Podcast Summary: How to Money – Episode #946

Release Date: February 17, 2025
Title: Ask HTM - Birth Now Pay Later, Forcing Home Equity with a Basement Build, & Saving vs Paying Credit Cards #946

Hosts: Joel and Matt from How to Money, an iHeartPodcasts show dedicated to providing comprehensive personal finance guidance.

1. Introduction to Listener Questions ([02:09])

Joel and Matt kick off the episode by outlining the main topics they’ll cover, centered around listener-submitted questions. This episode delves into innovative financial strategies, home renovation funding, and managing debt versus savings.

2. Phil's Question: "Birth Now Pay Later" vs. Immediate Payment ([07:59])

Scenario:
Phil is facing a $2,700 medical bill from childbirth. He has the option to:

• Option 1: Pay the lump sum upfront.
• Option 2: Utilize the hospital’s 10-month interest-free payment plan.

Discussion Highlights:

• Pros and Cons of Deferred Payment:

  • Joel draws a parallel to buying furniture on interest-free terms, warning about potential pitfalls if payments aren’t managed meticulously.

    “If you don’t pay off your loan while the promotional interest rate is in effect, you're going to owe a lot more.” ([13:11])

  • Matt advises caution, emphasizing the minimal financial gain from keeping the money in savings versus the risk of accruing penalties.

    “I’m probably not going to recommend for folks out there to do this because you've got the cash. Just go ahead, pay the bill, be done with it.” ([14:04])

• Health Savings Accounts (HSA) Utilization:

  • They explore leveraging an HSA to fund medical expenses, allowing the remaining funds to grow tax-free for future use. Proper documentation is crucial for accessing these funds without penalties.

    “The HSA is just one of the best accounts because it is so darn flexible.” – Joel ([19:58])

Key Takeaway:
Given the relatively low interest gain compared to the risk of accruing penalties, paying the medical bill upfront is the recommended approach.

3. Shane's Question: Funding a Basement Renovation ([25:43])

Scenario:
Shane from Madison, Wisconsin, plans to finish an unfinished basement (700 sq. ft.) to add living space, a bedroom, and a bathroom. He seeks advice on funding options, particularly considering a Home Equity Line of Credit (HELOC).

Discussion Highlights:

• HELOC Considerations:

  • Current HELOC rates are high (~8-9%), making it a costly option.

  • Joel advises minimizing borrowed amounts and ensuring a swift repayment plan to avoid long-term interest accumulation.

    “I'm more than willing to do it... but make sure you have a reasonable payoff timeframe.” ([31:02])

  • Matt underscores the importance of shopping around for the best rates, preferably through local credit unions, which often offer better terms.

    “Just shop around and see if you can find yourself the best deal.” ([31:02])

• Cost Optimization Strategies:

  • Utilize existing materials from thrift stores or discount sources to reduce renovation costs.

  • Focus on functionality over luxury to keep expenses in check.

    “This is the basement. No one sees this. It's just the extra bedroom.” ([33:09])

Key Takeaway:
Opt for a HELOC while being mindful of high interest rates and implement cost-saving measures to minimize the total amount borrowed.

4. Melissa's Question: Living Paycheck to Paycheck – Save or Pay Off Credit Cards? ([47:34])

Scenario:
Melissa is struggling between building savings and paying off high-interest credit card debt while living paycheck to paycheck.

Discussion Highlights:

• Emergency Fund Priority:

  • Matt recommends first establishing a minimal emergency fund (~$3,500-$5,000) to shield against unexpected expenses.

    “Having a cash cushion on hand is going to allow for that credit card debt payoff to be permanent.” ([50:43])

• Debt Repayment Strategy:

  • After securing the emergency fund, focus on aggressively paying off credit card debt beyond the minimum payments to eliminate high-interest burdens.

    “Avoid paying the minimum amount because that would keep you in debt for decades.” ([52:38])

• Budgeting Tips:

  • Implement a "bare bones budget" temporarily to maximize savings and debt repayment efficiency.
  • Utilize resources like Undebt.it or consult Money Management International for structured repayment plans.

Key Takeaway:
Prioritize building a small emergency fund before tackling high-interest credit card debt to ensure financial stability and prevent cyclical debt accumulation.

5. Andre's Question: One-Year Guaranteed Investment Above 3-4% ([54:17])

Scenario:
Andre is seeking a one-year investment option that guarantees returns exceeding 3-4%.

Discussion Highlights:

• Reality of Guaranteed Returns:

  • Matt bluntly states no such investment exists without risk.

    “Nope, doesn't exist. That's the tldr.” ([54:54])

• Safe Alternatives:

  • Certificates of Deposit (CDs): Offer fixed returns but generally align with high-yield savings rates.

  • High-Yield Savings Accounts: Provide competitive rates (~4%), though they are subject to change with fluctuating interest rates.

    “You should be able to get like a 4ish percent rate without needing to actually invest or take any real risk.” – Matt ([55:46])

• Caution Against Risky Options:

  • Warns against chasing higher returns through Neobanks or lesser-known financial institutions due to potential instability and compromised customer service.

Key Takeaway:
Opt for a high-yield savings account or a reputable CD to secure competitive, albeit non-guaranteed, returns over a one-year period without unnecessary risk.

6. Cade's Question: Wife's Pension Payout and IRA Conversion ([36:17])

Scenario:
Cade is evaluating whether to transfer his wife’s pension payout (post-move and partial vesting) into a traditional IRA or a Roth IRA, considering future income projections and tax implications.

Discussion Highlights:

• Roth IRA Conversion:

  • Joel supports converting to a Roth IRA for tax-free growth and simplified future financial planning.

    “I think why not get more money into the Roth?” ([40:26])

  • Emphasizes the advantage of avoiding future tax complications, especially with the anticipated increase in household income.

    “Because you have the ability to pay the taxes at that lower tax rate, I’d be interested in somehow seeing if I could maneuver that.” – Matt ([42:33])

• Traditional IRA Considerations:

  • Deferred tax benefits could optimize tax liabilities based on future income brackets.

• Hosts' Consensus:

  • Given the likelihood of rising income, converting to a Roth IRA is generally more advantageous for long-term tax benefits and flexibility.

    “I'm glad that I made that decision, even though I can’t say that it's the most optimized move to make because I’ll only know that in retrospect.” – Joel ([43:19])

Key Takeaway:
Convert the pension payout to a Roth IRA to capitalize on tax-free growth and maintain flexibility for future financial strategies, especially considering expected income growth.

7. Conclusion and Final Recommendations ([60:53])

Joel and Matt wrap up the episode by reinforcing the importance of informed financial decision-making and encouraging listeners to engage with their resources for personalized advice. They highlight success stories and emphasize that with the right strategies, financial stability is achievable.

Key Encouragement:

“Melissa, you're not alone in this predicament and you can claw your way out.” – Joel ([54:17])

Notable Quotes:

• “The HSA is just one of the best accounts because it is so darn flexible.” – Joel ([19:58])
• “I’m probably not going to recommend for folks out there to do this because you've got the cash. Just go ahead, pay the bill, be done with it.” – Matt ([14:04])
• “You should be able to get like a 4ish percent rate without needing to actually invest or take any real risk.” – Matt ([55:46])
• “I think why not get more money into the Roth?” – Joel ([40:26])

Resources Mentioned:

• How to Money Website: howtomoney.com
• Undebt.it: Tool for creating debt repayment plans.
• Money Management International: Organization for debt counseling.
• Investopedia, Bankrate, Doctor of Credit: Sites for comparing financial products like CDs and savings accounts.

Final Note:
Joel and Matt continue to provide valuable insights and strategies to help listeners navigate their personal finances effectively. For more detailed advice and resources, visit howtomoney.com.