How to Money: Ask HTM - When to Ditch an Old Car, Dropping Escrow, & Investing via an ESOP #928

Release Date: January 6, 2025
Host: Joel Larsgaard and Matt Preston
Produced by: iHeartPodcasts

Introduction

In episode #928 of How to Money, co-hosts Joel Larsgaard and Matt Preston delve into three pressing financial questions submitted by their listeners. Joel and Matt provide insightful discussions on when it makes sense to replace an old vehicle, the pros and cons of managing escrow accounts independently, and the viability of investing through an Employee Stock Ownership Plan (ESOP). Their conversational and jargon-free approach ensures that listeners gain practical knowledge to make informed financial decisions.

1. When to Ditch an Old Car

Listener: Tyler from Utah
Timestamp: 09:19 - 15:43

Background:
Tyler shares his experience with a 2001 Chevy S10 truck purchased in 2016 for $4,300, which accumulated 67,000 miles. Over the years, Tyler invested approximately $5,100 into maintenance, culminating in a costly repair for a blown head gasket estimated at $2,300. Faced with this repair cost relative to the truck's value, Tyler opted to sell the vehicle and purchase a new one outright with cash.

Discussion Highlights:

• Cost vs. Value Assessment:
  Joel emphasizes evaluating the cost of repairs against the vehicle's current value. If the repair costs approach or exceed the car's worth, it may be financially prudent to consider replacement.
  Joel (14:08): “If the cost of the repair is half the value of the car, then it's worth looking into selling it.”

• Financial Preparedness:
  Matt underscores the importance of being prepared financially before deciding to upgrade, advising against taking on new car debt.
  Matt (12:35): “Are you financially prepared to get another vehicle? Because financing that next car like that is the real problem.”

• Reliability and Make Considerations:
  Joel and Matt discuss the reliability of different car makes, noting that investing in a dependable vehicle like a Toyota Tacoma might justify repair costs more than a less reliable model.
  Joel (16:03): “I think we have a like a Toyota Tacoma. I would feel differently about it.”

• Long-Term Ownership:
  They highlight that long-term ownership can recoup initial higher costs through reduced maintenance and insurance.
  Joel (05:45): “Energy efficient upgrades are underrated and spending a little more on the front end makes more sense... especially if you're planning on being in that house long term.”

Conclusion:
Joel and Matt agree that Tyler's decision to sell the truck and purchase a new vehicle was reasonable, especially given the high cost of repairs relative to the truck’s value. They advise listeners to carefully weigh repair costs against the vehicle's current worth and consider the long-term benefits of maintaining reliable transportation without incurring additional debt.

2. Dropping Escrow Accounts

Listener: Mike from Kansas City
Timestamp: 35:17 - 43:18

Background:
Mike and his wife are contemplating removing their escrow account to manage their property taxes and insurance payments independently. This consideration arises from recent property tax increases in their area, which have doubled their previous bills.

Discussion Highlights:

• Pros of Managing Escrow Independently:
  Joel and Matt discuss the potential financial benefits of holding escrow funds in a high-yield savings account instead of letting the mortgage provider manage them.
  Joel (37:09): “If you have that money in your own high yield savings account, you would be able to earn a decent return.”

• Increased Control and Sensitivity to Expenses:
  By managing escrow payments themselves, homeowners may become more aware of their actual tax and insurance costs, encouraging them to challenge unjust increases and shop for better rates.
  Joel (38:02): “When you physically pay these bills yourself, you feel the pain a little bit more.”

• Potential Drawbacks:
  They caution that not all loans permit the removal of escrow accounts and highlight the increased responsibility to stay organized and ensure timely payments to avoid penalties.
  Joel (43:01): “But this is something that doesn’t need to be a high priority, but it always is a pain in the butt.”

• Operational Challenges:
  Matt shares his personal frustrations with escrow accounts not disbursing funds properly, reinforcing the desire for greater control over their finances.
  Matt (40:27): “It’s a customer service nightmare too.”

Conclusion:
Joel and Matt conclude that while dropping an escrow account can offer more control and potential financial benefits, it requires disciplined budgeting and organization. They recommend that homeowners like Mike assess their ability to manage large, lump-sum payments independently and consider the potential for savings through higher interest earnings versus the convenience of automated payments.

3. Investing via an ESOP (Employee Stock Ownership Plan)

Listener: Alex
Timestamp: 51:20 - 54:37

Background:
Alex inquires about the merits of investing in his employer’s ESOP, specifically questioning whether it is a sound investment or merely a strategy for the company to inflate its stock value.

Discussion Highlights:

• Benefits of ESOPs:
  Joel points out that ESOPs can be advantageous, especially when employees receive discounts on stock purchases. Investing through an ESOP can be likened to a beneficial deal similar to purchasing discounted gift cards.
  Joel (53:09): “If you’re getting a sweet discount on the front end. So if you’re getting a hundred dollars worth of credit to a store for 75 or 80 bucks, yeah, go for it.”

• Diversification Concerns:
  Matt warns against over-investing in a single company's stock to avoid concentration risk, advising employees to limit ESOP investments to a manageable portion of their overall portfolio.
  Matt (54:22): “We don’t love folks investing in the company they work for... you’re putting too many eggs into one basket.”

• Balancing ESOP Investments:
  They recommend participating in ESOPs up to the offered match or discount but advocate for broader diversification through index funds and other low-cost, diversified investment vehicles for the majority of one’s portfolio.
  Joel (54:37): “But if you’re handling your investments, your finances well, then I think certainly taking advantage of this perk, it makes a lot of sense.”

Conclusion:
Joel and Matt support the idea of investing in an ESOP, particularly when it includes employee benefits like discounted stock prices. However, they emphasize the importance of limiting such investments to prevent excessive exposure to one's employer's stock. For most investors, incorporating ESOPs as a small, strategic part of a diversified portfolio aligns with prudent financial management.

Final Thoughts and Recommendations

Throughout the episode, Joel and Matt reinforce the importance of thoughtful, evidence-based financial decisions. Whether managing car repairs, escrow accounts, or investment opportunities, their guidance consistently advocates for balancing immediate costs with long-term benefits, maintaining financial flexibility, and avoiding unnecessary debt.

Notable Quotes:

• Joel (14:08): “If the cost of the repair is half the value of the car, then it's worth looking into selling it.”
• Matt (12:35): “Are you financially prepared to get another vehicle? Because financing that next car like that is the real problem.”
• Joel (37:09): “If you have that money in your own high yield savings account, you would be able to earn a decent return.”
• Matt (54:22): “We don’t love folks investing in the company they work for... you’re putting too many eggs into one basket.”
• Joel (54:37): “But if you’re handling your investments, your finances well, then I think certainly taking advantage of this perk, it makes a lot of sense.”

Resources Mentioned:

• OwnWell.com: For challenging property tax bills.
• Roth IRAs: Recommended for diversified long-term investing.
• Consumer Reports: Cited for reliability ratings on older cars.
• Navy Federal Credit Union Offers: Discussed in advertisements (skipped in summary).

Conclusion

In this episode of How to Money, Joel and Matt effectively address listener concerns with practical advice and relatable anecdotes. Their balanced approach encourages listeners to make informed decisions that align with their financial goals and lifestyles, reinforcing the podcast’s mission to provide unbiased, jargon-free personal finance guidance.

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