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So money episode 1905 ask Farnoosh.
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You're listening to so Money with award winning money guru Farnoosh Kharabi. Each day get a 30 minute dose of financial inspiration from the world's top business authors, influencers and from Farnoosh yourself. Looking for ways to save on gas or double your double coupons. Sorry, you're in the Wrong place. Seeking profound ways to live a richer, happier life. Welcome to so Money.
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Hello everyone. Welcome back to Sew Money. AskFarnouche Friday, November 14, 20205 Lots to Dig into this Friday, including this really wild idea that spread this week of a 50 year mortgage. Did you hear about this? The White House has been floating this concept around. And on the topic of housing, we're going to get into some adjacent topics today. We have a question from the audience about how to receive help from your employer when you are house hunting. This might be an option to you that some companies offer and how to split costs with your partner when you're first moving in together. A lot of couples are doing this. I did this with my husband before we got married. First though, I want to start with something personal and meaningful. This week, my team over at the Montclair Pod. That's why I started a new podcast. This year we collected our Signal award. We were the judges pick for one of the best local news podcasts in the country. We got the silver award in that category and this was a really huge moment for us as a hyperlocal news podcast. And so congrats to my team, my co founders, Michael and Ally. We are doing, I think, some really impactful work in the community. We're so proud of ourselves, but also our town for really showing up and being there for us. We couldn't do it without our town being willing to go on the show and give us information and share their thoughts with us. And you know what I realized is that what I bring to this podcast is not just my skill set as a podcaster. That's been helpful for sure, but also my financial understandings, the fact that I can know how to read a balance sheet, because here's what's going on in our town and maybe in your town too, because I think this is like unfortunately a reality in a lot of towns. Our school district is in financial shambles. It's really sad what's happening. A lot of that has to do with costs that are not within a school district's control, like rising teacher salaries, rising healthcare costs, inflation, utilities. But also, let's be honest, there was some or a lot of financial mismanagement. We've had a number of superintendents, a revolving door of superintendents, not consistent leadership, not a lot of oversight. We're calling for a forensic audit. We can't afford it. It's just a lot of drama. And so our podcasts not knowing this was even like on the horizon. We started the podcast in January and Then in the summertime we this bombshell came to our attention. We actually broke the story about just how big the debt was on our podcast. And now we've become very much like a go to source for the town for news and commentary, being able to talk to officials in the town wearing our like financial journalist hats. My co founder also is a financial journalist, so it's been great to have that skill set and I don't take it for granted. So there you go. Thanks so many for helping me out with the Montclair podcast. What's funny is too sometimes I'll interview somebody on the Montclair pod And I'll go, Mrs. Turner, welcome to the so Money podcast. And they're like, what? And by the way, I've done that on SO Money too. I'll be like, Joe Smith, welcome to the Montclair pod. So my worlds are colliding, I guess is what I'm saying. But we're also having a lot of fun building something new. Both of us are in midlife, me and my co founder Mike. And I hope if nothing else, if you're not even in Montclair, you're watching us from afar, that we're inspiring you at whatever life stage you're at to to do the same. Go out there and if it's not a podcast, try something new, experiment, build something, make waves, dare to be creative, get loud. And we just had an election here in New Jersey. Wow, what an election. People really came out. We had some local elections, statewide election. It's a really pivotal time in local communities and it's a really great time to be a part of your neighborhood and your municipality and your towns. Especially right now when it feels there's so much happening at the national level and the global level that it's really daunting. We don't feel like we have any power, any control, but we can make a lot of change at the local level, which does trickle up and I believe that. So anyway, I'm gonna get off my pedestal. I wanna talk about the news this week. Two stories, two stories. One is this 50 year mortgage situation, which I don't think it's going to become a thing because it's just silly. And then the other is that the penny is going away, which is fine with me. But I want to talk about how you can still take advantage of your pennies. But first, the 50 year mortgage thought, I guess was put out into the world this week by the White House. So a lot of us are like not even happy with a 30 year mortgage. Like mortgage brokers are just often pushing like the 15 year, the 10 year sometimes. But this 50 year mortgage, the Trump administration and the federal housing regulators are floating this idea of allowing lenders to offer a half a century year loan for borrowers, which is way more than like a 30 year traditional mortgage. And why? Because buying a home has become out of reach for so many people. This does technically make the monthly payment less, it stretches out the loan. But if you do the math, which I have, it balloons. The lifetime cost of that house, right, it almost more than doubles what you end up paying for the house. So let's say you borrow half a million dollars at an interest rate today of say six and a half percent on a 30 year fixed. Your monthly payment, principal and interest is about 3160. On a 50 year fixed, it comes down to about $2800. So yeah, you're saving about 340 bucks a month, give or take. And that's not bad. But it's like you're buying a second house for the bank because you're paying over $550,000 more in interest over the life of that mortgage. Why don't you just go buy a summer home at that point? Here's my two cents. When you hear 50 year mortgage, it might give you that moment of hope. Oh my God, finally I can afford a house. But you got to remember what's actually happening, right? This isn't a solution to affordability, it's just stretching the pain. Homes are too expensive, I'll give us that. But why? It's because incomes are not keeping up the underlying issues. Supply, wages, construction costs, lending standards, why not address that stuff? That's not, that is where the problem lies, right? A mortgage that outlives your career, that's not the solution. We need to address the housing supply, we need to address the construction bottlenecks. We need to talk about how we can help first time buyers responsibly. We need to look at ways that we can stabilize interest rates and maybe come up with affordable planning and actually make housing that is affordable for more people. I don't know, just a few thoughts. I'm not running for anything. Just some thoughts to put out there. It's just silly. This is obviously just. Yes, banks would love this, but the consumer, this is a financial, this is financially ruinous for them. You don't need me to tell you that. But it was like waiting. It was just sitting there for me, wanting me to beat it up, basically. Second story, the penny RIP the penny has been discontinued. Just my favorite Mac lipstick. Hot Gossip, by the way, if anybody owns it or knows where I can get a bootleg version. Hot Gossip. It's this beautiful pink, kind of cool pink lipstick, has a little bit of hint of blue in it. And if you like. I think the last time I found it in the Mac store was before the pandemic and I knew it was getting discontinued so I bought the last two and I'm still using it. I'm like being very conservative with it. Anyway, I digress. Back to the penny. The U.S. treasury Department announced this week that it has stopped producing pennies after 230 years of minting the $0.01 coin. You can still use them, you can still deposit them and you can still cash them in. So if you still have pennies lying around the house, you can roll them up and bring them to your local bank and exchange them for dollar bills. But the production is over. Apparently it costs almost 3 cents to make every coin. The government also loses near cents per nickel. And there are 114 billion pennies already in circulation. A lot of them in junk drawers, jars, couch cushions. You know it all. They're just like, just put your hands in your pocket right now. Officials say the coins are severely underutilized for you could. I think penny loafers are back though, right? So there's that. But here's. I read an article, it was in Money magazine. Copper pennies can act as natural fungicides for flowers. They can weigh down curtains and you can also make a DIY cold pack using an old sock filled with frozen pennies. So there we go. There we go. While the penny is being phased out, it can still be redeemed at banks. Like I mentioned, most will still take penny deposits or exchanges, but you got to get those like paper rollers and you can maybe find a coin machine somewhere. Although I find that they're few and far in between. So this is going to become one of those stories we're going to tell in our rocking chairs to our great grandkids. I think I remember when the penny was around. So anyway, enjoy it while it lasts. Get, I guess start. Put them, put them in your flower beds. Got. First I got to get a flower bed. First I got to get a flower bed. All right, let's. All right, let's head to the mailbag. First up is Lori in the audience and she wants to know my thoughts on adding your child as an employee in your business. She says, hey farnooche, I was chatting with a friend the other day and she was wondering if she should add her two year old son as an employee in her company. Two years old. She uses his photos to promote her business. I have no idea. And I'm sure you've talked about this on your podcast in the past and I found it interesting. So I thought I'd ask you your thoughts and opinions on the topic. I'm sure she's not the only person who's ever had this idea or question. Thanks so much. All right, Lori, this is an interesting question and it has come up. I haven't done a deep dive on it, but we do hear from tax experts and entrepreneurs who run their own businesses about how there are benefits to adding your children onto your payroll. You do, you pay them, but then there are tax benefits to your business. And also that income that your child is earning can now be used to fund a Roth ira, which we know all the tax benefits of that. If you search this online on social media, a lot of people talk about how this is like a back door to to creating millionaires, to leading your children down the path to millionaire status. Because imagine opening up a Roth IRA for your child at age 2 and fully funding that every year. That compounding tracking the US Stock market or a diversified portfolio, you will have a boatload of money waiting for your kid by the time they're young adults. But here are some things to consider. First, the IRS has specific guidelines around paying a child as an employee and the tax benefits tied to that. The rules vary depending on the child's age, and this is where the council of a tax planner can come in handy. You have to be sure that the work is legitimate and that the wages are reasonable for the services that your 2 year old in this case provided. How much would a modeling agency pay your child for similar work? I don't know the answer to that, but when you pay your child, you want to make sure that it matches or is commensurate with the going rate for a modeling session. The other thing you want to keep in mind is child labor laws, which again vary by state. And there's usually restrictions on the types of work and the number of hours that minors can perform. A two year old may be too young to be classified as an employee under these laws, even if the photos are being used for the business. So here you would want to consult with a legal professional in addition to your tax specialist to just figure this out. Someone who's specializing in employment law would be helpful. So those are just some considerations you want to make sure. That it's IRS compliant, that it's labor law compliant. As an alternative, instead of making your kid an employee of your company, your friend could also consider compensating their child indirectly by setting up a custodial account or contributing to a savings account or education fund for that child. These don't offer tax breaks for their business. But if the goal, and this is where you could ask your friend, what's the goal here? If there's just a bigger goal of having the child have access to money when they're older, to create a savings account to help them start earning sooner than later. There are ways to accomplish that without the complexities of making your child an official employee. And one thing I just want to bring to everyone's attention, because this could spread. But in Illinois. Illinois has passed new law just this summer in July, requiring parents who use their children in monetized social media content. They have to set aside part of the earnings for the child. So for example, I had a partnership with SkinCeuticals. I was the only one in the reels had I used my children in those reels. And if I was living in Illinois, I would be subject to this law. And what it says is that parents have to put 50%. 50%, that's a lot of the earnings into a trust account for the child which they can then access when they become 18 years old. And this applies if the child is in at least 30% of the content in a 30 day period. And this law was designed to essentially protect kids from financial exploitation. There are a lot of parent influencers out there that are leveraging their kids essentially financially monetizing from their children. And I think I agree with this law. I don't know if I agree with the 50%, but I think it's important that if you're going to use your kids to run your business and you're profiting so much from them that they get some of that right when they get older. It just makes sense. Lori, thanks for your question. It was really interesting. And we don't cover this in my Affording Kids special this month, but it's definitely fun to talk about. All right, Jennifer on Instagram wants to know about employer assisted down payment programs. I didn't even know this existed. So first of all, Jennifer, thank you for bringing this to my attention. I had to look up up what this is. And her question is essentially this, that her employer has offered to give Jennifer some money towards a down payment on a home. She says it sounds like that the fha and some of the conventional banks accept these kinds of gifts. However, how is such a gift taxed? Are there any limits or risks that I should be aware of? Cannot find any information about a down payment gift from an employer. They've also offered to hold onto my bonuses to use that as a down payment on a house. Is that a better idea? All right, so first, Jennifer, let's talk about this employer assisted housing program. I looked it up. You can actually find a lot of information online at nhc.org, the National Housing Conference, where they have summarized what this is. It's a real thing. Not every employer offers this, but increasingly, employers that want to stay competitive, improve their employee retention are offering this as a benefit, just like they're offering 401ks and other benefits. The employer assisted housing plan is an increasing benefit that some employers are providing. How it typically works. Now, I say typically because there may be some nuances depending on where you work. So you want to also talk to hr, Jennifer, but from what I understand, in general, these employer assisted housing programs are really like loans. So what the company is giving you is a loan towards the down payment on your home. They can give you a partial loan or the full amount. So let's say just to keep the math simple, that your down payment is $10,000. I know it's going to be a lot more than that, but I can't do bigger math right now off the top of my head. So $10,000, let's say your employer's like, here, Jennifer, here's our gift. It's not really a gift, though. In many cases it's not really a gift. What it is really a structured loan that says over five years, as long as you stay with the company every year for the next five years, we will forgive 20% of this loan. So you don't actually have to pay anything back as long as you stay with the company. So they're getting what want out of the deal, hopefully, which is retaining your employment and not having to spend money on headhunters and hiring and training and acclimating and all that, which costs companies potentially hundreds of thousands of dollars a year when people leave. And so in their minds, this is a great way to make this sort of a win win. People are struggling to buy homes. They're struggling to retain employees. So this employer assisted housing program kind of solves both crises. And for you, you ask the question, how will this be taxed? Again, depending on how this benefit is structured, if it is a loan, a five year forgivable loan. Only the 20% which is forgiven in that taxable year is what you have to report as essentially income and you will probably get taxed on that. So if they give you $10,000, they're essentially every year they're saying 2,000 of this will get deducted from your balance. We will cover it, but that way a gift, right? So then you will have to pay taxes on that $2,000. The risk here is that in order to benefit from this program entirely, you have to stay at the company for those five years. If you leave early, they may say, hey, all the money's due right away. Just if you take out a loan from your 401k, you can actually do that through your employer. The risk is that if you leave the job and you still have this outstanding 401k loan balance, usually the loan comes due pretty quickly, like within a couple of months. And so that is something to consider. So you will get probably taxed. It will be encouraged for you to stay for five years for this loan to get forgiven. If you leave sooner, you run the risk of having to pay back this gift as a loan entirely or pay the entire tax that is remaining on that balance immediately, depending again on how your company has structured this benefit. When you're a forward thinker, you don't just bring your A game, you bring your AI game. Workday is the AI platform that transforms the way you manage your people, money and agents so you can transform tomorrow Workday, moving business forever forward.
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Okay, next up is Christina. Christina and her partner have moved in and they are not sure how to share furniture costs. She says, I'm sure we're getting to work through different needs and wants as well as quality preferences. What are your tips? So this was interesting because I contributed to an article for Fortune magazine. The writer came to me with this exact question where he and his girlfriend had just moved in together and they had to essentially furnish the entire apartment from scratch. How do we do this? He has more expensive taste than she does. She's more quote unquote frugal than I am. But I also realize that I tend to overspend. So where can we meet? In the middle. How do we compromise? And I said, firstly, please don't break up over a dresser. This is not worth it. I think that it's going to be a constant negotiation, but at the root of it, you really need to first before you start looking at furniture on websites and going on Facebook, Marketplace and all the things, having a sit down conversation about how what money means to you. Okay, now at this stage in your relationship, I don't know how long you've been dating, but how well do you know your partner's financial history? How they were raised around money, thinking about money. This is so important because too often when we're in a relationship, especially in the early days, we'll pick up on cues. We'll see how our partner spends or tips or talks about money. And we will make assumptions that sometimes are unfair and unjust and false. Get fair, talk about each other's financial backgrounds and this will allow you to give a bit of a foundation for these conversations and discussions around what we should buy and what we shouldn't buy. And if you do discover that your partner is a little bit more on the frugal side because they grew up with less and had this scarcity mindset growing up. You want to be able to convey the value that you see in certain purchases in a way that where they will also see the value, you have to find common language. So for example, if you want to buy a couch, there's the $500 couch from IKEA and then there's the 1500 dollar couch from CB2 or wherever. If you really want the $1,500 couch, then you want to negotiate other areas where as a couple you might be able to save money to offset this big expense. Because your partner might be thinking like, oh my God, we're going to have negative $1500 at the end of the month. But what you can show to your partner is actually we can make up like 800 of that if we make these ad other pieces of furniture or other. Or we can be on the plus side, even if we hold off on other pieces of furniture for a few more months that aren't necessities. And so this won't be as much of a financial drain on our finances. And honestly, I think if you're the partner who makes more, who it's decided will keep that piece of furniture, perhaps in a breakup, then buy it. I think there are going to be some instances where that's okay too. Every piece of furniture is going to have its own story of how it arrived into your apartment. Some of the stuff you'll pay for together, other things you're like, I just really love this and with your blessing, I'd like to buy it. That's okay too. Don't make this a financial hang up in your relationship. And Christina wrote to me, she said, I'm going to look at Facebook Marketplace, like, I'm going to be smart about these purchases. I'm going to try to find the gently used versions of things and do good for our wallets. And also the environment, again, having these conversations, the primal conversations about what money means to us and why that you can have some empathy when you're having these negotiations, but also realizing that there's not going to be one rule for how you go about furnishing your entire apartment. Ann in California has a question about 529 plans. She wants to go back to school in another two to three years to get a bachelor's degree. She asks, would there be a benefit in setting up a 529 for myself for this short period of time, or would it be better to set up something like a CD instead, a certificate of deposit? The California 529 plan does have a few investment options within their 529. So when you open up a 529 in California, you can choose from different portfolios. There's an age based portfolio which adjusts its asset allocation over time. So when you're younger, the investments are more aggressive. And then as you get closer to college, the portfolio shifts to more conservative investments like bonds and money market funds. There's a static portfolio you might be able to choose from, which is a fixed allocation of stocks, bonds, funds and assets. You can choose if you want an aggressive, a moderate or a conservative allocation. And then they have individual fund portfolios. And you can choose from specific asset classes like stocks, US stocks, international stocks, bonds, and socially responsible investments. So what I would say to you, Ann, is that if you wanted to do the 529 plan, although it's just a few years for you until college, it's not typical for someone to open up a 529 plan with such a short time horizon horizon. But if you did want to do that, because 529 plans offer tax benefits, which can be advantageous. There's tax free growth. Earnings on the investments grow tax free as long as the funds are used for qualified education expenses. You've got tax free withdrawals from the 529 plan, so they're not subject to federal or state income tax. Again, if used for qualified education expenses, California does not offer a state tax deduction unlike other other states. But that being said, the 529 overall is a pretty great tax friendly investment vehicle. And so the question really becomes, should you be investing this money over just a short period of time for a goal that you want to meet in that period of time? Generally speaking, we don't want to invest money that is needed before a five year mark. Why? Because if there are major dips in the market, if there is another major economic recession, and it takes a toll on the US Stock market, that can take years in some cases for a recovery. So by the time you're going to college, you may not have what you started with, or you've barely what you started with because of the unpredictability and the volatility in the market. But if you hear this and you're like, no, but I still want to invest in a 529 plan. I would say within the California 529 plan, as I mentioned, there are these different ways that you can invest. I would go with the conservative allocation where you're going to be primarily invested in bonds and cash equivalents for lower risk. I would not be in anything aggressive, not even moderate, something really conservative because you want to be sure that you have this money for college in the next few years. You don't want to risk that if you and again, the 529 plan has those tax benefits, so that could be really attractive. If you want to go outside the 529 category, the alternatives would be a high yield savings account. This offers more liquidity. There are no tax benefits. At worst, you're going to have the money that you started out with. At best, you'll have a little bit of growth in there. The CDs that you mentioned are another alternative. They offer fixed returns over a set period of time and the CD rates are pretty decent. Right now the average for a three year CD is between 4.3 and 4.7% depending on the institution. Credit unions and online banks tend to offer the most competitive returns. That's guaranteed, unlike a high yield savings savings account where you could start today at 5%, but by the end it's maybe half that. And we know the Fed is going to be lowering interest rates starting this month. You might want to go with the CD because it's a guaranteed locked in annual percentage yield. But with that comes less liquidity. So if you know you don't need to tap this money until you go to college, then I would say the CD is probably your best bet.
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All right.
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I hope that helps to narrow down your decision. All right. If you ever have a question for these Friday episodes, it's very easy to get in touch. You can go to so showmoneypodcast.com and click on the Ask Farnoosh button at the top right. Drop your question in there. You can also leave me a voicemail which will air on the show with your permission. And you can DM me on Instagram. You can email me Farnooshomoney podcast.com so moneymembers club.com if you want to learn about our lineup of workshops and how to join the club. For more access to our community and help getting your questions answered, I hope your weekend is so Money.
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Foreign.
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Introducing Family Freedom from T Mobile we'll pay off four phones up to 3, 200 and give you four free phones all on America's largest 5G network, visit t mobile.com familyfreedom up to 800 per line via virtual prepaid card typically takes 15 days. Free phone via 24 monthly bill credits with finance agreement. Example Apple iPhone 16128 gigs $829.99 eligible. Trade in example iPhone 11 Pro for well qualified credits end and balance due if you pay off early or cancel. Contact us.
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Group health insurance can put businesses in a tough position. Now a new form of employer coverage called an ichra can help. Unlike group insurance, ICHRAs offer predictable costs and personalized health plans. Learn more at ambetterhealth.comichra.