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Rich Habits Podcast
Q&A: Investing OR Paying Off Mortgage, Passing Wealth To Children, & Paying For College
00:44:43
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- [00:01]
A
You're about to make a trade. Which u do you listen to? Is it get optioning those options or let's do a little research. Learn more@finra.org TradeSmart when did making plans get this complicated? It's time to streamline with WhatsApp, the secure messaging app that brings the whole group together. Use polls to settle dinner plans, send event invites and pin messages so no one forgets mom 60th and never miss a meme or milestone. All protected with end to end encryption. It's time for WhatsApp message privately with everyone. Learn more@WhatsApp.com hey everyone and welcome back.
- [00:46]
B
To the Rich Habits Podcast Question and Answer Edition brought to you by public.com as you all know, this is our 101st Q Q A episode. Last week we announced that we had this hundredth episode and if you follow us on Instagram you will know that we actually gave away a pair of AirPod fours to a lucky commenter on that episode via Spotify. Well, we did a random number Generator and commenter number 23 who is seasons whoever they're C S E A S O N S on Spotify. You have won a free pair of AirPod fours. So if you're listening to the show seasons, email us@rich habitspodcastmail.com to claim your prize. Would love to give it to you. And major shout out to like the 100 and what seemed like 150 plus comments of just like super nice words. I I'm going to read us some comments here real quick. Best Financial Advice channel. Keep it going guys. Congrats on 100Q&A episodes. It's been an incredible journey so far. Goat podcast happy 100th episode. Thank you both for all you do. This podcast has truly changed the way I view money and I will forever be grateful for that. Like Robert, how sick to read comments like that. And just it gets me so pumped up knowing that we've got tens of thousands of people that come back every single week, but we've like actually been able. I would argue this podcast, Robert, has probably changed the financial trajectory of like so many people. Like just thinking about the people that now have a Roth IRA for the first time, now know what a stock is, an index fund, an ETF, and maybe they're, you know, contributing to a 529 for their children. Like, it's just so cool that we're able to impact so many people's financial journeys.
- [02:25]
C
Yeah, I love it. We have best jobs on earth and it's so much fun every day to be able to do this with you. It would be a very cool metric if we did know because there's so many people that engage with us that are in the Rich Habits Network or DMS on Instagram, but there's also hundreds of thousands that don't. You know, I had a one on one call last week with somebody and said they've been following us for three years and has changed the trajectory of their lives and their kids lives, but they've never spoken up, they've never commented and they just booked a call. It was incredible. I'm so proud of what we've built. It's just an amazing journey.
- [02:59]
B
As always, thank you all so much for coming back to these Q A episodes. We are so grateful to have your attention every single Thursday morning and again Seasons. Be sure to email us at rich habits podcastmail.com to claim your free pair of AirPod fours. And this is a lesson for everybody. If you're not following Rich Habits on Instagram at Rich Habits Podcast, be sure to do that because we'll, you know, we post little things here and there. You could have known if you're like, oh, I didn't know you're giving away AirPods. We didn't announce it here on the podcast, it was on Instagram. So be sure that you're following us and staying up to date on all this stuff. Stuff we're doing now. Robert before we jump into the episode, it's super important for everyone to understand that the only way that they'll ever be able to stop trading time for money and truly begin to work toward a financial future that includes a prosperous retirement is to start building a financial nest egg asap. So if you want to stop trading time for money and retire one day, you need to be investing towards your financial future.
- [03:52]
C
And the easiest way anyone can begin investing towards their Future is on public.com they make it incredibly simple to build a multi asset portfolio, ETFs, stocks, bonds, crypto options and more. They also offer access to industry leading yields of up to 3.8% APY for your emergency fund.
- [04:12]
B
And for a limited time you can earn a 1% match on all IRA deposits, IRA transfers and 401k rollovers. That's $1,000 in free money for every hundred thousand you roll over into the platform. So that old 401k you've got at a stinky broker, go roll it over to public and get that 1% match.
- [04:28]
C
That's right, we love public. So fund your account in five minutes or less. Head to public.com rich habits to claim your 1% match today. Paid for by Public Investing. Full disclosures in the podcast Description so.
- [04:41]
B
Our first question comes from Glycy R. Glicey says. Hey Robert and Austin, thank you for all you do. I've joined the Rich Habits Network and I just finished watching the intro videos, but I'm wrestling with a really big question. My wife and I, 44 and 46 are both self employed and take small W2 salaries from our businesses. We've already maxed out our Roth IRAs each year, but we want to invest more toward our retirement account because our real estate investments and business write offs our paper income is under 100,000 a year which makes the whole tax and contribution strategy even trickier. I've been researching SEP IRAS Solo 401ks, both traditional and Roth and even the mega backdoor Roth ira, but honestly it's overwhelming trying to figure out which one makes the most sense for us. So what's the best route for contributing beyond our Roth IRAs given that we're self employed with modest W2 incomes and want to optimize for both taxes and long term growth? What a good question Glycy. If I were in your shoes I would ask myself one question. Do I care more about long term growth and compounding in retirement tax free growth, right? Or do I care about tax savings today? If the answer is I care about long term tax free growth in my retirement, I would go to carry.com c a r r y.com and open up a account with them to do the mega backdoor Roth solo 401k. That's what I do. That's what Robert does. You can literally like put 70 grand a year into retirement accounts if you're trying to really compound a lot of money over a long period of time using the strategy. On the flip side, if you're someone who cares more about the tax write off side of the equation, the SEP IRA is also something I've done in the past back when I was trying to figure out taxes and everything like that. I think you contribute up to your annual salary there as well. But that's the big thing. And Robert, I'll let you answer the question as well. But before you do, I just want to like remind people everyone I feel like is hypnotized by this idea of oh yeah, I didn't pay any taxes this year. I saved all my money, I didn't pay any taxes. The only way that business owners don't pay taxes is by not making any money. Right. And so, like, when you don't make money on paper, it's so much harder to qualify for loans, to max out retirement accounts, to like to do things that I would argue taxes are an okay excuse, like the, the toll, right, of paying money to be able to do. It really just depends on your situation. But I really think that people need to flip the switch out of, oh, I'm going to just report all these paper losses and all this stuff to save on taxes. And they realize, like, wait, I can't do things that I was hoping to do with my money because I don't have money on paper.
- [07:23]
C
I think that's a really insightful breakdown. And, you know, we talk all the time. It's not what you make, it's what you keep. But in this instance, I think you're 100% correct. So many people try to get fancy and figure out ways around paying taxes, which we should all do. We should use the tax code to our benefit. But instead, what you're alluding to is so many people are worried about that so much. They're not worried about increasing their income because at the end of the day, you need the income first. I see people all the time that are making 48 grand, 68 grand a year. They've got $2,200 in their Roth IRA and they're worried about tax strategies. How about we get you to 100k in earnings first and get your 100k base built first, then worry about getting fancy. So, Yeah, I agree 100%. Austin, I think you covered it well. And I just wanted to give my kind of flip side of the story because too many people try to get fancy too early. I think you guys are spot on. See if the SEP is a good fit. Do what Austin said with Carrie.com and I think you guys will be in a great position. But I would definitely focus more on getting your income up.
- [08:30]
B
Having a little bit of taxable income, six figures even, is a wonderful idea in the long term. My opinion.
- [08:36]
C
Yeah, I agree. It's trickeration by deception. On one hand, they want to show income and be able to get loans and get good interest rates. But on the other hand, they want to try and get all of these benefits. You have to find the happy medium. I, of course, enjoy all the benefits that the IRS creates for us in the tax code, but I also make sure that I'm still able to have good credit and be able to get loans when I need them.
- [09:02]
B
Our next question comes from Jacob. Why? Hey, Austin. And Robert, my name's Jacob, and I had a question about how my wife and I should handle our retirement accounts. My wife is 23 and has a traditional IRA from her time working at Aldi during college. It's currently worth about $3,400. I'm 27 and I have a pension through my employer and a Roth IRA with a balance around $12,800. I've been contributing $85 per week to my Roth IRA since account first opened. And her old job doesn't offer any retirement plan. She had recently started a new job that offers a simple IRA with a 3% match. Our first question is, do you think it makes sense to convert her traditional IRA to a Roth IRA while the balance is still small? And my second question is, now that she has an employer match, should we focus on her simple IRA first before adding anything to my Roth ira, or do we try and contribute to both? That's a good question, Robert. You want to kick it off?
- [09:57]
C
Yeah, I like this situation and I really like where their head's at. But my first take on this would be get that Roth as close to matched out as possible. I know you mentioned $85 a week, which gets you halfway there, a little bit above half, but we want to really try and max it out at that $583 a month. I would definitely transfer the other smaller IRA over to the Roth and get that in there. You're going to have a little bit of a tax hit now, but at your ages, I think it's a tremendous opportunity to get that for both of you guys built up tax free in retirement so you can really start to pile on that money year after year.
- [10:34]
B
Yeah, I agree. I think you want to get that 3,500 converted, which means that you'll probably end up paying 500, 600 in incremental taxes on that conversion. Just as a reminder there, make sure that tax payment is not coming out of the account itself. You're just saving that money on the side. Maybe it's a little side hustle action. Maybe you're just little sinking fund, pull it from your emergency fund, whatever, but it's not coming out of the investment itself because that's kind of counterintuitive, right? But yeah, match beats Roth, beats taxable. That's what we always say. So in your wife situation, contribute up to that match of 3%, get the free money, and then max out the Roth ira. And if you still have money left over, then do the taxable. Right. This is your Public.com account where you just put money in and trying to have it grow. Match beats Roth beats taxable. It's been our sort of mantra here for a while now. Get the free money, get the tax free growth and then get just the compound interest over time. You all are both in your 20s. You're doing such a great job when it comes to investing at such a young age and we could not be more excited for you all. Now our next question comes from Jane S. Jane says we love your podcast. It's fabulous and we listen to all episodes. My husband and I live in New Zealand but would love your advice. We find the lessons very relevant even internationally. We're 58 and 59 years old and still want to build our long term wealth but see our paid salary job sort of winding down. I work in marketing. I earn 180,000 a year. My husband works for a design company earning 90,000. His job is tenuous, mine very tenuous. I feel like people are kind of gravitating more toward Gen Z when it comes to marketing. So we just want to make sure if something shifts in the next five to 10 years we get ahead of it. Now here's our situation. We have a paid off home, no mortgage that's worth 3.2 million. We have three rental properties worth 3.2 million as well, but a combined $2.8 million mortgage across all three of them. We have of 3.8 million of which 3.3 million is aggressively invested and includes index funds and 500,000 in a KiwiSaver superannuation fund which we can't access to 65. Must be a New Zealand thing. Sounds good. Jane also says we want to keep building our wealth and have it working for us as long as possible. So we have a wonderful amount of money to pass on to our three children one day and to support our own retirement. How would you recommend we do this? Should we use some investment funds to buy a business, maybe buy more rentals, pick up a lower paid retail job? I'm quite interested in hospitality, so maybe a little BNB or motel. But these may require investments to buy and not return as much for the work that's involved. We don't really want a business with staff if we can avoid it, but something we could do ourselves might exist, might not. But long story short, what should we do as we are not ready to slow down just yet. Robert, what do you think about the situation?
- [13:17]
C
I think they're in a tremendous place to be financially and I would be very careful at 58, 59 years old. You guys have done a really great job and I would hate to see you go out and spend hundreds of thousands, maybe a million dollars on buying a business or buying partial ownership in some existing business or whatever it may be. I would just hate to see you risk large sums of money at 58 or 59 years old and go backwards financially. So in my opinion I would wind down the jobs when they wind down, don't force it. I would probably look at finding a lower paid job because even if you're making 150 now and you find something for 60 or 70, that money can still all go towards your net worth and helping you continue to build more wealth. And so I think you guys are in a great position. I'd be very weary of going too hard at 58 or 59 and potentially going backwards. So I would pick safer investments, maybe with lower returns to make sure you're heading in the right direction for the years to come.
- [14:21]
B
Yeah, I think that's good advice. I don't think that they should take this three and a half million they have invested and like go cash it out to go buy a random business for a couple million or like, like literally just think about the rule of 72 which tells us that the S&P 500, right, the American 500 largest, most profitable companies doubles every seven years in value. Right? So if you have your 3.3 million that is aggressively managed and invested in index funds and ETFs, especially the ones we talk about, your 3.3 million in seven will likely be worth around six and a half to 7 million depending on what the market does. I think six and a half to 7 million by what would that be? Your mid-60s? It's pretty good retirement. I don't, I don't think there's anything wrong with that. I don't think anyone's mad about having 6 million, 7 million in the bank account with a paid off $3 million plus mortgage and another, call it probably by that point half a million to a million in real estate equity in your rentals. So it's just like you guys are going to be fine. You're going to have a net worth probably excess of $10 million if you continue on the path that you've been on. And I just want to reiterate, yeah like do the marketing stuff due to the design company stuff and when or if it ever happens that you get phased out of your job for just like not being a Gen Z or something like whatever, that's cool. Time to Reevaluate and say we don't have to go earn. Call it a quarter million, 260, 270, 280, maybe 300,000 by that time a year in income to support our lifestyle. We have a paid off mortgage. We've got nearly, you know, 6, 7 million in our investments. We've got these rental properties. Our kids are through college by this point, like everything's great. Now you say what makes me happy? You mentioned like, you know, get a part time retail job or maybe do some small lodging or like hospitality work. Like maybe you go work for a hotel. Maybe you guys have a passion project of taking half a million of this and like building a cabin. Like I don't know, but like you're at a point in your life financially where you can make those decisions.
- [16:19]
C
Yeah. And I also think they could look at it from this perspective. You have all of this experience in marketing, go open an online agency. There is so many ways to make money consulting and doing small business marketing to where you might be able to make a couple hundred grand right there and not have your age come into play. To where someone was like, you know, thinking about like for me for instance, as you get older, you don't want to feel like ageism is in the way of you making money. So I think you could do that as well and actually look at it as a side hustle that could grow to be really big, especially if you're good at the marketing stuff. So I think you have a lot of opportunity. I wouldn't rush getting out of the job and definitely look at downsizing your role, enjoying life. I mean, you're in New Zealand, one of the most beautiful places on earth, and really just absorb and do the right things with the money you already have. That's what I would do.
- [17:11]
B
So our next question comes from Jack H. Jack says, hey guys, my name's Jack. What's up, Jack? How's it going? I'm a big fan of your show and all the advice y' all give. I'm in my mid-20s and I just bought a house. I currently live with my girlfriend. She's paying me half the bills, mortgage, interest, taxes, insurance, utilities, stuff like that. And I should have another roommate moving in in a month or two. We will then split all the bills into thirds. I owe about 310,000 on the mortgage. The interest rate is 6.125%. I don't want to just make the minimum payments as over the span of 30 years, I'll be paying over 300,000 in interest, which just doesn't sit right with me. I'd like to contribute an additional 400 to 500amonth to the principal, but I'm unsure what the best way to do that is. Should I just dump all the extra money into the mortgage? Should I be investing in the stock market? Well, it might grow larger and then put that all into the mortgage. What do you guys think about my situation? Robert? I'll kick it off. Jack, Love where your head's at, right. You're trying to optimize for interest and optimize for wealth building in the future. So here's the million dollar question, or in your situation, the $300,000 question, which is, is that extra 400 to 500amonth better serving you by saving interest in your mortgage or is it better serving you growing in the market? So let's start with breaking down the interest in the mortgage. I did some digging and your mortgage payment is probably close to 2000 ish dollars a month. So what you're doing here is you're saying of the $2,000 a month mortgage payment, I'm going to take an extra 4 to 500amonth and 2000 is going to go to principal and interest. Much of that skewed toward interest in the first several years. But all of that 4 to 500 will go toward the principal of the mortgage. So. So according to some of these amortization schedules, I was able to configure behind the scenes here, you should pay your mortgage off about 12 years faster by adding this 4 to $500 a month to the principal. So now the question is, okay, cool, for the last 18 years you've been putting about $2,400 a month toward your house. And now for the next 12 years, right, because that's the 30 year allotment you would have done with the next best thing, which is just paying the minimum monthly payments on your mortgage. So for the next 12 years, the here is to say, cool, I've just freed up $2,000 a month. Should I now take that and go invest it? And the qu. And the answer to that question is yes. So whatever you think about this, like tactically speaking, what you have to understand is, is your money going to grow more for you over the next 30 years by simply paying the 2000amonth mortgage plus the 4 to $500 a month just goes to a Roth IRA or a taxable brokerage account? Like what does that turn into over 30 years? And then comparing it to investing nothing for the next what would that be 18 years? And then over the subsequent 12 years investing all $2,000 toward your taxable brokerage account, Roth IRA, stuff like that. So Robert and I just ran the numbers and we're going to walk you through exactly what we found. So situation one is you make extra payments for the next 18 years with this $450 was the assumption we use toward your mortgage and do not invest it at all. Right? And now at the end of 18 years, you will have a paid for house and then you're going to take the 2000 monthly mortgage payment, add the 450 to it. Now you have 2450. And all of that gets invested into the markets. And then you do that for the subsequent 12 years, which gets you to that 30 year allotment period that you were going to have. Regardless of just making minimum payments on your mortgage. That number that you would have at the end of 30 years is $775,000. Now to your point, yes, you would save another 300,000 in interest. So we could even bump that up to say 1.1 million if you want, depending on how you think about that interest. But you're not really going to have that money in your pocket. It should be like money saved. So, long story short, 775,000 is what you would have in a brokerage account. But if you want to use some mental gymnastics, you'd have, I guess, close to that 1 million, 1.1 million from the saved interest as well. Now, let's say on the flip side, you just made minimum monthly payments on this mortgage at a 6% interest rate, which is at 2,000amonth. And this 450 per month that you were going to put on extra on the mortgage, you just go use it and you max out your Roth IRA with it, or you contribute it to your Roth ira. I don't think it would max it out anyway. But you're investing it, right? You're investing that $450 a month. If you invested $450 a month over a 30 year period of time, the same 30 years we just talked about here, you would have $1.5 million in your brokerage account. 1 million 500 dol. And 31,000 is what it says, which is another 400,000 more than the if you include interest scenario and more than double in your brokerage account than if you went and used the extra payments to pay off your mortgage early. So yes, you would have 1.5 in a brokerage account. And yes, you technically did pay 300,000 or so in interest. So I guess you want to bring that down. It'd be like 1.2 or something like that. But it's still more than the other situation. And this is real cash versus like saved interest. So Robert, we just broke down the numbers. These are all real. We just did the calculations. What's your take?
- [22:34]
C
I love it. It just really shows you. We talk about the arbitrage of money and always making sure that you have that consideration that the positive arbitrage is in your favor. It's very trendy for people to talk about paying extra payments on their mortgage, paying down their mortgage faster. But many times the numbers just don't work out because if we're making 10, 11, 12% over here in the market and you're making, you're saving this interest over here at 6%, you just want to have that arbitrage in your favor. And your breakdown really illustrates that and highlights it. So I think it's, it's personal. Finance is personal. Everyone's going to have a different opinion on this one. For me personally, I would pay the minimum payments because the other way I look at it is too down the road. Let's say you're paying six, six and a half percent right now. You can always refinance when rates come back down while you're still making all this money in the markets by investing that $450 a month. Now the only caveat here that I will add for anyone that's doing the mental gymnastics around this math is this the only way this really works. How Austin Illustrated is if you actually invest $450 a month. Because if you don't automate it and it's just on the honor system and you start missing some months you went on a vacation, then you're not going to have the same outcome in which that I would rather see you do it on the mortgage because hopefully you have that automated through your mortgage company. So it works really well either way. But I would rather pay the minimum payment, make the money in the stock market because we have a lot of years where the markets are more than 10 or 11%. So it really accelerates even further growth for retirement. So listen up folks. You can lock in a 6% or higher yield with a bond account on public public. But remember, your yield isn't locked in until the time of purchase. So you might want to act fast. Lock in a 6% or higher yield with a diversified portfolio of high yield and investment grade corporate bonds only at public.com forward/rich habits and don't forget, Monday's.
- [24:38]
B
Episode was all about direct indexing on public. I've begun to start direct indexing on public myself. Cannot wait to share how much money in taxes I will be saving because I'm doing that right. Tax loss harvesting is automatic when you direct index on public. So go check out direct indexing if you're not doing that already. Our next question comes from Sergio. Oh, Sergio says hello, Austin and Robert. My name is Sergio. I'm 27 years old, happily married, and a proud dad of a five month old baby. Congratulations, my friend. That is awesome. You are living the dream. That's a rich man, Robert. That's a rich, rich man. Happily married with a newborn baby. Come on now. Sergio says. I'm from New Mexico and I've been listening to you guys for quite some time now. I've learned a ton from your show. So first off, thank you both for everything you do. Three years ago, I started my construction business and it's going really well. We're expanding and getting our name out there. This year I'm on track with my Roth IRA and I have about 20,000 sitting in a savings account. Here's my situation. I make 100,000 a year. I've got 90,000 in total debt spread across three vehicles, credit cards, and some equipment financed for work. I own a rental property in North Carolina with about 60,000 in equity, and I'm planning to get a loan to buy land and build some duplexes. My crew and I would handle most of the work ourselves, which would save significantly on labor costs. My question is, should I focus on paying down my, my debt first before I buy the land and build, or should I move forward with building first and worry about the debt later? Really appreciate your guidance on how to approach this smartly. Thanks again for all you do. You guys have truly helped me grow in both business and in life. And Robert, if you ever want to build a New Mexico, I'm your guy. All right, Robert, I'll let you kick us off here with Sergio's answer.
- [26:14]
C
Yeah, I love it. I would pay off the debt, especially the credit cards. And I'm assuming the equipment loans are going to be high interest too, probably 7, 8%, maybe a little bit higher. So we just want to see that get whittled away because the last thing you want to do. We love debt as long as the arbitrage in our favor makes sense. And in this instance, because a lot of it is equipment loans and credit card loans, I just don't know if it Makes sense. And also I have property all over the place. But I don't know starting out, if you should have the North Carolina property. So I would look at maybe selling that when the market gets a little bit better so you can get top dollar dollar taking the funds from that and using it either to pay off some of the debt or to have that nest egg to start the duplex project near you so you can better manage it because you don't want to be spread so thin when you still have this high interest debt. Because I feel like, you know, we always say you can't out invest high interest debt and in this instance I think that's what you're trying to do. And I would hate for the duplexes to really be crushing it while you've got all this equity tied up in North Carolina to make 2, $300 a month in passive income, if it's even passive in cash flow. So that's what I would do. I would seriously consider getting rid of the North Carolina property, putting that money towards getting rid of some of these debts and then work on getting that nest egg rebuilt so you're not paying the high interest debt so you can do this duplex project. And I will definitely keep you in mind, mind if I build in New Mexico and you keep me in mind and us in mind if you find a good deal.
- [27:49]
B
Yeah, I like that answer. Robert. I think that our friend Sergio here should sell the rental property in North Carolina, right? Don't fire, sell it, don't do anything silly, but definitely get out from under it. Because who wants to be a long distance landlord? Assuming it doesn't really cash flow that much. Take the 60,000 of equity, use most if not all of it to pay off the high interest debt. Anything that's call it 6, 7, 8, 9, 10%. Like let's get rid of that, right? Can out invest high interest debt over a long period of time and then whatever you have left, use that as a down payment toward this land and building of the duplexes. In my humble opinion, I would not want to rush the duplex purchase and building where you're like going into too much debt or an interest only like be very smart with this, right? Because if you play your cards right between the down payment, the interest rate, the I guess draw schedule, like I don't know how all that stuff works. Robert can talk about that, I guess, but like if you play your cards right between those things, you're going to have so much sweat equity into this because you've Owned. You know, you guys are the ones that are working on it yourselves. Assuming it's a three or four unit duplex and it's renting for $1500, 1800 a unit and you've got such a small mortgage payment on it between the materials and the land, like this very well could be a cash flowing machine that's spitting out 20, $30,000 a year. Maybe more. Right? Maybe more. When you think about tax depreciations and you know, different types of write offs and stuff from an IRR perspective, right, you could easily get this close to like 15, 17, 18, 22% internal rate of return there. So I think if you play your cards right, this could be a huge hit over the next five to 10 years. But do not do this thinking about like quick money. Think about this as like something that's going to pay you a quarter million dollars over the next 10 years while also probably doubling in value. Right. This is going to be a major net worth needle mover between 27 year old Sergio and 37 year old Sergio.
- [29:48]
C
Yeah. And also there's one time closed loans that are really, really favorable for this situation. Sometimes you can do as low as 5 to 10% down. So make sure you're really looking at it. What is the best way to finance this? Because we like leverage and we like debt, but we just want to make sure we're doing it responsibly. And by having all of these equipment loans out there and the credit card debt, I think that's what you got to tackle first while still moving towards getting these duplexes built. Because I agree with Austin, it is a great needle mover, especially if you're into flipping them. Maybe you build them, get them rented and flip them and start do it again. And I just think you're in a really good spot. And these are the tweaks I would make.
- [30:27]
B
So our next question comes from Gabby. Gabby says hi y'. All. Love the podcast. Can't thank y' all enough for the infinite knowledge y' all share. It truly sheds light on what type of people and souls you are and hold. That's a lot of y' alls in one sentence. Gabby, I say y'. All. You just said y' all three times. Gabby says. With that being said, super random one off question, but when do you know when to use your emergency fund? When does this expense or that expense determine? Oh, I'm going to go dip into my emergency fund. Is it car things? Is it house things? Is it professional services? If y' all can give me a rundown on what you've actually dipped into your emergency fund for and what you'd essentially do in case of an emergency. Appreciate you both to the moon and back and beyond. Thank you so much, Gabby. I love your energy. You sound like a fun person. So here's my rule of thumb. Here's the framework I use for my personal emergency fund. If I. I have an expense that month that was not budgeted for, it comes from the emergency fund. That's all it is, right? Because it's like if I have an expense that month, for example, in August, my dog died, I had to pay like $8,000 in vet bills and all this stuff to, like, put her down and do all the stuff. So, like, that $8,000 wasn't in my budget that month, so I pulled it from my emergency fund and then I replenished my emergency fund, you know, weeks and months after that. And so, like to think about it, it's like, okay, if I gotta pay this $8,000 bill, I've got three options. One, I don't pay it, and I like, default on the, you know, bill, and I. It tanks my credit. It's a terrible thing, right? Pay your bill. So option number one really isn't an option. Option number two is you put it on a credit card, which is high interest debt at 25 or 30%. That sucks. Or option three, I sell my investments to pay for this because I've got to pay for it anyway. So either one, I swipe a credit card, or two, I cash out investments, and I use investment money, pay taxes, stuff like that, to pay for this bill. So I don't want to cash out investments, and I certainly don't want to go into high interest credit cards debt. So what do I do? I use my emergency fund. Remember, we always talk about how the emergency fund is not an investment, it is insurance against your investments to ensure that they stay invested, right? So just like if I have 8,000 sitting over here in an emergency fund, which I do, I have about 30,000 in cash in this emergency fund, high yield savings account, all that stuff. But I took 8,000 from it and I paid the vet bill. If I didn't have that 8,000, I would either, one, swipe a credit card card, no, thank you, it's a bad idea, or two, I'd have to sell my investments at what could be a loss. Right? We saw what happened last week in the markets when Trump was posting about whatever about China, right? All the markets went down in a day. Maybe that makes your money be in the red now. Right? So, like, having that money set aside is insurance against our investments to ensure that they can grow over a long period of time like they're supposed to.
- [33:17]
C
Gabby, love the energy and I really want to commend you on the question. We've never been asked this question before, and I think it is hyper critical for people to understand exactly what Austin just broke down. Because so many people, when they get an emergency, they immediately go to the credit cards because they don't take the emergency fund seriously and they're running up the credit cards for the tires they didn't know they needed or the AC unit goes out on the house and it's $2800 to fix. This is a great question that everyone needs to really consider because you're right. Austin says it perfectly. Basically, the emergency fund is not an investment fund. You don't want to be taking from your investments. You don't want to be using credit cards. You want the emergency fund in a high yield savings account for emergencies. I love this question. I love the breakdown even more. Austin and everyone needs to make sure they keep this in mind so you don't have those surprises and then get in the credit card cycle.
- [34:14]
B
So let's like think through what she gave as examples as quote, unquote emergencies, but they might not be emergencies. So hard things. Well, we all know we have to get our oil changed every 5,000 miles or 10,000, whatever it is for your specific vehicle, you should have a sinking fund, which is sort of like a bucket in your savings account, setting money aside every month, knowing that you will have to have this expense come up in the future. Same thing as it relates to new tires on your car. I just paid like 1400 bucks for new tires for my car, and it was coming up, so I saved for it. Right. Like, if you have things that you know are going to happen been, like you've got to replace your roof at your house every 10 years. Like you should have a sinking fund where. Oh, every year I want to make sure I put 500 bucks in this or $1,000 over here to ensure that I have the money saved for that expense. Robert, what's a. A recent expense that you've had that you had to pull money from your emergency fund to pay for?
- [35:08]
C
For me, I think it's an oddity because it's all the time, but I had to. One of my work trucks recently was parked outside at the warehouse and somebody cut the Cadillac converter off. Get in it to start it. I start it up, and it's really loud, and I'm like, what happened? I look underneath. They literally cut it all off. And it wasn't a lot of money, but it was like 600 that I wasn't expecting. But I go through it all the time because of all the properties. So that's a whole entirely different conversation of how do you prepare for properties. For instance, the warehouse. We did one third of the warehouse roof last week. Week. And it was almost $20,000 that we knew was coming, but still had to. The money had to come from somewhere. So it comes from those overages, those. Those emergency funds to make sure to stay on top of it. So for me, it's endless. But it's also part of the game of building wealth, because when you have a lot of property and things, you're always going to have those expenses. So that's why I'm so excited that we're answering this question, and I'm just really shocked that no one's ever asked it before.
- [36:13]
B
Well, that's why it's so important when it comes to owning real estate. Like, what's the rule of thumb, right? You set aside, like, 10% of your monthly rent every month for vacancy and repairs. So, like, if you're collecting, I don't know, $2,000 a month in rent, so $24,000 a year, 2400 of that is sitting in a sort of emergency fund for your property. So if you got to replace the dishwasher, like, I've replaced my dishwasher now, like, three times. Or you got to do whatever it is, right? New roof on the warehouse, like, whatever, right? You've got money set aside for that specific instance, right? That's kind of that sinking fund that I was breaking down earlier. So our next question comes from edj. Edie says. Hey, guys, I just listened to your podcast for the first time, and I really like your advice. My question's about paying for college for our daughter. My husband and I make good money, about a quarter million a year, but we have no college fund. Our plan for using real estate income fell through, unfortunately, a few years ago when my husband lost his job. I'm looking for advice on how to get our daughter through college without crippling debt for ourselves. Or on top of that, she's chosen a very expensive career path, which is aviation. Any advice would be appreciated. All right, Edie, great question here. Let's talk through it and think through this. Right? So I want to highlight a couple things that you just shared the first thing is I'm looking for advice on how to get our daughter through college without crippling debt for ourselves and her. Right, let's make sure that we differentiate. You do not not have to do anything when it comes to paying for your kids college. I took on student loans, Ireland took on student loans. Student loans for 95% of the population is part of the game. And the rule of thumb when it comes to student loans is to not take on more student loans than your first year salary out of college. If you get beyond that number, it really begins to sting when it comes to budgeting and it's really going to impact your wealth building journey and just how sustainable you can be as a human in your 20s. So that's kind of the framework we like to use now in your instance when you do have some money to set aside for your college or for your kids college rather. That's awesome. Congratulations. I think that is really admirable and incredible. But the thing is you should never do it at the expense of your retirement, at the expense of your healthcare, at the expense of your groceries, at the expense of insert anything here that's going to make a bad living situation for you in your 60s, 70s and 80s, 80s. Right. I would much rather see your daughter take on all hundred to $150,000 of debt that comes into being a pilot. Which is what I'm assuming you said with aviation you want to be a pilot. We did some research about 100, 150k is what it costs. Would rather see your daughter take on all of that herself. Knowing that you have enough money now to retire and support yourselves in your 60s, 70s and 80s. Then maybe you don't have enough money in retirement. You did some real estate thing, husband lost his job, now you don't have the money you want. Now all of your 250,000 a year is going to try pay for this tuition. A 30,000 a semester for the next three or four years for your daughter. Yeah. Not saving now, now you're in your call it 60s, you got nothing. And now your daughter, you're looking, hey honey, we gave you money, remember? Can you pay our mortgage for us? And now you got a weird dynamic. Let's not do that. The goal here is to ensure that you give enough instruction to your daughter where she can use that framework we just shared. Right. So about one year salary is equivalent to how much debt you should go into, give or take a little bit. Right. But she's not going into some crazy amount of 300,000 200,000 debt to go, make 40,000 a year as a barista. Make sure that ratio makes sense. So, Robert, what's your take here for Edie and her husband, how do they think about budgeting for their daughter's aviation tuition? Making a quarter million a year while also balancing their own retirement, investing?
- [39:59]
C
I think you nailed it. And the big takeaway here is too many people get in this situation where they want to take care of their kids, which is fantastic, but they're not taking care of themselves first. So we would have to know the deeper set of numbers of where they're at from a retirement perspective right now. But aviation to become a pilot is a very expensive route. Great job. Obviously, we need pilots and we commend pilots, but you can't do that in lieu of setting yourself up for retirement. So I think it's a noble thing to do and want to. To do. But they would have to really consider, are they in a position to be able to spend this much money? Because maybe there's a world where it's a hybrid, where they help a little bit, and maybe it's a loan back from future wages. I don't know. I just know that you have to set yourself up first before you take care of everyone else, because generally, you don't want to have that weird situation down the road. When you're in your 70s, you run out of money because we are living long, longer, and then all of a sudden, you're going to the kids and saying, hey, we took care of you 25, 30 years ago. Now you got to take care of us. It's better to just avoid that whole situation by proper planning.
- [41:12]
B
Proper planning includes being very crystal clear with your daughter about the arrangement. Right. Robert just alluded to, like, a percent of future wages or like, like, whatever. The last thing you want to do, Edie and Edie's husband, is be like, kind of like, oh, yeah, we'll pay for college, and we can just figure it out later. Later, right? And your daughter's like, okay, cool, I'm 18, 19 years old. Whatever. I trust my parents. And then like 10 years later, she's like, rocking and rolling. And you're like, oh, man, we don't have as much money as we thought. And then, like, you're going. You're like, hey, can you remember the 150, 000? Like, it's later. We want it back now. Right? Like, and now she's like, what are you talking about, Mom? And it's like a weird situation. So, like, if you do end up doing something that's cool. Just make sure that it is crystal clear as to what is going to be agreed upon here. So there's no like, weird, weird vibes in five to ten years from now when your daughter and you are having this conversation and she thought something, you thought something completely different. And now you guys are in a riff and it just. And money's now involved. It's like, it's a whole thing. So just make sure you're super, super upfront and everyone's on the exact same page about what expectations are. But yeah, shout out to pilots she's going to be making. Depending if she signs with like a Delta or an American or United. Like, I think the first year out salaries are now between 120 to 150,000 a year. I think we saw some tuition dep on, like where she ends up going could be 100 to 150,000 for flight school. So that would definitely fall within the range there. Other pilots, first year out end up making like 60 to 90,000, which I would still argue falls within that general 100 to 150. Right? You're going to be okay. You could probably afford a payment when it comes to student loans. Here's how you can think about what that potential payment will look like, though. For every $10,000 you borrow, every month, that monthly payment goes up by about a hundred dollars, right? So if you end up borrowing $100,000, your monthly stud payment will be about 1000amonth, right? So if you borrow 150, it'll be about 1500amonth. Now, if you're taking home 6,000, 7,000amonth, you can afford 1,000 or a $1500 a month payment, right? That's why, you know, we kind of. Or if you're taking home 60,000amonth, you can afford about a 5 or 600amount, you know, payment. So that's why we have that framework there. Because if you go way off on one of the ratios, you're now like student loans are 200, you know, 200,000. It's 2000amonth over here, 2200amonth for rent. Now you're at essentially 5000amonth just to live. And that's before saving, investing, retirement goals, anything. And so that means you now have to make 80,000 just to survive. And you got to be really careful about that. Edie, please have these conversations with your daughter. The last thing we want is for her to go to some crazy flight school that cost a quarter million dollars and she's doing the wrong thing. So we commend you for being such incredible parents and wanting to think through this on her behalf.
- [43:57]
C
And for everyone listening, just take this as a consideration because we're not trying to be harsh, we're not trying to be insensitive, sensitive. We are here to provide value and walk you all through the math. Because the worst thing that could happen here with Edie, let's say you do put her all through all of the school, everything. She becomes a pilot and then a year later she just decides, nah, I want to live van life and I want to do tick tocks for a living. And you just spent a quarter of a million dollars that didn't go towards her future. So just make sure you understand the considerations and set yourself self up first. Always. And if Edie, you happen to have 10 or 20 million dollars already put away towards retirement, then scratch everything we said because you'll be just fine.
- [44:39]
B
With that being said, everybody, thank you so much for tuning in to this week's episode of the Rich Habits podcast Question and Answer edition. Do not forget seasons. Send us an email at rich habits podcastmail.com because you won the free AirPod fours. Exciting. And don't forget, come back tomorrow Friday for our Rich Habits Radar episode where we talk about the biggest headlines and how happenings impacting you and your money. Thanks everyone and we'll see you tomorrow. And Doug, here we have the Limu Emu in its natural habitat helping people customize their car insurance and save hundreds with Liberty Mutual. Fascinating.
- [45:41]
C
It's accompanied by his natural ally, Doug Limu.
- [45:45]
B
Is that guy with the binoculars watching us.
- [45:47]
C
Cut the camera.
- [45:48]
B
They see us. Only pay for what you need@libertymutual.com Liberty Liberty Liberty Liberty Savings Very unwritten by Liberty Mutual Insurance Company and affiliates. Excludes Massachusetts.