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Rich Habits Podcast
Q&A: My Parents Think House Hacking is a Scam, Our Financial Order of Operations, & Cashing In On Stock Options
00:47:26
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- [00:00]
A
Hey, everyone, and welcome back to the Rich Habits Podcast, our question and answer edition. And by the way, happy Thanksgiving. Robert, what are you most thankful for for the year of 2024? Just kind of reflecting back on everything that you've built and accomplished over the last 12 months. What are you really thankful for right now?
- [00:15]
B
I have been super, super thankful this year around team you and Christian and Fauche and Elizabeth and everyone that I work with around the country, all of my different teams for all of the businesses, because I feel, and I know for a fact that I can't scale and be me without all of you. And so that's what I'm most thankful for and always health. And those are the two things that get me up and keep me smiling every day and so energetic, because it's like, I want to do all these cool things, but you can't do it alone. Entrepreneurship is a very lonely game. So for me, having team members and partners like you just make it all worthwhile.
- [00:55]
A
Well, I appreciate that and I'm equally as thankful for you and Elizabeth as well. I would say something I'm also really thankful for, and I think you'd agree with me, is just the 70, 80, 90,000 people that come back every single week to listen to the Rich Habits podcast. Geez, it's just so humbling to know that so many people add us to their weekly routine, right? So many people have us in their rotation when they're driving to work or at the gym or whatever it might be. So we're just super thankful. We've been on this journey now for almost two years. You all continue to keep us in the top 10 on Spotify's Business business charts and just come back every single week. You all continue to support the Rich Habits podcast, You read our newsletter every Thursday, and you also have joined the Rich Habits network and support us that way. So it's just. It's so humbling to know that you guys come back every single week. And I'm just so, so thankful for all the support Robert and I get when it comes to this podcast. And we can't wait to dive into this episode.
- [01:45]
B
Yes, yes, yes. It'll definitely be a fun one. And I like the Q A because it really lets us get into the minds of our listeners and what can we do to move the needle the most for them and help them with their pain points? So before we go in, though, there's just a quick heads up, folks, that interest rates are falling, but you can still lock in a 6% or higher yield. With a bond account@public.com that's a pretty big deal because when rates drop, so can the interest you earn on your investment.
- [02:14]
A
A bond account allows you to lock in a 6% or higher yield with a diversified portfolio of high yield and investment grade corporate bonds. So while other people people are watching the return shrink in their high yield savings accounts, you can sit back with regular interest payments with a public.com bond account.
- [02:31]
B
But you might want to act fast because your yield is not locked in until you actually invest. The good news, it only takes a few minutes@public.com to lock in a 6% or higher yield with that bond account only at public.com forward/rich habits.
- [02:47]
A
This was brought to you by Public Investing, their member of FINRA and SIPC. And as of November 22, 2024, the aver average annualized yield to worst across the bond account is greater than 6%. Now, yield to worst is not guaranteed. This is not an investment recommendation. All investing does involve risk. So please visit public.com disclosure bond account for more information about that risk. Now with that being said, Robert, we got another Fed rate cut just the other week. Interest rates are falling on everyone's high yield savings accounts. And don't get me wrong, right, it's very smart to have money. This emergency fund, it's working for you. It's not dead money. But a bond account at 6%, 7% yield is nothing to sneeze at anymore. I mean, this isn't a bond you give to your 13 year old kid and you know, cross your fingers and makes 100 bucks by the time he's 30. This is a real yield. This is real money that's being made.
- [03:36]
B
Yeah, I mean it's like everything we do, we try to find the best place for people to put their money, whether it's short term or long term. You know, two years ago treasury bills were the way to go. They were paying super high yields and.
- [03:47]
A
We were the first ones to talk about it.
- [03:49]
B
Nobody talks about these. You know, you hear a lot of people talk about high yield savings. That's great. But you know, high yield savings even is going down right now where they're down to like four and a half, four, you know, 0.75. So when I see yields like this in a bond account, I'm going to jump all over and make sure we tell everyone else to look at it as well. So I'm super excited about it. Public always releases such great tools to help people out and that's why we love working with them.
- [04:15]
A
So our first question comes from Nejah. Nejah says hi Austin and Robert. I'm 26 years old and I came across this podcast right after I graduated from college. I started listening in winter of 2020 during a really tough time. As I adjusted to life without school and transitioned to a full time work schedule, I found myself getting bored just doing my full time job as an operations manager at a charter school. So I decided to open a Boba Tea shop. Bubble and Cheesecake. Listening to episode 49, scaling small businesses to Millions with Candice Nelson was eye opening for me. It encouraged me to complete my business plan, secure 30,000 in funding and find an active investor. I think I listened to that episode more than 10 times to help me through the startup phase and to this day I revisit her story on TikTok TikTok for inspiration. Our first shop is set to open on November 29th in Minnesota. If all goes well, we can't wait to expand and open additional locations. So here's my question. What is the best way to prepare for taxes for your LLC and submitting an annual report? Any advice on taxes and government related paperwork would be greatly appreciated. Robert, I'll let you kick this one off.
- [05:19]
B
Yeah, I would love to. So first and foremost, let's start out by understanding one very important thing. Make sure you have a good localized accountant. Make sure they're sharp, make sure they understand online sales. Make sure that they understand all the different platforms that you might be using. And then I would say the next step would be choose your software wisely. I use QuickBooks online for every individual of business. It's been working fantastic for us for decades and I think that is a great place to start. But then also make sure you keep good records because you can have a great accountant, you can have great software, but if you're not on top of the rules, how to save them, make sure you're documenting your receipts using the right platforms, you're not going to have good records to make sure that you follow the rules and set aside the amounts of taxes you need each month. So maybe Austin, you can talk a little bit about franchise taxes and other parts of this, depending on what state they're in, to be able to make sure that they're setting aside the right amounts either monthly or quarterly.
- [06:23]
A
Yeah, I'm right there with you Robert. I'm also a user of Intuit QuickBooks. It is a wonderful, wonderful software. So here is how I go about running my business. In preparing for taxes and annual reports and everything in between, I Have a business that does a couple million dollars a year and a million plus so of profits, right? I've got a couple employees I employ myself, I've got some retirement accounts, I've got a lot of expenses, right? I'm running a full fledged business over here. And so a few things that I do religious to make sure that my business is in order. One, I always have visibility as to what my cash flow looks like for the next month. So I'm alongside using QuickBooks and my own internal spreadsheets. I know what invoices got sent out, I know when those invoices are due, I know who's already paid those invoices and when those invoice pay dates align with payroll, align with other expenses that go out the business, right? You have to make sure that your cash flow is always in the green and that you're never overdrawing or having to go into debt just to operate your business, right? So being able to balance and forecast, right, Robert and I say this all the time. Broke people react, wealthy people forecast. Being able to forecast what your next 3, 4, 5, 6 weeks ahead looks like in your business, with payroll, with expenses, with rent, with everything in between is really important. So being able to do that Inside of Intuit QuickBooks is super, super valuable. The next thing I'd encourage you to think about is every single month at the end of the month, right, we start a new month, look back over the last 30 or 31 days, whatever it was, and say, okay, how much do we make in revenue? How much of that was gross profit? What is our expenses that came out for operating the business? What is our operating income now that we've paid those expenses? What do I owe taxes on? And once you do this every single month, you'll get a lot better at figuring out what is the number every month that I owe taxes on. And then to Robert's point, sitting down with that educated CPA who's very well versed in what this looks like, you can begin to set aside that 20, 25, 30% of whatever that number was and say, okay, this is what I owed for tax in the month of December or January or February. Let me put this aside in this account. And then when I have to make now my quarterly tax estimates to the irs, that money is already sitting aside for me and I can send that to the irs. No penalties, no late fees, no interest charges, none of that, because you're making those quarterly estimates. The next thing that I think is also really important is make sure you're very up to date on payroll. There's unemployment tax, there's all these Medicare. I mean, there's a ton of different taxes that need to be set aside for payroll, depending on what state you're in. For me, I use a software called gusto. It's like $50 a month per employee that I have, super reasonably priced. And every quarter they do all that for me. They send me little updates. They say, hey, Austin, we paid this for you. We sent this form for you. I mean, it's super, super easy for me to add people on payroll through Gusto. And the last thing that I think is really important, back to what Robert was talking about, right? I live in the state of Tennessee. I operate my business in Tennessee. And unfortunately we have a franchise and excise tax of like six and a half percent here, which means six and a half percent of my corporate profits of my business go to the state of Tennessee for just operating in the state of Tennessee. I didn't know that for the first like 12 months of my business. And so when I got that bill of like tens of thousands of dollars from the state of Tennessee in the mail, I was like, yo, what's going on? I went to my accountant like, hey, why don't you tell me about this, right? Fired them. But you gotta have someone that understands what you're doing, how you're going about this stuff, and be proactive, right? I think what really sucks about this, Robert, of being a business owner is it's never okay to not know in the IRS and the view of the state, you can say, oh, I didn't know I had to pay that. It's not my fault. You didn't know. It's your fault. You didn't know. You have to go learn it. You have to go know these things because they're going to say, oh, you didn't pay it. They knew and they still didn't pay. And here's your interest and penalties and fees and everything like that. Now, as it relates to annual reports, I just use my cpa, right? They're the one that helps me a lot with that. For me, it's a couple hundred bucks here in the state of Tennessee. So it's not that bad. It's just a super easy thing to do there. But the taxes, I think, are the most important part. That's where a lot of small business owners get hung up when it comes to cash flow. That's my whole breakdown of how I run my seven figure business. And I think that should be pretty helpful.
- [10:37]
B
And I've got a couple other kind of little hacks and pro tips that I've learned over the years. And I remember back in Silly Bands when we were at the height of manufacture and selling of Silly Bands, this would have been 2010, 11, 12. I learned that my city had an inventory tax. So for any inventory I held in my warehouse, I had to pay like two and a quarter percent tax on the inventory that I held, I paid for and I imported. But I found that 20 minutes away in a township nearby where my warehouse was was a township with zero inventory tax. So make sure when you're getting ready to open that small business, if you're going to be doing warehousing and you're going to have inventory, make sure you learn all about these different types of taxes because it all comes back to it's not what you make, it's what you keep. Everyone online, all the fake gurus say, Well, I did $2 million this year. That doesn't matter. All that matters is the bottom line and what your profit margin is, your net net and a number two, I would say a pro tip is if you're service based and you have hundreds of clients. Not a Boba shop because that's retail, but service based. Let's say you have a lawn care company or you have a T shirt shop or something like that. I would highly suggest, especially as you get a few years in and if you feel like you're chasing money and some of the clients slow pay or don't pay at all and you're constantly chasing, rate your clients, go into your database, whether that's QuickBooks or however you have all of your customers and make a list and rate them A, B or C and all of them that you think are C clients, after you sit down and think about it, get rid of them. Because they will drain your energy, your time and your profits because you're always chasing them to pay or they always want discounts. That would be my last pro tip for this question.
- [12:27]
A
And my last pro tip is do not fall, because Robert just mentioned these gurus, right? Do not fall for this notion of buy all the things that you can possibly buy so you don't have to pay any taxes. I'm a big believer in having net income after tax profits on my business and I'm of course doing everything I possibly can to lower my tax bill. But when it comes to business funding, when it comes in my example to wanting to get a mortgage, when it comes to doing all these other different things, if you show zero profits every year for your business because you spent it all trying to lower your tax bill or maybe you invested or whatever you did. You can't borrow against a business that's making zero in profit every year. You can't borrow as a solopreneur to go buy a house for $450,000 if you're showing your business is making $0 in profit. Right. So what I'm trying to say here is like, don't fall for this trap of like, oh, don't pay taxes. It's terrible. Like, sure. Like, don't get me wrong, I don't like taxes either. I've paid way more in taxes than I ever thought I would in my life over the last four years. But what I'm saying is when you pay taxes, that means you made money. And after tax profits is a really powerful thing, especially when it comes to now investing in these solo 401ks SEP IRAs. These investment account now have access to as a small business owner. So I love this question and we're rooting for you. If I'm ever in Minnesota, I'm going to get some boba tea. And if you're in Minnesota, definitely go check out Bubble and cheesecake, Nigel's Boba Tea Shop. We're rooting for you. This is going to be a lot of fun. We're really excited for you. Our next question comes from Bri V. Bree says. I'm a huge fan of the podcast and I have a question about startup stock options. I worked for a startup and was given the option to purchase 5,000 shares of the company, which I did. It's been about six years since then and I have no idea what happens next. Do I have to wait for the company to go public? Can I sell these shares if the company is still privately owned? Last time I checked, the company's valuation has gone up to $12 per share, which would help pay off almost all of my family's debt. I'm just not sure if it's like real money or not. I'm 35. My household income is 180,000 a year. We're a family of four in Dallas, Texas. We want to be consumer debt free in 2025. We have 26,000 in credit card debt and 35,000 in car loan debt. What do you all think about this? I'm going to kick this one off. Robert, go. I don't want you to look at this potential windfall as a way for you to just pay off your debt and keep your lifestyle the Same. You guys are making $180,000 a year and you're in $26,000 of credit card debt. What are you thinking? Congrats on maybe investing and having done all these things and being a high earner, but having $26,000 of credit card debt. I just. Where's the emergency fund? Where's the budget? I mean, at $180,000 a year, you all should be taking home roughly 135,000 of that or about $12,000 a month. If you're taking home $12,000 a month as a household with two kids, like you absolutely can live off 12,000amonth with two kids. So I guess what I'm saying here, Bree, is no matter what this answer is, and I'll answer your question right, but, but whatever this answer is, please, please, please, in 2025, get that honest budget. It's going to be linked in the show notes below. Put in all of your information. Understand what comes into the household money wise, what leaves the household every month from expenses, right? Find that margin of 10, 15, 20% in your budget where you're able to start setting some money aside for the emergency fund. Make sure that you're completely out of credit card debt. Don't go back into credit card debt, right? 2025 is your year. You guys are making a ton of money. It's time to buckle down and act like it. So now to answer your question about the startup stuff, my girlfriend worked for a startup. She was granted a ton of stock options. She'd spent I think like six or seven thousand dollars of her hard earned after tax dollars going in, exercising and buying these stock options and the company still privately held. Now the answer to your question, bre is yes, you have to sit on these because there's no liquidity when a company that goes from private to public, they go from a privately held company and they IPO in the stock market making them publicly traded, which means anyone, any retail investor can go and buy and sell their stock. If that did happen, congrats, you now have all this stock, 5,000 shares that you could go sell to any other retail trader. They'd buy the shares from you for whatever the price of the stock was on the stock exchange. But before that happens, right, you're now sort of in this limbo of well, I've got all this shares of stock that, you know, they raised this money. It's worth $12 a share. But like, can I cash out on that? A couple solutions for you. One, there's website called Equity Zen Equity, zen.com. they allow you to sell shares of your privately held companies. They'll send out an email blast to 600,000 other investors and say, hey, Bree has 5,000 shares of this startup company. She wants to sell them for $12 a share. Is anyone interested? And so equities then will take a 5, 10, maybe 15% fee for their services, giving you this liquidity. And then someone might say, yeah, I'll buy them at $10 a share, and then you'll make your $50,000. It won't be that same. Call it, you know, 60,000 or whatever that you were hoping for. But that's. There's other sort of, you know, secondhand markets that allow people to sell shares of privately held companies. It's really just a dice roll, honestly. It's like the people that are buying shares of stock like this on these secondhand markets normally are retail investors, which means they don't have a lot of money to spend. So think about, like, 5 or $10,000 will be invested, not maybe 50, 60, or 70,000 like in your situation. So you might have to do multiple sales of stock to different people. But equities is a good example of this. Hive is a good example of this. There's a couple other websites that people can go buy stock in of privately held companies. So definitely just like Google that and check that one out. Yeah.
- [18:12]
B
And then I would only add to this that you could look at. Does your company internally have an auction process? Sometimes their underwriter will allow for an auction of someone that's trying to get liquidity of their stock. And you can check with them, their investor relations center within the company, and ask them if they have that process. And that may give you a situation where you can have some liquidity as well.
- [18:36]
A
Yeah. For example, SpaceX does that. They've got a ton of employees that have been with the company for a long time. And, you know, their stock options are now worth millions, if not tens of millions of dollars. And some of these employees are like, yo, why haven't we IPO'd yet? I need to cash out on this investment. Right. So they. They kind of allow that to happen, which is really cool. So that's your answer. And again, really want to encourage you in 2025 to buckle down. You're making a lot of money here. 12,000amonth. You can absolutely live on this. And we're rooting for you. You got this. Just stay focused. Our next question comes from Andre. Andre says, hey, y'all, I'm 23 years old. I'm a grad student, and I'm currently in physical therapy school. I ran into your podcast a few months ago, and honestly, it changed my life, and I cannot thank you guys enough for all the knowledge you all share and provide. I side hustle by Ubering every Single morning at 3am before my classes start, allowing me now to have maxed out my Roth ira. I have a thousand in my bridge account, and I have $8,700 in my emergency fund in a high yield savings account. I am so thrilled. First off, holy crap, let's go. I mean, that's incredible. Just thinking back to the question we had a couple episodes ago of, like, how do you start early and often if you're, like, in medical school or grad school, this is how you do it. You get up, you Uber, you make your money, and you keep rocking and rolling. I mean, geez Louise, it's so great.
- [19:48]
B
Because far too many people in society have the victim mentality that, oh, I'm going to school. So that gives them the carte blanche to say, you know, hey, world, help me. And it's just ridiculous because this is a prime example of what you can do if you really want to get after it and make sure to set yourself up for financial freedom. So I love this question.
- [20:08]
A
Now let's jump into the question. I've got a bit of a dilemma and would love some advice. Fifteen years ago, my parents became family friends with a life insurance agent and bought into the idea of Iuls and that they were a good investment. After running the numbers, I figured out that my mom has now paid $90,000 in fees to the guy that sold her the IUL. And that's on top of all the other negatives that come with this product. My dad won't get behind the idea that Iuls are a terrible investment, and he's telling me that I'll be inheriting this account and I should continue to fund it after my parents pass. How do I go about this situation as he seems so willing to defend this terrible investment? Robert, I'll let you kick this one off.
- [20:50]
B
Yeah, this is a brutal, brutal situation, because everyone knows I'm very outspoken about Iuls and my disdain for them. The fees are incredibly high in the beginning. The commissions are worse. And the only person really winning with an IUL is the agent selling it. And if you look at your situation with your parents, they're paying this guy that is supposedly their friend $500 a month to manage an IUL, which is just absolutely egregious and should be illegal. The other part I have a problem with with Iuls is that if you wanted to stop paying and you wanted to surrender the account, then you also have surrender fees and penalties alongside. To me, the IUL was created as in another insurance product guised as an investment product, and far too many people are hoodwinked by it. And that's why the contracts are so convoluted and difficult to understand. And I know people will come from me, and that's all right, because I've never had an IUL salesman be able to show me the math that it makes sense versus me just having someone invest in VOO or QQQ or something simple. So at the end of the day, you've got a very difficult situation here with your parents because if they're expecting upon their death for you to take this account over and you inherit it and you're to keep it going, it's just going to be another long cycle of you paying for something that underperforms and costs way too much. So I would really get well versed on this in the coming timeframe that you have and make sure that you understand what your rights are, what your surrender fees are and what your penalties are so you can make an educated decision of what's best for you financially.
- [22:32]
A
I love this answer, Robert. At the end of the day, you are someone, obviously you're young, right? You're 23 years old, but soon you're going to be 25 and 30 and 35 and 40. And there's going to come a day where you have to say, I am going to do what I think is best for me, not I'm going to do what my parents tell me to do. And I don't mean that in like a rebellious fashion. I'm not telling you to do anything illegal or malicious. I'm just saying that there's going to be a day where you have to figure it out on your own. And if you agree with us that Iuls are a bad product and that they underperform and their high fees and everything else in between, which they are, then it sounds to me like you're making the conscious decision of, you know, once you inherit this product, it's time to cash in for whatever it's worth and then take that money and invest it yourself into the index funds and ETFs. We talk about the low cost cost index funds and ETFs. We talk about inside of these retirement accounts, the bridge account, everything. You're obviously doing so well as now as such a young man at 23 years old. Anyway, I'm sorry to hear your parents are in this situation. Here's what I would not do. I would not cause a riff in the relationship with your parents. I don't think it's worth it. Money is not worth causing a riff in a relationship like that. If they want to continue to invest in the IUL and do that they think is right, let them do it right. They're not going to take advice from someone they used to change diapers with. You just got to make sure you have that perspective of they're still your parents. They're going to do what they want and don't put such a negative connotation on their relationship because of this single factor. You love them, they're great people. I'm sure they just made a mistake. So I would obviously keep the relationship as strong as you possibly can. And when they unfortunately pass away when you're older, that is when it's time to make a decision for yourself. And I think you've already made that decision.
- [24:11]
B
I love it. I love it.
- [24:13]
A
All right, everyone, you gotta listen to this. Time could be running out to lock in that 6% or higher yield at public.com you can lock it in a 6% or higher yield with a bond account on public.com but remember, your yield is not 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. Don't forget, the forward slash rich habits allows you to get some extra perks when you make your account. You're not just a nobody joining public, you're a Rich habits member joining public and you get some perks that come with that. So. So public.com forward/rich habits go lock in that 6% or higher yield on public.com all right, our next question comes from Derek L. Derek says I'm currently 23 years old making $50,000 a year at my job and I'm expected to make 90,000 over the next one or two years if my career develops the way I think it will. I always max out my Roth and I contribute a little bit towards my 401k as my current investments. My next shift is focusing on real estate. Although I don't have lots of money right now, this is a future focus. I listen to your podcast and real estate investors about owning duplexes and house hacking. My parents are actually willing to help me own one of these. But they don't believe in the idea of FHA loans and house hacking as they invest in real estate themselves. And they say the math does not add up and that an FHA loan just simply can't be used on a duplex or a triplex. Here's my question. Is house hacking really as simple as it seems? I would like to get a more thorough breakdown about the problems that could occur and other obstacles that can get in my way. I guess you can say my parents still believe in the old fashioned way of real estate investing and find it hard to understand today's investment strategies. Robert, you are the real estate house hack guy, so I'll let you take this question.
- [26:03]
B
Yeah, Derek, great question, but I'm really kind of dumbfounded by the question. If they have experience in real estate. I've never heard anyone say that house hacking or buying duplexes, triplexes or quad plexes are problematic. The way I look at it is why do I want to tie up all of my credit, credit and all of my money buying a traditional single family home. And right now, when you look at products like Fannie Mae's 5% down mortgage, you can buy up to $1.3 million in property, you can buy up to four doors and if you live in it, then you have these tenants paying your mortgage, paying down your mortgage payment every single month and you're only coming out of pocket, you're 5% down plus your closing costs. So for me, I don't quite understand their disdain gain for you not wanting to do this and for you to do more of a single family home purchase. Because in that instance, especially without using an FHA loan, you're going to be at 10 or 20% down, you're going to have a 30 year mortgage probably, and then any equity that you build in that is going to be locked in. Whereas if you were to buy a duplex, triplex or a quadplex, live in it for one or two years, repeat the process again, all of a sudden, then you're building this portfolio much quicker of the amount of doors you have paying you every month. And it's just a much better way to cash flow out of the gate. Because right now I think the national average for rental income for a single family home, if you were doing it as an investment, is around 400 net per door. And all I can say is at $400, that's not going to really move the needle much for your financial situation. Unless you're buying a home in a high capital appreciation area. That's my take. I will die on the hill with it. Because I think it is a great way for starters to build up that portfolio, get some cash flow moving, while also reducing your monthly outlay of your own money. Because instead of you having the mortgage and the HOA and everything on your own, you have tenants to share with. So the only thing I could think of of is them not wanting you to own one of these types of properties because they don't want you living in a property that has tenants. So that might be the case where they're concerned about your safety or something like that. But otherwise I don't understand the math of why they would not like this for you.
- [28:26]
A
So now walk Derek through the problems that could occur with house hacking.
- [28:30]
B
I mean if you weren't careful about your tenants, that could become problematic. But there's so many great tools out there now for screening tenants. You can just google that. Other than that I don't really know. Because if you buy the right property, it's sound, you make sure you have a good inspection. Other than having bad tenants, I don't see an issue, especially in a duplex, triplex or quadplex because it's not like you're buying a 48 unit and you have to screen all these tenants. You're literally going to be screening one, two or three people to be your tenants. So I don't think it's a problem. And other than that, I don't know of an issue that you would have have having this multi door unit.
- [29:10]
A
Yeah. So if you think about the problem side, it's pretty apparent that the biggest problem is the tenant not paying. Which means that you're now on the hook for the total mortgage. Of course you're paying the total mortgage yourself every single month. So let's call it 456000. But if your tenant pays you 2, 3, 4,000 dollars a month in rent, or your other two tenants pay you 2, 3, 4, thousand dollars a month in rent, then of this $6,000 mortgage, 4,000 is being given to you by tenants. So you're on the hook for 2000. Or maybe the math adds up in such a way where they pay your entire mortgage and you can live rent free in this home. That is the biggest problem as it relates to duplexes and all this house hacking stuff. But that's also the biggest problem with any sort of real estate investment. Right. It's like your tenants not paying on time. I guess another problem could be to Robert's point, not buying a sound home. Maybe you buy something that's a little bit older and things begin to go wrong and you're now putting so much money into this property that it's just costing you an arm and a leg. Another problem might be around insurance. I don't know what area of the country you live in, but I know in Florida some insurance prices have gone up dramatically over the last two or three years. But again, that's not duplex specific. Maybe another problem would have to be pmi. Maybe there's a PMI situation that you might be uncomfortable with. But again, that's not duplex specific. Right. So none of these problems that Robert and I are going through, they're general real estate problems, they're not house hacking problems. Right. The only house hacking problem that is is clear is the tenant situation. Because you are going to be living, you know, next door to this person. So if you have a decent human being that is just trying to rent a duplex and live and do their thing, pay their rent and move on, right? Like that's great. If you can't screen for that correctly and you get someone who sucks, that is a problem. But that's the only, to Robert's point, real problem I can think of and.
- [30:59]
B
The other part of this that I don't like, that I don't think your parents are considering if they have this old school mentality, is the opportunity cost. If you go buy this duplex like Austin said, at $4,000 and you're going to pay a $4,000 month payment on a single family home, if you get these tenants to pay 30, 60, 80% of your mortgage, then all of that money that you're not spending on your mortgage because you're living much more inexpensively can go towards investing. So look at that opportunity cost as well. Let's say you just, just carve out 2,000 additional dollars a month that you're not paying in mortgage and it goes into investing, that's going to be huge over a 10, 20, 30 year lifespan rather than having so much of your money into a single family home. So I just think there's an argument for our side that makes sense. I think you're on the right track and I'd love it. If you want, I would do a free call with your parents and you to discuss this point because I'd love to hear their side it to understand where their math is coming from of where they believe this is a bad idea for you.
- [32:03]
A
If their whole thing is the math situation. I Understand that because the math could not make sense in some specific situations. Right. You might only put down 5%, which means the purchase price, that says half a million. And so you now are borrowing $475,000. Interest rates are 8% right now. So like, I can understand your mortgage being really expensive and then that being more than the going rate for rent right now, therefore, or you have to pay a lot on a mortgage. But like that's a math situation and that's going to be for any type of real estate, not just duplexes or triplexes. So I guess, Robert, it comes back to this idea again of like, if there is a problem, it's a real estate problem. It's not a duplex house hack problem. The duplex house hack problem comes back to screening the tenants correctly and understanding like what you're getting yourself into from that perspective. But again, I mean, you gotta screen tenants with single family homes just the same. Same.
- [32:54]
B
Yep, I agree.
- [32:55]
A
So our next question comes from Eric S. Eric says, Good evening, Robert and Austin. My name's Eric and I've just started listening to your podcast, the Mindset Shift. I've experienced in not only my finances, but also my spouse's mindset just by listening to y'all once every few days has been amazing. Shout out to Eric. Let's go. Eric and Eric's spouse. That's awesome. I did have a question about starting out with building my base. Do you guys have a recommended type of financial order of operations? Do I focus on getting an emergency fund going before I start investing? I'm working on paying down my high end interest debt. I've transferred it to a 0% APR card. I plan to have it paid off before the intro period is done. My thoughts are all over the place right now, so any help is appreciated. Robert, I'll let you kick this one off.
- [33:36]
B
Yeah, I love it, Eric and I think you're right on track. We love to see people build that emergency fund first. And when we say emergency fund, that doesn't mean we want it sitting in your checking account doing nothing. We want you to build that emergency fund, have it in a high yield cash account like@public.com or something like that. If you have a bank or a credit union that has a good, good high yield savings account, that's what we're talking about. And yes, we want to see you have that 2, 3, 4 month emergency fund built up right after that. We want to make sure that you're thinking about that Roth ira. Get the individual brokerage account Open, get the Roth IRA moving, get invested in that basket of index funds that we talk about all the time to build towards your base. We love the VOS, the QQQs, VGT, maybe moat, AIQ. There's several really good funds that we like to see. People have to be diversified and that's your next step. We really want everyone to build that Roth, try to get it maxed out every year and build towards that first $100,000 of invested capital that is your base. Once you get to that, you've got the emergency fund, you've got your base, then you can start looking to diversify more, more, get some cryptocurrency going, maybe get some other alternative investments, some individual stocks to build from there. But the key is getting yourself started with that emergency fund and building your base and then move on from there.
- [35:05]
A
I like this perspective, Robert. And so if you are asking for like a financial order of operations, I'll tell you this. Step one, create the budget. We have something called an honest budget, which means you're actually being honest about what's inside of it. What you're taking home, what you're spending money on. You will never be successful with money if you do not know how much you're making and how much you're spending every single month. Once you have that budget, take care of your essentials. Pay the mortgage, pay the rent, buy the groceries, pay the utilities, pay the phone bill, do the things you need to do to survive as a human being, as well as make sure that you are making the monthly minimum payments on all your debt so you don't get behind and have it negatively impact your credit. It's okay to keep some debt around. If you're really kind of like squeezed for cash right now. Now the last thing we want you to do is though, stop paying on that debt because that's really going to have a negative impact on your credit. And we all like 800 plus credit scores around here, but we don't want debt in perpetuity. Which brings me to step number two. Now once you've done those things is build that small emergency fund. Dave Ramsey says a thousand. We say 1, 3, 5,000. Somewhere in that range, right? Have a little bit of a cushion between you and life. Because we all know that if you are really trying to save money and get ahead in life and your car, car, you know, tires go out, or something happens with your transmission, or something happens with a dog, the emergency room with the pet stuff, I mean, there's so many things that can go wrong here. But if you have $3,000 of cash sitting in a savings account, you're feeling pretty good because that means you don't have to now go back into high interest debt by swiping the credit card and going more and more and more into debt. We don't want more high interest debt. So once you've got that small emergency fund, it's time to evaluate your financial situation right before you're surviving. Now it's time to forecast, right? We're not reacting to life, we're going to be forecasting against our life going forward. So now we evaluate and we say, okay, what high interest debt do I have? Is it credit card debt? Is it student loan debt? Is it a used car auto loan? What is my high interest debt? Austin Robert, what do you define as high interest debt? I define high interest debt as double digit debt. So 10%, 11%, 12% interest rates on this debt. That is really where you start to get into the range of high interest. If it's single digit debt, I'm not going to say it's high interest or low interest. It's around where the prime rate is right now. So like maybe not, but if it's double digit time to go, right, that's how we're going to treat it. So maybe it's an auto loan at 14%, maybe it is student loans at 12% or high interest credit card debt at 34%. Right? If you have that, Robert, and I say this all the time, you can't out invest high interest debt. We want you to have that hundred thousand dollar base, we want you to have these millions in retirement. But you shouldn't be thinking about investing right? Making 10% in the stock market. If you're paying 30% over here year just to have money borrowed, right? By paying off that debt, you are making 30% return on your investment, essentially. So pay off the high interest debt. So you got the budget, you got the small emergency fund. Time to find the margin and put all that extra money into paying off the high interest debt. Once you are out of high interest debt, stuff gets exciting. You can now start investing what we say is up to the match at your employer. So you get the free money. Then it's the Roth IRA, max that out at 7,000 a year and then it's the bridge account. If you have any money on top of that, which is think public.com normal tax brokerage account. And inside of all that you want to be buying the index funds and ETFs. We love Voo Vti Qqq Moat VGT V U G right? All these big awesome funds that do incredible over a long period of time. Once you've built that base of a hundred thousand dollars, now it's time to kind of take your foot off the gas from a desperation perspective and begin to say, okay, like how do I want to live my life in a way that allows me to continue to invest as well as build wealth? I think I'm in this phase right now. I like to build wealth and invest, but I'm also not living paycheck to paycheck. I go out to eat with my girlfriend here and there. I bought a jet ski that I saved up for and paid cash for for my birthday. Like I'm doing these things that like add a lot of value to my life. I go on vacation twice a year, right? And I'm paying for those things in cash. I'm not going into high interest credit card debt to buy those things. I'm saving money up every month and saying what's going to make me happy with this? I don't have to always have every dollar going into investments, right? We aim for that 15 to 20% range if you can. But that's our financial order operation. Once you're at that sort of phase of building wealth, then maybe it's time to consider paying off the student loans early. No one wants to be 65 with student loans. Maybe it's time to consider saving up for a house. Maybe you want to do some house hacking like Robert suggests. There's a lot of fun stuff you can do, but until you're out of that high interest debt that it seems like you're still in, it's really all hands on deck to pay that off.
- [39:31]
B
I love this take and I wish we could put that out and just have some of these big, big idea nuggets that we put out there, there, you know, somewhere where people could just always reflect. Either they're in a book or a dvd. I don't even know like what the dvd like, like, like some sort of a old school way to where they have it. It's on their coffee table, like a coffee table book or something. Because there's just so many of these things. I'm listening to you say it and I'm even like, yeah, and I've preached this and heard you say it and me say it a thousand times times. But it just makes me so happy to realize that some of these tried and true things are just, they work for any age, anywhere. You're at in your financial journey. They just work and make sense and they're tried and true over decades and decades. And the number one biggest, and the only outtake I'll give for this is don't let lifestyle creep get in the way. So many people, when they're building towards that base, they get to 50k, they spend 20 on a jet ski, they get to 70, they spend 30 on a kitchen remodel, they get to 88,000. And then they got to get the new BMW. Don't do that. Get your base built. Hold some restraint, you know, and don't let the lifestyle creep get in the way. And you'll be so much better off later on.
- [40:49]
A
And I think, Robert, my biggest piece of advice for people that are building their base still, and they're sitting on this, you know, obviously we didn't mention after you've got your, you know, emergency fund and your debts paid off a little bit like beef it up. You want three to six months of expenses in there, right? I keep about 40 or $50,000 in my own emergency fund, just depending on the month. But what I want people to take away with this is that 40 or $50,000 that I keep in my high yield savings account. It's not an investment. It is insurance. It ensures me that I don't have to go sell my existing investments, that I don't have to go swipe a credit card to pay for some crazy $12,000 surprise hospital bill or something terrible that might happen. That's going to cost me thousands, if not tens of thousands of dollars. I don't have to now sell my investments. That's that insurance. It ensures my investments to stay invested because that is the most important thing. If you can keep your money working for you for a long period of time, that is how you build wealth. That is compound interest. And by to Robert's point, oh my gosh, gotta swipe the credit card. Now I gotta cash this investment out to go pay for it. I gotta borrow against the 401k. Gotta go buy this to do that. No, we're not doing that. We're keeping our money invested and we're gonna grow it over a long period of time.
- [42:03]
B
Yeah, I used to have an old business partner who definitely lived beyond his means. His whole family did. They all had Rolexes, they all had Mercedes, they all had all the toys. And in one year, I remember going through the books. I didn't own any of this business, but we were going through it because he wanted some help financially on stuff he had $181,000 in bounce check fees on a 3 million dollar a year business.
- [42:27]
A
Wow. Wow.
- [42:28]
B
Yeah. It was insane. I was like, why do you all have all these toys and Rolexes and boats and all this and you don't have an emergency fund to make sure that if you get overdrawn or you're going to be overdrawn because payroll's high and you have some capital issues. You don't have an emergency fund and they just didn't know how to operate safely. And I was shocked that they wasted that much money on overdraft fees.
- [42:53]
A
Well, not just that, but I think a lot of entrepreneurs think entrepreneurship is the yachts and the private jets and Rolexes and like, don't get me wrong, if you're making tens of millions or hundreds of millions throughout your lifetime and you can afford that stuff, like, cool. I hope to be on a private jet one day. Never ridden one. Could be fun. But like, I make millions of dollars a year and I eat groceries. I don't go out to eat, but on the weekends, really, I eat a sandwich for lunch. Most days I'm wearing a T shirt that I paid probably like $22 for. That's got a really cool University of Tennessee graphic on the back of it, right? Robert's like, don't look at mine.
- [43:28]
B
Yeah, mine says Ritz Carlton. Sorry.
- [43:31]
A
But like, there's a difference between actually being wealthy and like financial. Like just independence and peace and like confidence and security that comes with finances. And then there's the people that like, are always trying to like, be something they're not. And I'm not saying there's anything wrong with being something you're not. If that's what really makes you happy and you want to waste your money on that, like, go do you, like, that's your money. I'm not trying to tell you what to do with it, but for me, me, I want to have money for forever and not just have money for five years, right? I don't want to just come into wealth and then spend it all. I want to come into wealth and then make sure that my children's children continue to see the benefits of the wealth that I was able to create. And of course, I go to the Mexico all inclusive vacations with my girlfriend twice a year. And I like, I have fun. I'm not an, you know, I'm not like a frugal idiot. But like, I'm not in a yacht in a Lamborghini. Welcome to my garage and my Lamborghini, guys I'm Tai Lopez. Like, get out of here. That's crazy.
- [44:21]
B
Yeah. I mean, you could go tomorrow and buy a Urus and be the coolest guy in your neighborhood, but it wouldn't be a good investment. It would be a terrible idea. So I love it. And we could go on and on about this topic. But let's get to our last question today so we don't run on too much.
- [44:35]
A
All right, so our last question comes from Emil. Emil says, hey, Austin and Robert. First of all, I love the show. Thank you guys so much for making investing fun and interesting. Since the New Year's coming up, I wanted to get your all's take on a traditional 401k versus a Roth 401k. I'm 29 years old, and my company offers both. I currently have the traditional, but the Roth 401k seems intriguing. Should I convert my traditional to the Roth? It seems like a lot more companies are offering this option as well. So hopefully others have this question and dilemma in the future. Yes, I would convert the traditional to the Roth, or I would stop doing traditional contributions and in 2025, start contributing straight to the Roth. If you don't have the money to pay for the taxes on the conversion. Right. But yeah, I mean, at the end of the day, we always love the ROTHA variant of these retirement accounts because we don't know what taxes are going to be like in 25, 30, 35 years when we're in retirement. There were a lot of stirs going around during the presidential campaign and election process that happened over the last six months that capital gains taxes were going to go up, income taxes were going to go up. Right. The United States is $35 trillion in debt. You know, the only way they're going to make more money is if they raise our taxes. So I am 100% sure taxes will be high, higher in 30, 40, 50 years than they are today. Which means if I can get rid of my tax burden now, then I can have all the flexibility and autonomy over, you know, how much of that money I can take out of the account and enjoy in retirement versus oh, wow. If I take the money out of my account, I got to pay a 40% tax on it, and I got to do this tax and that tax. And so I don't want to take it out. I can't afford to take it out, whatever it might be. I don't want to have to deal with that in retirement. So take the traditional, convert it to the Roth, pay the taxes on it. If you can afford it. If not, keep the traditional start just contributing to the Roth in 2025. And when time allows, money allows for you to make that conversion and pay the taxes, then do that too.
- [46:27]
B
Yeah, we always want to make sure you have as much money going into retirement, that is after tax. So then that way you don't have to worry about it later because like Austin alluded to, you don't want to kick the tax man down the road forever and ever because it's only going to get worse and taxes are going to go higher. So I love this question. Austin, I think you did a great breakdown. And that's it for today's episode. I'm super excited and just appreciate each and every one of you every week giving us those five star reviews, following along, sharing with a friend, and really helping us grow and spread the message that we've created in the Rich Habits Network and the Rich Habits Podcast. So thank you all for stopping.
- [47:06]
A
Bye everyone. We hope you have a great rest of your Thanksgiving. We hope you have all the turkey, all the cranberry, all the stuffing, all the green bean casserole, which is my favorite. And maybe go outside, play some with the family, watch some football. Enjoy this awesome, awesome time and we can't wait to see you on Monday. Thanks everyone and have a great rest of your week.