Podcast Summary: How to Money – Episode #931

Release Date: January 13, 2025
Hosts: Joel and Matt
Title: Ask HTM - Sahm Rule Recession Indicator, New App Gives Kids IRAs, & Paying for Big One-Time Expenses

Introduction

In Episode #931 of How to Money, co-hosts Joel and Matt delve into listener questions revolving around the Sahm Rule as a recession indicator, a new financial app designed to help children save for retirement, and strategies for managing significant one-time expenses. The episode is packed with practical advice, insightful discussions, and actionable tips tailored to help everyday individuals navigate their financial journeys effectively.

Listener Warning: Avoiding Financial Pitfalls ([02:59] - [06:42])

Joel and Matt begin by addressing a cautionary tale from listener Sam, who encountered unexpected fees while renewing his passport through a third-party website.

Key Points:

• Sam's Experience: Instead of using the official State Department website, Sam opted for a third-party service, resulting in paying more than necessary for his passport renewal.
• Hidden Fees: Sam faced an additional charge labeled under the State Department, which was actually an inflated fee imposed by the third-party site.
• Protective Measures: Upon realizing the discrepancy, Sam promptly sought a refund and took steps to secure his financial information by freezing his credit.

Notable Quote:

“What pops up in the sponsored results is not always going to be what's best for you. Sometimes it will lead you astray.” – Joel ([04:00])

Advice:

• Use Official Channels: Always verify that you're using official government websites to avoid unnecessary fees.
• Monitor Financial Statements: Regularly review your financial statements to spot any unauthorized or unexpected charges.
• Protect Personal Information: If you suspect you've been overcharged or scammed, take immediate action to secure your accounts and personal data.

Understanding the Sahm Rule as a Recession Indicator ([08:24] - [18:29])

In this segment, Joel and Matt explore the Sahm Rule (referred to as the SAHM Rule in the transcript), a relatively new metric used to predict impending recessions based on unemployment rate changes.

Key Points:

• Definition of the SAHM Rule: Developed by Claudia Sahm, the rule triggers a recession warning when there's a half-percent increase in unemployment over three consecutive months.
• Current Economic Context: Joel and Matt discuss how unprecedented events like the COVID-19 pandemic have affected the applicability of traditional economic indicators.
• Impact on Investment Strategies:
  • Debt vs. Investment: The hosts debate whether to prioritize debt repayment or continue investing in light of potential economic downturns.
  • Long-Term Investing: Emphasizing the importance of staying the course with investments, especially for younger individuals, to capitalize on market dips.

Notable Quotes:

“If the most recent three months have seen half a percent increase in unemployment, it's supposed to be a direct indicator of an upcoming recession.” – Matt ([10:29])

“The truth is nobody can [predict a recession].” – Joel ([17:31])

Advice:

• Stay Informed: Keep abreast of economic indicators but avoid making hasty financial decisions based solely on them.
• Continue Investing: Maintain regular investment contributions, especially during market downturns, to take advantage of lower stock prices.
• Prioritize High-Interest Debt: Focus on paying off consumer debt with high interest rates, regardless of economic predictions.

New App for Kids’ IRAs: Halfmoor ([32:59] - [44:42])

Listener Amy introduces Halfmoor, an app designed to help parents set up custodial Roth IRAs for their children by turning household chores into earned income.

Key Points:

• How Halfmoor Works: Parents can assign chores to their children, and earnings from these tasks can be directed into a custodial Roth IRA.
• Benefits:
  • Early Investment: Starting investments at a young age allows for significant growth through compound interest.
  • Financial Literacy: Encourages children to understand the value of earning and saving money.
• Concerns:
  • Fees: Halfmoor charges $144 annually, which may be a barrier for minimal contributions.
  • DIY Alternatives: Parents can manually track chores and contributions to a Roth IRA using tools like Google Sheets, potentially saving on fees.
  • App Longevity: Uncertainty about the long-term existence of the app and access to accumulated data.

Notable Quotes:

“It doesn’t have to be something that’s overly complicated though.” – Matt ([39:26])

“She wouldn’t owe tax on that money because it's inside of a Roth IRA.” – Joel ([35:17])

Advice:

• Evaluate Costs vs. Benefits: Consider whether the convenience and additional features of Halfmoor justify the annual fee based on your child’s earning potential.
• DIY Solutions: If comfortable, parents can create their own system to track chores and contributions, thereby reducing costs.
• Ensure Compliance: Whether using an app or a manual system, ensure that all contributions comply with IRS rules for custodial Roth IRAs.

Managing Big One-Time Expenses ([48:41] - [58:26])

Listener Adam shares his financial scenario involving upcoming large expenses totaling $45,000, including home improvements, furnishings, and replacing a family vehicle. He seeks advice on whether to leverage home equity or utilize investment accounts to cover these costs.

Key Points:

• Current Financial Position:
  • Investments Available: $50,000 in a Vanguard taxable brokerage account and $55,000 in an inherited IRA (to be liquidated by 2028).
  • Mortgage Status: A nearly paid-off mortgage with favorable interest rates.
• Options Discussed:
  • Home Equity Loans/HELOCs: Generally unfavorable due to high-interest rates (~9%) and adding new debt.
  • Tapping Investment Accounts: Utilizing Vanguard accounts to fund expenses while potentially managing tax implications.
• Vehicle Replacement: Advising against purchasing an expensive new car, suggesting more affordable alternatives or extended use of the current vehicle.

Notable Quotes:

“If you are looking to take more of a DIY approach, which is going to allow you to avoid some massive fees and especially some of the worst products out there where they're going to receive the highest commissions.” – Matt ([30:53])

“Let’s say you are expecting sort of like you said, Joel, like, you want to continue to invest, I would even say that.” – Matt ([17:31])

Advice:

• Avoid New High-Interest Debt: Refrain from taking out home equity loans or HELOCs, as the high-interest rates can outweigh the benefits.
• Utilize Investment Funds Wisely: Consider liquidating part of the inherited IRA in a tax-efficient manner to cover expenses, spreading out withdrawals to minimize tax impact.
• Budget Vehicle Expenses: Opt for more affordable vehicle options or maintain the current vehicle longer to reduce financial strain.
• Evaluate Necessity and Timing: Assess the urgency and necessity of each expense to prioritize spending and explore cost-saving measures.

Conclusion

Throughout Episode #931, Joel and Matt provide valuable insights into navigating financial decisions amidst economic uncertainties. They emphasize the importance of informed decision-making, proactive debt management, and leveraging investment opportunities to secure long-term financial well-being. By addressing listener questions with practical advice and thoughtful discussions, the hosts empower their audience to make sound financial choices tailored to their unique circumstances.

Notable Quotes Recap

• Joel: “What pops up in the sponsored results is not always going to be what's best for you.” ([04:00])
• Matt: “If the most recent three months have seen half a percent increase in unemployment, it's supposed to be a direct indicator of an upcoming recession.” ([10:29])
• Joel: “The truth is nobody can [predict a recession].” ([17:31])
• Matt: “It doesn’t have to be something that’s overly complicated though.” ([39:26])
• Joel: “She wouldn’t owe tax on that money because it's inside of a Roth IRA.” ([35:17])
• Matt: “If you are looking to take more of a DIY approach, which is going to allow you to avoid some massive fees and especially some of the worst products out there where they're going to receive the highest commissions.” ([30:53])
• Joel: “Let’s say you are expecting sort of like you said, Joel, like, you want to continue to invest, I would even say that.” ([17:31])

Final Thoughts

How to Money continues to be a valuable resource for individuals seeking clear, jargon-free personal finance guidance. By addressing real-life financial challenges and providing actionable strategies, Joel and Matt reinforce their mission to help listeners thrive financially and live a rich, purposeful life.