Podcast Summary: How to Money - Episode #937: Ask HTM - Diversifying to FI, Upside Down on an RV, & Extreme Lengths to Buy a Home

Release Date: January 27, 2025
Host/Author: iHeartPodcasts
Title: Ask HTM - Diversifying to FI, Upside Down on an RV, & Extreme Lengths to Buy a Home #937

Introduction

In Episode #937 of "How to Money," co-hosts Joel and Matt tackle a trio of listener questions centered around financial independence, managing vehicle debt, and strategies for saving for a home. The episode delves deep into practical advice, personal anecdotes, and expert insights to guide listeners through these common financial challenges.

1. Diversifying to Financial Independence (FI)

Listener: Mike
Timestamp: [07:07]

Mike, a long-time listener in his mid-30s without children, reaches out with concerns about his investment strategy. He and his wife have diligently maximized their 401(k), IRAs, and HSAs, contributing approximately $4,000 monthly to a brokerage account. However, he's hesitant about diversifying into real estate, citing high risks and minimal cash flow in their medium cost-of-living area. Mike questions whether solely investing in low-cost index funds is sufficient for achieving financial independence.

Key Discussions:

• Diversification Necessity:
  Joel: "If you're all in with 100 bucks, that's one thing. If you're all in with a million bucks, that's another thing."
  Matt: "Low cost index funds, man, it's the way to go."

• Real Estate Considerations:
  Joel and Matt explore the pros and cons of real estate investment. They acknowledge that while real estate can potentially "supercharge" finances, it often requires significant effort and may not be suitable for everyone, especially if the primary goal (financial independence) doesn't align with the investment's demands.

• Alternative Diversification Methods:
  Matt suggests Real Estate Investment Trusts (REITs) as a less hands-on alternative to direct property investment. Matt: "You can invest in REITs, VNQ specifically, that couldn't hurt."

• Conclusion for Mike:
  Given Mike's current strategy and risk aversion towards real estate, Joel and Matt advise that his focus on low-cost index funds is adequate. They emphasize that diversification is personal and should align with one's financial goals and lifestyle.

2. Managing an Upside-Down RV Purchase

Listener: Tony
Timestamp: [24:06]

Tony from San Diego shares her dilemma of being "upside down" on an RV purchased in May 2024. After her circumstances changed, she bought a home and no longer needs the RV. She faces a $30,000 gap between the RV's value and her remaining loan balance. Tony is torn between selling the RV privately or returning it to the dealership, risking a significant financial loss.

Key Discussions:

• Selling Privately vs. Dealership Return:
  Matt: "If you let the dealership sell it for you, it's going to end up costing you a lot more money."
  Joel: "Put in a little bit of sweat equity and look to sell it yourself might be more the path that we would recommend."

• Depreciation Risks:
  The hosts highlight the rapid depreciation of RVs, noting that even minimal usage can lead to substantial financial losses. They advise Tony to seek the highest possible sale price to minimize the gap.

• Creative Solutions:
  Matt suggests renting out the RV through platforms like Outdoorsy to potentially turn it into a side income, which could help offset the loan balance.

• Final Recommendations:
  Joel and Matt encourage Tony to attempt a private sale to recover as much value as possible and consider additional income streams to manage the remaining debt. They caution against returning the RV to the dealership due to the financial repercussions.

3. Strategies for Saving for a Home Purchase

Listener: Ophelia
Timestamp: [34:53]

Ophelia from Los Angeles plans to sell her condo in two years, rent temporarily, and save up for a new home. Currently, she holds her savings in a high-yield savings account and seeks advice on better short-term investment options to maximize growth.

Key Discussions:

• Optimal Savings Vehicles:
  Joel: "It's all about timeline and risk tolerance."
  Matt: "Saving in a high yield savings account like CIT is one of the best options."

• Investment Options:
  Matt discusses the merits of Certificates of Deposit (CDs) as a way to safeguard funds against fluctuating interest rates. However, he notes that current CD rates may be lower than high-yield savings accounts.
  Matt: "Maybe you split your money. Maybe you put half of what you currently have in a CD, the rest keep it in a high-yield savings account."

• Risk Management:
  They caution Ophelia about the potential volatility of the stock market and the emotional impact of market downturns on her savings intended for a home purchase.

• Timeline Considerations:
  Joel emphasizes the importance of aligning investment choices with Ophelia's home-buying timeline to avoid unnecessary risks. If the timeline is flexible, Ophelia might consider allocating a portion of her savings to higher-yield investments while keeping the rest in safer accounts.

• Final Recommendations:
  The hosts recommend maintaining most of her savings in a high-yield savings account to ensure liquidity and minimize risk, advising against venturing into more volatile investments given her short-term goal.

4. Understanding Credit Utilization and Its Impact on Credit Scores

Listener: Bonnie
Timestamp: [48:54]

Bonnie asks whether credit utilization rates are calculated on an aggregate basis or per individual credit card. After several large expenses pushed one card to a 45% utilization rate while keeping overall utilization below 10%, Bonnie experienced a significant drop in her credit score by over 30 points. She seeks clarification on why this happened despite paying off the card before interest accrues.

Key Discussions:

• Credit Utilization Metrics:
  Matt: "The credit scoring models out there, they rate this statistic pretty highly."
  Joel: "If you have $100,000 in total credit available and you're using $10,000 of it, that's great, you have a low credit utilization rate. But if all $10,000 is on a single credit card that has a $12,000 limit, your credit score is going to take a hit."

• Scoring Methodology:
  Joel explains that credit scoring models assess both individual card utilization and overall utilization. High usage on a single card can negatively impact the score even if the overall rate remains low.

• Best Practices:
  Joel: "Best practices are to keep your utilization rate under 30% of your overall credit limit and under 10% on individual cards."
  Matt: "Focus on the individual cards because by keeping each individual card under the 30% limit, it is impossible to go over your 30% overall aggregate credit limit."

• Mitigation Strategies:
  The hosts suggest paying down balances before statement closure to prevent high utilization from being reported. Additionally, requesting a credit limit increase can help lower utilization ratios.

• Conclusion for Bonnie:
  They reassure that once balances are lowered, the credit score will rebound. Understanding both aggregate and individual credit utilization is crucial for maintaining a healthy credit score.

5. Beer Review: Humble Forager's Barrel-Aged Stout

Timestamp: [56:02]

Joel and Matt take a brief detour to review a specialty beer they enjoyed during the episode—Humble Forager's barrel-aged American double stout.

Key Points:

• Tasting Notes:
  Joel: "This was huge in every essence of the word huge... a sweet, burly beast with maple syrup infused into it."
  Matt: "A little too much for Joel's dainty palate... felt like drinking straight molasses."

• Overall Impressions:
  Despite the intense flavor profile, the hosts appreciate the craftsmanship but acknowledge it might be overwhelming for some. They liken it to enjoying a rich, winter beverage.

Conclusion

Episode #937 of "How to Money" offers invaluable insights into managing investments for financial independence, handling debt from high-value purchases like RVs, optimizing savings strategies for home buying, and understanding the nuances of credit utilization. Joel and Matt provide practical, no-nonsense advice tailored to diverse financial situations, empowering listeners to make informed decisions on their financial journeys.

Notable Quotes:

• Joel [07:07]: "Low cost index funds, man, it's the way to go."
• Matt [09:06]: "I was glad Mike is asking this question. He's asking how much diversity is necessary to be a successful investor."
• Joel [24:06]: "Tony can't twist my arm. I still won't budge."
• Matt [34:53]: "If you're keen on raising your score, focus on the individual cards."
• Joel [56:02]: "This was huge in every essence of the word huge."

For more detailed discussions and personal finance tips, visit howtomoney.com.