratio, Over the course of an investing timeline, like 20, 30, 40 years, your portfolio is cut in half cut in half. It's insane. So since it's so odd, like and the assets under management advisor might give you a couple reasons to stick with them, like, oh, but you know, I had your risk, and I make sure you stay in the market when the markets dropping, and, you know, you'll have to come up with some incentives, right. But like, that's pretty expensive to do that and they're making that money regardless of what actions you take. So if you you know, if you can just weather the storm, because when the stock market goes down, your your portfolio is gonna go down with it, but you don't lose any money unless you sell. In fact, if you could just get to the mindset, well, when the market goes down 30% that means I'm buying the stocks for 30% off if you can have that mindset when the market went down like a couple weeks ago, Blip, there's something in the news, like I'm getting excited, so I'm getting the market for a little bit less right is there a way I can get more if you can have that mindset with a long term, buy and hold you know that when the market goes back up, you're going up with anything you were able to buy as it goes down? You just were able to buy it on sale and so it's gonna go up even farther, and your returns are gonna be even better.

Jay Clouse 30:02
I want to cut in here because Jonathan is touching on a very, very important point that is key to your own financial literacy. If you're investing into a public market, whether it's through an index fund or individual stocks, you were buying small shares of a company. As of this recording, a share of Apple stock cost $350. Let's say that you paid $350 for one share of Apple stock right now, you now own that asset you own that share, not $350. So if Apple's price drops 30%, the value of that asset is now $245. But remember that you own the asset, it's not liquid cash, it's not $245 it's still a full share of Apple stock, even if the cash value is less than what you bought it for. When the market drops, people often panic and start to sell their assets. If you sold that share of Apple stock, you would no longer own that asset. you'd only have that $245 in cash $105 less than where you started. What Jonathan is pointing out here is that the price for a share of Apple stock may rise again in weeks, months, or even days. So the value of that asset that you own may rise again. So if Apple's price recovers, and the stock price goes back up to $400 per share, you're back on top, your asset that you own is now more valuable than when you started in all you had to do was hold on to it. And even better, when Apple's share price drops to $245. You can buy more shares for that new price. So if the stock recovers again, back up to say $400, you've gained $50 in your first share, and $155 on your second share. Now remember, that's value that's not cash in your pocket. But of course you could sell that asset and get that cash. That's why the legendary investor Warren Buffett says before fearful when others are greedy, and be greedy only when others are fearful, when prices go down, you may want to actually hold on to your investments. And it can actually be a great opportunity to invest more.

Jonathan Mendonsa 32:13
If you can have that mentality right now you can get the end the market, which is a low cost, broad based index fund, there's three providers that just obviously come to mind Schwab, Fidelity, and Vanguard are just the three most common providers that are out there BlackRock is another one. And you just want to look for a total index fund a total and it's something that reflects the entire market, and you just want to find something that has low fees as possible. So for instance, Vanguard who is kind of on the cutting edge of doing this, their fees are like 4.04%, which means on a million dollar portfolio, I think your fees are like 400 bucks a year. If you have $200,000. It's like less than 80 bucks a year, some days it's nothing. And each fund has a ticker for a mutual fund that will kind of allow you to keep up with the market. And you just throw as much as you can into in terms of you like your scenario we threw out earlier. I think the question is like How much do I need? You know, and this is one of my big problems with retirement calculators on the internet. They're all based around how much you make, which if you're saving money, by definition, you don't need everything you're making. Because you're saving money you need how much your life actually cost. So once you have a sense of how much your life actually cost, in this case, this lady that we had, we talked about this briefly a second ago, making minimum wage $35,000 a year is what their life actually costs. Just take that whatever number you came up with, for your annual expenses and be you gotta be intellectually honest, if this isn't steady state, this is a deprivation state, because you were leaning into it for a bit. You know, you really want to figure out what you project your life is actually going to cost. But let's just say it's $35,000 a year, you multiply that times 25. And if this individual were to have $875,000, and broad based low cost index funds, you could expect they could pull out 30 at least $35,000 a year for effectively the rest of their life. It would never run out you basically created a third income earner in the home that's working 24 seven for you but there's no like magic number. like someone's listening to this and saying, well, crap, all I've crossed 70 or 80 K, great, that's fine. Now you know how much your life costs now, multiply that times 25. For that 70,000 scenario, you need 1. $1,750,000. And so, you know, you could double that or triple that, but it's just a function of how much your life actually cost. And then again, like, it's not all or nothing, right? If you're saving 50% fantastic. That's something that I anchor myself to. I use anchoring as a technique to really keep myself focused on my goals. But if you save 40% 30% 20%, are you a failure? No, the average American is saving negative percentage each month, there's opened up a new credit card to get to the next pay period. If you're saving 20% fantastic. And if you're saving 20%, where you were only saving 10 your future self is going to be doing jumping jacks thanking you for getting your act together and getting focused on this. So this isn't, this isn't binary, but what it does is again, knowing that we just talked about how when you're building a business, you're creating equity out of thin air. So if you're in the business building mentality, you don't have to get to FI and I did not get to FI before I started building my business, right? I did. at a low risk, the amazing thing is when our parents, the generation before us, when they wanted to start a business, it had to be a physical location. It had to be brick and mortar, you had to go get a lease, maybe it was a 5, 10 year lease, like this is a digital age, which means your costs for startup are nothing. They're what you allow it to be for me if my business didn't work, maybe my ego was a little bruised, and I can just go back to work is this the only in this era, can you create a business for like less than $500, less than $100 for nothing, you get it for free, if you really want it to. And then from your revenue that you bring in scale and grow as it suits your needs. My business like it, certainly it cost money now to run. And it's a lot. It's a big budget now. But when I started, I started with less than three or $400 worth of equipment, but a few Google searches. It's just this is an incredible opportunity for you to explore your creativity and do it in such a low risk opportunity, If only you could get some bandwidth in your life.

Jay Clouse 35:58
So to get back to the story of Jonathan here, start off, I want to earn good money. Business owners fail. I don't want to be a starving artist . And now here you are running a podcast that is wildly successful teaching thousands 10s of thousands, hundreds of thousands of people to be financially independent. What's changed? How do you feel now about running a business.

Jonathan Mendonsa 36:19
There's this thing get 1% better, right? A 1% better, we hear that, but you can apply it to every single aspect of your life and with business. It's so powerful. So let's actually step back because it's interesting. In the context of this, we've actually talked about two investing strategies. We've talked about, hey, let's make a lot of money. Let's put that money to the side and let's throw it in the stock market, low cost, broad based index fund, that's, you know, let's get our money invested in the stock market, which would be one tried and true path. We talked about real estate investing through the lens of let's let's try house hacking and see if there's a way that where other people were spending $1000,$ 2000, $5,000 a month on a mortgage, we're living for free, in fact, bringing in profit, allowing us to de-risk our life. And then now we're kind of shifting gears and we're talking about this other angle, which is building a business. And what's incredible about building a business is you're literally creating equity out of thin air. The business which was worth nothing and didn't exist yesterday, is now bringing in $30,000 a year in revenue or more. Jay, I think you've sold one business in the past. And you could point the fact that if you have a $30,000 a year business with clientele that are showing up and paying money, if you were to sell that business to some point, you're not just selling it for $30,000, depending on the industry, it's a multiple of that. And so you have literally created equity out of thin air, you're creating a valuable entity out of thin air due to you every single day showing up and leaning into it bringing in your talent stack, bringing in your creative energy and your love into this business, building a team to support a vision. And maybe you're seeing revenue growth of 10% or 20% a year, maybe 10% or 20% a month when you figure out that 1% piece that you weren't doing before. You're constantly provided this opportunity to get a little bit better to dial in your message to open up networking opportunities to add a service that you weren't offered before, to look at the market and see what the market's unique needs are, and really dial in that message. It's an incredible opportunity. And it's not unreasonable to think that a company's value could be doubled within a period of months tripled within a period of years. And that's a unique like, you know, as long as you can give yourself the space and the permission to get a little bit better, you can blow it up. And so I wouldn't, you know, you don't need to go all in on this hand. Everybody that has made wealth has done it one of the three ways we just described, they've either build a business, they've invested in the stock market or the market successfully, or they've invested in real estate. Those are your three options. There's nothing else I haven't been able to think of anything. And I don't think I think anything that you come up with could probably fold itself very neatly into one of those boxes. And so you're not just limited to one in my case, I find investing in the stock market, very easy and comforting. It doesn't like it requires very minimal input for me. I just want to have extra money. I throw it in stock market. I don't at this point. I don't I don't I don't do a lot with real estate. That's just not me. I do know people that are doing it. But you don't have to, you know, if you find one or two that you love, that's probably going to be more than good enough. And so this is kind of where business building comes in. And I've kind of been able to get to the point where my business can fund my lifestyle and create margin to invest in the stock market. I don't really feel like going out and taking on the day job currently, you know, with real estate. And so this is kind of how I found my lane, but you need to know the options. And I think it's one of the things that they just don't teach you this in school, they don't teach you all complimentary.

Jay Clouse 39:25

Jonathan Mendonsa 39:26
They don't teach you how to like really practically what it looks like to build a business or entrepreneurship. It's a much needed skill. And I think if we can take some of the fear away, right now, with schools, we're training people for jobs that really no longer exist, whereas the jobs of the future are the ones that you create. They're the ones that haven't even been thought of yet and give yourself the space and the opportunity to figure out your unique value to the marketplace that only you can bring as an incredible opportunity and creatives are so uniquely positioned to thrive in this new economy that we're all finding herself in.

Jay Clouse 39:56
So maybe by this point in the conversation, you're convinced that you should be Investing for retirement. But for self employed individuals like myself, you can't just go through a company 401k unless you set up your own 401k for your own company. So I wanted to dig into that and ask Jonathan, how and where we should invest our funds, especially knowing that some retirement accounts actually penalize you for trying to withdraw your funds early.

Jonathan Mendonsa 40:22
Great question. I love this question. Okay. But it's complicated. So let's let's go hear that. Let's do it. So first of all, your question you have basically three options to which I can recall off the top as a individual that starting your own businessfreelancing, your solo 401k, SEP IRA, SIMPLE IRA. These are containers that are available for entrepreneurs to give them access to invest in the funds they want to access. Now, there's benefits for each but for most people after doing some research, and when you're starting out and your revenue is building the solo 401k will probably be the most attractive, and the solo 401k actually lets you put up to $18,000 a year into that Accounts pre tax, and actually it goes up by about four or $500 a year. So now it actually might be up to like 19,000. But what's interesting is if you're an employee working for company, your company might offer a match, right? That match is not actually considered part of your contribution, what it is, is you're able to contribute up to the limits, maybe it's 19,000, 19,400 somewhere in that range. But then your players adding on an additional maybe at the 4%, match 5% match. And you're able to do that effectively when you have your own business as well. And what's interesting about that is the actual amount that you can put in pre tax into account between the employee contributions and the employer contributions is roughly 25% of profit, or $53,000. Right? So that means actually, you're able to put in up to $53,000 into the solo 401k pre tax. So if you're in a marginal tax bracket of 25, 30%, that means you're avoiding 30% taxes, your money's going 30% farther growing tax free. Now, what's interesting about this is that tells you will open Crap. Well that's that's an easy problem to solve, man, if I could just get a business that would make $200,000 in profit each year that Oh, holy crap, I could actually invest up to $53,000 into this account, pre tax. Now, there's some nuance here. As you know, as an entrepreneur, when you're the employer, you have to pay both the employee Social Security tax and the employer side. So there's some additional taxes on on both ends of that. But this is an incredible superpower for freelancers that are actually able to build up the revenue stream and understand how to do that. So that's definitely another one of those things. This is not the, you know, the manual on how to set up a 401k. But if you hadn't thought of that before, you're not setting aside for your retirement. You need to be doing that. This is an incredible opportunity. The government is encouraging you to save money for your future. And the great thing about your future is it's coming. You're going to need this money at some point, right? And someone saying, Well, what if I need the money now I hear you, you're going to get to 60. So you probably want to leave it there. If you want to get it sooner, there's actually a couple ways that you can get access early one is you can just get it early. There's a 10% penalty. Like I'm not a fan of paying penalties if you don't have to, if you really had to, but figure out a way not to have to first of all, but know that you could, if you absolutely needed it.

Jay Clouse 43:11
So I've been listening this podcast now this whole conversation between you and I, and I am totally convinced, I'm going to get a handle on how much my life costs and I'm going to start saving at a higher rate. What would you say are the next steps for me right now, if I take nothing else away from this conversation? What are the next steps that I should take as a listener to have a better shot at financial independence?

Jonathan Mendonsa 43:36
If you don't need accountability, if you don't need a plan, you just kind of know you just needed the nudge you already know. Go do it. But the information is fine, but it only works if you take action, right? So one is just get started. Don't you don't have to solve everything now. Just the same with your business with your finances. You can focus on the one piece, what I would try to do is automate everything. So for instance, we just described a ton of terms. I almost feel bad, how many like kind of accounting level terms we just threw out there. It does not have to be complicated. Once you get this thing piloted, you could spend less than 10 minutes a month, right? So figure out how it is that you are going to start saving for retirement out of buddies in the military. And he came to me in the military does a great job getting you to invest in the TSP, which is the military retirement account, which is fantastic. Everybody should take advantage of that. But he actually had no idea how to set up an account outside of that. So that is this individual that literally might be the most painful part is actually setting up your first account and funding it with your first $100 $500 actually understanding how to do that. I tell you what we actually created if you don't mind me doing a little promo here, we created a free course. I want someone to maybe be able to have an action plan that they can put into place. So my podcast is called ChooseFI and certainly you could listen to the podcast but if you just want the course it's completely free. Just go to ChooseFI.com/FI101. And that course is intended to be it's like a six to eight week course. And in each one it breaks down the individual steps to actually get your game plan in place. I think you could charge for it. But if you're charging what it's worth, I think it'd be priceless, right? So it's really no point. This is like something they should have taught you in school, but they didn't. So we're rectifying it. Now this is what you need to know better ChooseFI.com/FI101.

Jay Clouse 45:18
Kudos to you, my friend, you made it all the way through an episode about personal finance. I know this was a bit of a departure from our regular episodes. But I think this is one of the most important topics for creatives and entrepreneurs to understand. For the first two years of my business, I didn't save much money at all. And when I began to learn how powerful compound interest can be, I was kicking myself for not getting started sooner. So really consider everything Jonathan shared with us in this episode. If you can lower your expenses and begin putting more money away today, your future self will thank you. Your future family will thank you and it starts with some really small steps. Again, If you want to check out Wealthfront, which is a tool that I use to invest, you can use my referral link at jayclouse.com/wealthfront to get started with your first $5,000 managed for free, no fees on that $5,000. I also really recommend the free financial independence course that Jonathan mentioned, which is at ChooseFI.com/FI101. If you want to check out Jonathan's podcast, just search for ChooseFI and the player you're using right now. I recommend starting with Episode 100, which is meant to be an introductory episode. Thanks to Jonathan for being on the show. Thank you to Emily Clouse for making the artwork for this episode. Thanks to Brian Skeel for mixing the show and also creating our music. If you'd like this episode, you can tweet at me @JayClouse and let me know I'm also on Instagram @JayClouse. And if you really want to say thank you, please leave a review on Apple podcasts. Thanks for listening. I'll talk to you next week.