Rich Habits Podcast: Episode Summary Episode: Q&A: Investing $200K of RSUs, Buying a Failing Biz, & $1.4M Net Worth at 34
Release Date: January 9, 2025
Hosts: Robert Croak and Austin Hankwitz

Introduction

In this engaging Q&A edition of the Rich Habits Podcast, hosts Robert Croak, a decamillionaire with over 30 years of business experience, and Austin Hankwitz, an eager entrepreneur in his 20s, delve into various financial queries from their listeners. Covering topics ranging from mortgage strategies and investment diversification to early retirement and managing underperforming financial advisors, Robert and Austin provide actionable insights to help listeners take control of their finances.

Mortgage Strategies: Heavy Down Payment vs. Investing

Listener Question by James D. (05:06):
James seeks advice on whether to make a substantial down payment (70%) on a property to quickly pay off a mortgage at a 7% interest rate or to opt for a more modest 20% down payment, investing the remaining funds in the market with the potential for higher returns.

Robert's Response (05:06):
Robert advocates for the 20% down payment approach. He emphasizes the potential for higher long-term gains by investing the extra cash in the markets, which historically outperform mortgage interest rates over extended periods. Robert states:

“I believe you should put down the 20%, not the 70%, take all that extra cash, get it into the markets, because you're right, over time, a long period of time, the markets are going to outperform 6 or 7%.” [05:35]

He further explains the benefits of leveraging low-interest debt to build wealth, noting that wealthy individuals often utilize credit to enhance their financial growth.

Austin's Commentary (06:43):
Austin expands on the concept of "good debt" versus "bad debt," defining good debt as funds used to acquire appreciating assets like real estate and businesses. He shares his personal calculation, comparing the cost of paying down his mortgage against the potential returns from investing:

“The big difference here, Robert, between money that we invest in the markets and the interest rates we pay on the mortgage is the money we invest in the markets compound and grow exponentially.” [08:10]

Austin underscores the importance of compound growth in investments versus the static nature of mortgage interest, advocating for maximizing investment potential.

Custodial IRAs and 529 Plans for Newborns

Listener Question by Manicon V. (09:37):
Manicon, a new parent, inquires about opening custodial IRAs for newborn twins. She discovers that each child must have earned income to qualify and wonders if alternatives like the 529 plan are more suitable, especially concerning unused funds.

Robert's Insight (11:39):
Robert acknowledges the flexibility of 529 plans, highlighting their adaptability even if children decide not to pursue higher education. He advises:

“5 29s are a really great tool and there is so much flexibility with them and that is why they work even if the kid doesn't go to school.” [11:39]

He encourages further research to ensure the chosen savings vehicle aligns with the family's financial goals.

Austin's Additions (11:57):
Austin suggests exploring various avenues to utilize leftover 529 funds, such as trade schools, certificate programs, or K-12 tuition. He emphasizes the flexibility of 529 plans in supporting diverse educational and developmental opportunities:

“Think trade schools, think certificate programs, maybe study abroad programs, apprentices...” [11:57]

Diversifying Large RSU Investments

Listener Question by Danish V. (13:35):
Dinesh, a 42-year-old tech professional from Seattle, plans to diversify $200,000 from vested RSUs. He is torn between investing the entire amount into SPYI or splitting it between SPYI and VOO, especially considering his potential entry into the highest tax bracket next year.

Robert's Advice (13:35):
Robert recommends a more diversified approach beyond just SPYI and VOO. He suggests incorporating additional funds to spread risk and enhance potential returns:

“I would like to see you add in some more funds into this and break it down with a little bit better weighting rather than just 50, 50 or all in one.” [13:35]

He encourages exploring global markets and even cryptocurrency, depending on individual risk tolerance.

Austin's Perspective (14:32):
Austin aligns with Robert's recommendation, tying investment diversification to early retirement goals. He emphasizes managing monthly expenses and ensuring portfolio income exceeds those expenses to facilitate early retirement:

“If this person was making $7,000 $8,000 a month in passive income and their monthly expenses were 6,000, then theoretically speaking, they could retire...” [14:32]

Austin stresses the importance of balancing debt management with investment growth to achieve financial autonomy.

Allocation Across Major ETFs and Considering Business Acquisition

Listener Question by Joe F. (21:10):
Joe, a 47-year-old planning to work another 20 years, seeks advice on reallocating investments across major ETFs like VOO, VGT, VTI, and QQQ. Additionally, he contemplates purchasing a failing auto retail franchise and asks whether obtaining an SBA loan for the acquisition is advisable.

Austin's Response on ETF Allocation (21:10):
Austin introduces the "core-satellite" portfolio strategy, advocating for a balanced allocation between stable, core investments and opportunistic, satellite investments:

“Think about your portfolio as the earth and then satellites that are orbiting the earth...” [21:10]

He recommends maintaining the majority of the portfolio in robust ETFs while allocating a smaller portion to higher-risk, high-reward opportunities.

Robert's Strategy for ETF Allocation and Business Acquisition (22:59):
Robert provides a specific weighting recommendation for ETF investments:

“I would look at it as something like maybe Voo is 40%, Qqq is 30% and then Vgt and Vti are 15 and 15...” [22:59]

Regarding the potential acquisition of a failing business, Robert advises careful evaluation of the business's fundamentals and the reasons behind its decline. He emphasizes the importance of having sufficient financial reserves to support the business through turnaround efforts:

“Make sure you understand something. When you're getting your financing order, you need to make sure that you have at least six months to a year of cash burn...” [23:43]

Austin's Additional Insights (25:56):
Austin cautions Joe to build a solid financial base before taking on new ventures like business acquisitions. He highlights the risks of tying up too much capital and the importance of maintaining liquidity:

“Please have money working for you in the markets while you buy this business over time and you're going to be just fine.” [25:56]

The 4% Rule for Early Retirement

Listener Question by Brandy G. (27:28):
Brandy, childfree and not planning to leave an inheritance, asks whether she should adhere to the traditional 4% withdrawal rule or adjust her spending in retirement to enjoy her savings more.

Robert's Explanation (27:28):
Robert clarifies that the 4% rule is designed to prevent outliving one's savings, not necessarily to leave a legacy. He advises Brandy to consider her longevity and future spending needs:

“The 4% rule was built around the Trinity study and it's to make sure you don't run out of money in your lifetime.” [27:28]

He underscores the importance of cautious withdrawal rates to ensure financial sustainability throughout retirement.

Austin's Addition (28:37):
Austin concurs and suggests that while the 4% rule is a conservative guideline, individuals with well-managed, diversified portfolios might safely withdraw more. He references the book Die with Zero as a resource for balancing spending and savings in retirement:

“I think if I had had $2 million invested or even a million dollars invested... I think I would be able to sustainably return, call it 6, 7, 8, 9% on average...” [28:37]

Transferring Property into an LLC

Listener Question by Aaron G. (30:09):
Aaron has recently purchased a home intended for rental purposes but hasn't yet transferred it into an LLC. He seeks guidance on the process.

Robert's Guidance (30:09):
Robert outlines the steps to transfer property ownership into an LLC, emphasizing the importance of legal accuracy to protect personal assets:

“You're just going to contact your lender, you're going to tell them what you're doing, and you're going to make sure that you have all your documents in order...” [30:09]

He advises utilizing a quit claim deed or warranty deed and consulting with a lawyer to ensure the process is correctly executed.

Austin's Recommendations (31:14):
Austin endorses Robert's advice and introduces resources like Dynasty Trusts, which simplify the process of placing properties into trusts or LLCs. He stresses the importance of protecting rental properties from potential liabilities:

“They are super focused on helping people protect their properties from those different types of attacks...” [31:14]

Addressing Underperforming Financial Advisors

Listener Question by Duck City USA (32:17):
Duck City expresses frustration with a fiduciary financial advisor who underperformed the S&P 500 by over 10% while charging fees, questioning whether to continue the relationship.

Robert's Straightforward Advice (32:17):
Robert strongly recommends taking immediate action, such as having an honest conversation with the advisor and considering alternative management options:

“There is no way you should be underperforming that badly in a bull market... You definitely need to have a heart to heart with them and you need to shop around.” [32:17]

He warns against the pitfalls of advisors funneling investments into their own financial products, leading to compounded fees and reduced returns.

Austin's Further Explanation (33:23):
Austin elaborates on the hidden fees associated with many financial advisors, illustrating how these fees can erode investment performance over time. He encourages self-management or selecting advisors who align closely with the listener's financial goals:

“These people also have mutual funds. It's kind of like a double fee structure really...” [33:23]

Building Wealth with a $1.4M Net Worth at 34

Listener Question by Scott F. (35:52):
Scott and his wife, both 34 years old with a combined net worth of $1.4 million, seek advice on further enhancing their financial position to retire early, considering their substantial investments and income.

Robert's Strategic Suggestions (35:52):
Robert recommends diversifying into larger real estate investments, such as multi-unit apartment buildings or commercial properties. He also advises increasing cryptocurrency exposure and exploring pre-IPO and venture investments to accelerate wealth growth:

“Look at value engineering... I think you're at that level now where it's time to begin to diversify into things of that nature...” [35:52]

Austin's Recommendations (40:49):
Austin encourages Scott to leverage his accredited investor status by investing in pre-IPO companies and startups through platforms like AngelList. He highlights the potential high returns from such investments while advising on maintaining a balanced portfolio:

“Dabbling in the dark arts of startup investing, I think that could be a really, really good idea.” [40:49]

Conclusion

Throughout this episode, Robert and Austin demonstrate a profound understanding of personal finance, offering nuanced advice tailored to individual circumstances. From optimizing mortgage strategies and diversifying investments to critically evaluating financial advisors and planning for early retirement, their insights empower listeners to make informed financial decisions. The hosts emphasize the importance of leveraging debt wisely, maintaining investment diversification, and continuously educating oneself to navigate the complexities of wealth-building effectively.

Notable Quotes

• Robert Croak (05:35):
  “I believe you should put down the 20%, not the 70%, take all that extra cash, get it into the markets, because you're right, over time, a long period of time, the markets are going to outperform 6 or 7%.”

• Austin Hankwitz (08:10):
  “The big difference here, Robert, between money that we invest in the markets and the interest rates we pay on the mortgage is the money we invest in the markets compound and grow exponentially.”

• Robert Croak (27:28):
  “The 4% rule was built around the Trinity study and it's to make sure you don't run out of money in your lifetime.”

• Austin Hankwitz (28:37):
  “I think if I had had $2 million invested or even a million dollars invested... I think I would be able to sustainably return, call it 6, 7, 8, 9% on average...”

Final Thoughts

This episode of the Rich Habits Podcast serves as a comprehensive guide for listeners navigating various financial challenges and opportunities. Robert and Austin's expert advice, grounded in real-world experience and financial principles, equips individuals with the knowledge to optimize their financial strategies and achieve long-term wealth and security.

For more insights and personalized financial strategies, subscribe to the Rich Habits Newsletter and explore the Rich Habits Network.