← So Money with Farnoosh Torabi
So Money with Farnoosh Torabi
1956: Ask Farnoosh: Roth 401(k) Strategy, Avoiding the Wrong Insurance, Paying for Childcare & FAFSA Tips
00:31:22
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- [00:00]
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Farnoosh Tarabi
So money episode 1956 ask Farnoosh.
- [01:40]
Podcast Host/Intro Voice
You're listening to so Money with award winning money guru Farnoosh Karabi. Each day get a 30 minute dose of financial inspiration from the world's top business minds, 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.
- [02:06]
Farnoosh Tarabi
Welcome to SO Money everybody. I'm Farnoosh Tarabi and it's Friday askfarnoosh time mailbag topics today should high earners prioritize Roth 401k contributions or diversify some more? We have, we have concerns in the audience about being steered into a variable universal life insurance plan. Does that make sense? And then how do we make childcare and daycare costs sustainable? What are some creative arrangements? Also a question about part time jobs when you're a teen and how that income could affect your financial aid eligibility. But first, it's been a crazy week over here. One of those weeks where you look back and you go, how did I get it all done? I was telling somebody all the different things that I do during the week. And as I was speaking, I started getting nervous for myself. I was like, this is not good. It's good that I'm performing at this level and I have so much that I'm accomplishing every week. But man, it's a lot of work. And people like, like, how do you get it all done? And I will say that my training in journalism, deadline driven reporting, writing, having multiple people to work with and collaborate every day, and needing to navigate, navigate all the different responsibilities and expectations at a very young age at a very fast pace. I think while I went through a lot of anxiety going through that in my 20s, I think finally in my mid to late 40s, I'm like, okay, I'm taking all of that and I'm able to just make really quick decisions during the week. I don't really spend a lot of time obsessing over decisions. I think what I've learned to do over the years is just move on very quickly and not stay in a stuck position. Just movement is really important. So if I don't know something, I'm quick to research it. Call someone, get an alternative to an option that doesn't look like it's a good option anymore. I think my training in producing, actually producing news, because remember that was also like usually out in the field when you don't have access to the Internet necessarily, you're like relying on just asking questions, asking for help, getting creative, putting on your MacGyver hat. And so that's what this week was really all about. It started Monday, out of the gate, getting in the car and driving to Newark because we got a last minute opportunity. Just found out about it like days before that. Senator Cory Booker wanted to be on so Money as well as the Montclair Pod, which is another podcast that I host here in town. He is our US Senator, one of our US Senators in New Jersey. He's announcing this week a huge, huge tax proposal. It's called the keep your pay Act. And he wanted to sit down with us, which we were very excited about. My co host, Michael Schreiber and I, and my co host, Michael Schreiber and I. And you may or may not have listened to that episode yet it aired on Wednesday. Really thrilled with that opportunity. It was a very wide ranging conversation. We talked about everything from, of course, his tax proposal, but also things like the cost of childcare and the cost of, and being an immigrant in this country, cost of childcare, immigration, media consolidation. And it's an opportunity that we got, I think, because of the fact that we host the Montclair pod. This is maybe giving you all out there who are listening, looking for your next podcast idea. Local news podcasts. That's where it's at. That's where the growth is. And I really just wanted to be more connected to my town and in some ways give back in the best way I knew I know how, using my skills. But it's really worked out. It's gotten a lot of attention. And we have the governor on. We have now another senator that's coming on soon. And so Interesting, right? Don't poo poo the local news platforms. In any case, if you're interested in learning more about the Keep your Pay Act, I have the link for that in our show Notes. But basically the proposal is to say is to under the but basically under this proposal, Booker's proposal, Americans would not pay federal income tax on the first 75,000 doll of income. So if you're earning like let's say 80, $90,000 a year, the first 75,000 of that would essentially be shielded from federal taxes, which according to calculations would be about thousands of dollars back in your bank account. But of course, how are we going to pay for it? Who benefits the most? Will this pass? Is a really interesting conversation. So if you're curious to learn more about that, check out so money on Wednesday. It was a good one. And then also this week, I had the honor of being featured in the latest issue of Kiplinger's magazine. They did a roundup of financial experts asking a very simple but powerful question, what's the best money advice you ever received? And I'll share one with you right now. The one that immediately came to mind for me was something that a guest actually on this podcast said once, many years ago. He said there are two ways to make money. You can make money from what you do, your trade, and you can make money from what you know. All of the life experiences, lessons and relationship building that you have worked on in the run up to becoming an expert in your field. And that really stayed with me because for a long time in my career, I was focused mostly on making money from what I did. The journalism, the TV work, articles, the podcast. All of those things I considered part of my trade. But I hadn't fully realized that the experiences that I had accumulated, building my personal brand, navigating a layoff, launching a podcast, actually, the mechanics of that, negotiating partnerships Creating a content business. All of those experiences had value, like writing books and all of it. People were asking me about it all the time, but I never really stopped to think, oh, is this like something that I could actually get paid to give advice on? People were wondering, how did I get that book deal? How did you pitch yourself to the Today show and get on? How do you turn your expertise into a platform platform? And so it really clicked for me. My podcast does occasionally help me too. And I realized our lived experiences are often our most valuable intellectual property. And that's advice that you'll read in Kiplinger's I'll put the link in our show notes. They're rolling out the advice every single day in different categories like spending and family advice. And on that topic, I'm actually hosting a free webinar later this month called how to Land a Big Book Deal. So if you want to learn how I've done it multiple times, I'll be co hosting that with Rachelle Fredson, who's the creator of the book proposal blueprint. People ask me about this constantly because publishing, traditional publishing can feel very mysterious and very intimidating. But there are actually very real strategies behind landing a book deal and building the kind of platform that publishers are looking for. So if writing a book, a nonfiction book, has ever crossed your mind, even if it feels like a distant dream, it. It's never too late to learn these strategies, and I'd love for you to join me. That Webinar is happening March 26, and you can find the registration link in the Show Notes. It's a live hour session, but if you register and you can't make it, you will get the recording the next day. All right, before we get into today's listener questions, I want to talk about a few headlines in the news this week that I think are worth paying attention to. Financial news. Because sometimes the news feels abstract, right? You hear the economy is doing this or the markets are doing that. But what I care about is how these shifts actually affect our day to day lives, our paychecks, our sense of stability. And there were three stories this week that really caught my attention. The first one has to do with mortgage rates. Mortgage rates ticked up again this week. The average 30 year mortgage is now hovering a little bit above 6%. Now, if you bought a home during the pandemic, like I did, when rates were sitting around 3%, hearing 6% probably makes you want to throw up because it basically means that the cost of borrowing to buy a home has doubled compared to just A few years ago. But let me remind us all that 6% is still relatively low. I remember back in the early 2000s, that was what rates were. They were like 5%, 6%, 5 to 7% was the going rate for a mortgage. And nobody poo pooed it. People were buying homes. It's just that during the pandemic, we reached this like, rock bottom with interest rates. And of course, it was an outlier of a situation. The pandemic. Do we want another pandemic to permit ourselves to take rates to that low again? I don't think so. I think we're good with pandemics. So it's not to say that it's affordable to buy a home right now, but 6% historically is not the record high. But it does mean that borrowing a home has doubled compared to a few years ago. And that's created something economists are now calling the quote, frozen housing market. Frozen millions of homeowners. Again, like I locked in these super low mortgage rates during the pandemic. Some of us are paying back loans with 2.7%. And now they're looking around and realizing if they sell their home and buy another home, their mortgage rates could be twice as high. They won't get the same size house even if they want to move. They're staying put because it just doesn't make sense financially. And the ripple effect is huge. Fewer homes are being listed, which makes inventory tighter. Buyers are competing over the small number of homes that are available. And even though rates are higher, prices have not come down dramatically in many places. And that's the thing that we usually see. We see usually when rates go up, prices come down. But again, this inventory problem that we have is largely what's supporting this frozen housing market. So what does it mean if you're someone thinking about buying, if you're navigating a market, it's frustrating, right? You're probably pissed off. And I hear from listeners all the time, they say, farnooche, I'm doing, doing everything right. I'm saving, my credit's strong. I waited until I was financially ready to buy a home, and now it feels like the goal posts are just moving further and further away. And that is a valid feeling. But two reminders. First, mortgage rates do change. They go up, they go down. Buying a home is not about timing the market. It's about, is it the right time for you to be buying and making sure that the payments, the monthly payments, work for your life today? And then second, remember that renting is not a financial failure. For some, it's a smart strategy to keep their financial life liquid, to be able to have more flexibility and freedom in their lifestyle, in their mobility. There's still a lot of cultural pressure around homeownership, and I recognize that. But renting can actually be a really smart financial choice, depending on your situation. So the key question is not, should I buy a home? Rather, does buying make sense for my financial life right now? And do not feel like a failure because you cannot afford a home right now. You are doing everything right. The market is not doing what's right right now. All right, second story I want to talk about is what economists are calling this K shaped economy. You may have heard this phrase before. The idea is simple. A K shaped economy. Like, think of the letter K. It means different groups of people are experiencing the economy very differently. One group is the top part of the K. They're doing really well. The line is going up. Their incomes are rising, their investments are growing. They're traveling. The other group is facing downwards. That line is going south. They're cutting back on groceries. They're carrying more credit card debt. They're feeling squeezed by housing costs, childcare costs, and everyday expenses. And that gap between those who are spending and those who are not is widening. So imagine that letter K. One line goes up, one line goes down. Big gap in between. The gap is widening. You see it in spending data. Higher income households continuing to spend at a strong pace. But lower income households are more cautious. You see it in savings rates. You see it in our debt levels. And you hear it in the conversations. A friend of mine was saying, we're booking our third vacation this year. I'm like, hello, it's March. Another friend is saying, I'm trying to figure out how to cover summer camp or should I buy a car? I don't know, should I lease? Perhaps because I want to stay more liquid. I get it. None of these questions are out of bounds. Everyone is doing what they gotta do. For some families, the last few years have been incredibly lucrative. Their homes have appreciated, their stock portfolios have surged. Their incomes have gone up. But for other families, the last few years have been really tough. Costs have been climbing faster than wages. Rent is up. Childcare costs are exploding. You'll hear about all this in my conversation with Cory Booker. The takeaway here is not to compare your financial life to someone else's highlight reel, but stay focused on your financial fundamentals. Your savings, your debt, your goals. Because listen how someone is spending right now and showing it off on Instagram. That does not define or direct your financial success. And then the third story that's really important for us to absorb is the job market. It's about the job market. We've been hearing for months that the labor market is quote unquote strong, at least on paper. But there are many signs that show that the job job market is softening. Some recent reports suggest that losses are ticking. Higher hiring is slowing down in certain industries. The latest non farm payrolls report showed less hiring in February, lower than expected hiring. So what does this mean for us? This doesn't mean that a recession is around the corner. Because economies move in cycles. The labor market naturally cools and then it heats up over time. But it does mean that this might be a good moment to do a quick financial checkup. A few simple questions to ask ourselves. Do I have an emergency fund? If my income, my job, my revenue streams were disrupted for a few months, how would I manage my expenses? Do I feel confident about my job security? And if not, what are the steps that I can take now to strengthen my position? Maybe that means updating your resume, building up your savings, taking that friend out to coffee. Finally, who might be able to help you get more strategic in your career?
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Dell/Shopify/Tommy John Advertiser
Fear.
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Farnoosh Tarabi
And these steps can feel uncomfortable. But this is the work. This is the work. And this is the work that's going to lead you to more empowerment. And if you are feeling financial fear right now, this is the stuff that when you do it, it will reduce the fear. Because now what's replacing it is more security. A sense of reassurance. All right, enough of that preamble. Let's hit the mailbag and answer your money questions.
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Dell/Shopify/Tommy John Advertiser
Picture this.
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Farnoosh Tarabi
It's late at night, you're scrolling and suddenly there it is.
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Dell/Shopify/Tommy John Advertiser
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Farnoosh Tarabi
If you've ever thought about launching something
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Dell/Shopify/Tommy John Advertiser
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- [19:04]
Podcast Host/Intro Voice
Sometimes AT&T business Wireless connecting changes everything.
- [19:10]
Progressive Insurance Advertiser
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- [19:32]
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Farnoosh Tarabi
Our friend Nicole in the audience wants to know about her 401k options and whether she should be approaching them differently. Here's the question Farnoosh. Together my husband and I have earned between 450 to 550,000 per year for the past several years. During that time we have fully funded our Roth 401 that come with a match, believing that the ability to pull out our contributions and growth tax free in retirement outweighs the benefit of getting a modest tax break today. Is that true? Should we be thinking about our 401k options differently? She wants to add that they Both have traditional 401ks from earlier working years and their current company's matches are contributed to traditional accounts. So they have some long term diversification. But is that enough? We are in our late 30s, she says. We have two young children, our only debt is our mortgage and we have actively contributed to five to nines for the children and we have separate brokerage accounts for shorter term goals. Uh, Nicole has listened to the show for years and she says I value your opinion highly. All right Nicole, I'm here to just say, keep it going. I like what you're doing because you're diversifying your tax exposure in retirement. Ideally, you have no tax exposure in retirement. Right. But the truth is you can't put all your money in a Roth 401K. There are limits to that. And based on how much you are earning, it is important to invest more for retirement. You know, we often say that in retirement you want to assume that you're going to need to live off of, you know, anywhere from 70 to 80% of your current income. And so in retirement, it's not like you're going to be able to live off of $100,000 a year. You might need to live off of closer to what you're making now, a little bit less. But it all really will depend. So you need to invest more than maybe in just one type of retirement savings vehicle. It's great that you're maxing out the Roth 401k because that, as you say, will allow you to pull contributions and growth tax free in retirement. But you got to do more, right? And outside of the Roth, there's nothing else that allows you to contribute today, to have your money grow tax free for your future. So then you go to a traditional 401k, a brokerage account, which you are doing. I feel like as long as you are maxing out your Roth opportunities, that's great. Beyond that, the traditional 401k is great. And then the brokerage account, as I always say, is like third in the hierarchy, because once you've exhausted all of the savings vehicles that provide tax benefits, whether that's to save today or in the future on taxes, you then move to the brokerage account, which doesn't offer tax incentives per se, but it does give you that flexibility and that opportunity to tap the money in the short term without being penalized. So, Nicole, I. I really think you're on the right track, you and your husband. Happy to hear you've also been investing for your children's futures. You know, my book editor reached out to me recently as I'm working on the final edits of A Healthy State of Panic. And she said, hey, just curious, what is the most common question that your audience asks you? And, you know, I thought about it and I was like, well, I mean, it's so many things that my audience asks me, but if I had to put a theme around it, like, what is the underlying question of the question? And I think it's something like what Nicole is asking me, which is like, I just want to make sure I'm on the right track. You want verification? You want maybe a second opinion. You value my opinion, which I so appreciate, and you just want to hear my interpretation of what you're doing. And really I think that's so normal because in our financial lives we may feel a little bit of insecurity. We don't have all the answers. And even if we feel like we're on the right track track, it helps so much to feel more confident that we are on the right track when we hear, yes, keep it going from somebody else. Or hey, maybe think about this differently. And I'm being really honest with you, Nicole. I do think that you have really thought things through. You're being very careful and methodic. I would do what you're doing. I would totally do what you're doing. Next up is Krista, who says that she has been working with a financial advisor who she trusts. It's been many years working together. Eight years. She's 35, female, partnered, but not married, does not plan on having kids, but close to her extended family. The question is about insurance, she says. Last year my advisor suggested that I open a variable universal life insurance plan V U L in place of contributing solely to my Roth. It was described very favorably and I trust her, so I went with it. Given the recent episodes around life insurance, I'm feeling a bit confused as to whether I made the right decision. Are you able to clarify the types of life insurance and what makes most sense? Or maybe refer me to a prior episode? Thanks, Krista. All right, Krista, I have a. I think I have a lot of more questions than answers here for you, but really the questions are for your advisor. You know, if I was there, I would have asked a lot of questions like why are we telling me not to invest in a Roth? And I don't have kids, I don't have dependents. Why am I getting a very expensive life insurance plan when term life insurance is more than likely adequate for everyone Listening. What is variable universal life insurance? It's a type of permanent life insurance. There's a death benefit as well as a cash value. And like a lot of permanent policies, there's long term protection. It's designed to stay in place as long as you live. I'm sure it was described very attractively, but there are disadvantages. One is that your money's getting invested in the stock market like it would in the Roth, but it's still not guaranteed returns. The cash value can drop with the market, so there is that risk. It's very expensive compared to standard insurance policies. There are maintenance fees, there are high fees associated with these kinds of permanent life insurance policies. And so for all these reasons, I just don't really understand why the average person who doesn't have a very complicated life, who doesn't have a ton of money and they've exhausted all their financial tools that they want to now up level to this, this is expensive. And if I told you, if I had a dollar for every person who has emailed me or stopped me on the street or asked me somewhere in my life, Farnoosh, what do I do? I have this whole or permanent life insurance policy. It's so expensive I'm thinking of quitting it and I'm like stuck because I've paid into it all these years. If I stop now, it's like money wasted. But I would much rather have this money for myself to invest in the stock market. I don't need this. I was sold into it. You really have to do the math, you know, do you need this? And is the return better than what you would get just investing in the stock market? Because you gotta factor in those high fees. And in the end the answer may be no. If it sounds like you just got it, maybe, you know, if you, if you cut ties with it now, it's not a huge loss. Just cut your small losses now rather than those who come to me a decade in and they're like, oh gosh, what do we've done? What have we done? It's nice to think about having a fixed income in retirement, but I don't think it should be in lieu of investing in other retirement savings vehicles like a roth or traditional IRA or your 401k at work, or even a brokerage account for that matter. I don't think variable life insurance should be the first thing you're getting as you are designing your financial life and you're creating a financial plan. This sort of insurance is very nuanced, it's very expensive, it's very specific to who it's marketing to. And I just don't think you're the target market. That's my honest opinion. And lastly, I don't think your financial advisor who sold you this was trying to do you a disservice. I think they probably came to you in good faith, but they're also making money off of this and public service announcement. To anyone ever being sold a financial product, always know what the other person, the salesperson's incentives are. That's why I always like working with CFPs, certified financial planners. They're fiduciaries. They put your financial interests before theirs. And if they sell you anything where they're getting a cut, they must disclose that. All right, next question. Our friend in the audience has a mortgage and isn't sure how to continue paying daycare to have this be sustainable. So you may have heard me talk about the importance of looking at childcare as an investment. If you had student loan debt and a mortgage, would you have this same sort of mindset about, oh, gosh, the student loans are like a second mortgage. Maybe you do think that, but you pay it. And you may not write a letter into me to ask about how to manage. I think that it's important to find childcare that works for your family that is affordable, which is a lot easier said than done. But when I hear daycare, I get very nervous for families because not only the price of daycare, but because your kid is walking into a place where they're with other kids getting sick. I have so many friends who had children in daycare and you know, especially around the wintertime fall, their home once a week, twice a week with a cold. You can't send your kid to daycare with a fever. Obviously you shouldn't. Or even in some cases they're more stressful, like the kid can't come if they have a cough or they have a runny nose. And so it's important to know this before you sign up for daycare. If your job is not flexible, how are you going to work around that? And sometimes that's a bigger cost than the cost of daycare. It's the cost of taking your kid out of that daycare to find maybe alternative childcare. Or you have to stop working to address this. It might be more affordable and more manageable to bring in a individual caregiver into your home, maybe sharing that caregiver with another family. And so you're doing a nanny share, a childcare share, Maybe some parts of the week they host at your house, other parts of the week it's at the other family's house. But I think these kinds of creative arrangements can not only save on cost, but also, again, make it so that your child is not as exposed to germs and other things. And if they are not feeling well, your caregiver might still be able to come home, wear a mask and help you out. And then outside of that idea, there's also other kinds of childcare co ops that are run by organizations. You can try to maybe adjust your work schedule so you and your partner can share more of the care duties. Like maybe one of you can work from home on a Friday. You can't obviously provide childcare and work at the same time. But having that flexibility can maybe mean that you don't have to put your in childcare for as many hours during the day and it's just temporary. I always say, like this is a real hard period where you are fronting a lot of bills, big bills. If you have a mortgage, that's one bill. Maybe you have student loans, maybe you have childcare. These are huge, huge expenses. But they're not forever, especially childcare. So look forward to that, plan around that. And I would say once that childcare cost goes away, maybe your child is in free pre K or now in public school to pretend that that expense still exists. And now think, where can I put this? Where else can I put this money more strategically? Is it to, you know, catch up on my retirement savings? Is it to fuel my rainy day savings? Is it to pay down those student loans? Your, your financial life will open up sooner than later. And this is an investment again because child care allows you and your partner to continue working, to continue earning. And that sets the stage for more earnings promotions in the future. All right, another question about kids, but this one is about a teenager's part time job and how that may affect their college federal aid eligibility. First of all, I love that your teenager is working part time. I was telling a friend the other day that for me, when I was growing up, my parents emphasized grades over working in a job, that you have to make sure your academics are, are spotless, that if you want to have a job, that's fine, but if it starts to, you know, weigh in on your studies, it's over. And I'm a little more flex on this. I think it's actually more important for young people to learn what it's like to be accountable on a job at work, have a boss, make money and to balance that with academics. But if it means getting a B plus instead of an A, but you got a B plus and you got really great work experience. I'm in the B plus camp. I'm like in you know what? And that's so not immigrant daughter of me. But maybe I will change my mind. But that's how I feel like right now. I think that especially with where AI is taking all the jobs, like we need kids who can think critically. You know, it's not just about like knowing how to take a test all the time. You got to get out there and roll up your sleeves. So that being said, the good news is that the FAFSA Application for Federal Student Aid has a built in student Income Protection allowance. So for this current academic year, dependent students can earn about $7,600 before it starts to impact their aid eligibility. If they Earn above that, 50% of the excess amount is factored into their expected family contribution. In practice, though, most part time jobs for high school students, you're not making that much money to cross that threshold. And remember, work experience, as I mentioned, has benefits far beyond the paycheck. You're learning time management, you're learning responsibility, accountability and financial independence. One thing I will note though, assets in your child's name, like a certain savings account, can have a bigger impact on aid than wages. So if your teen is earning and saving significant amounts balance, you may want to keep those funds in a parental account which is assessed at a lower rate in the FAFSA formula. All right, that's our show for this Friday. Whether you're bracing for this potential recession, I don't know, technically we're not in one yet, or you're balancing major expenses or you're planning for your kids future. All right, and that's a wrap. Thanks so much for tuning in everybody.
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Dell/Shopify/Tommy John Advertiser
I'll see you back here on Monday.
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Farnoosh Tarabi
We have a fantastic guest, Jay Money. Do you remember Jay Money, Rockstar Finance founder? He was one of the OG financial bloggers, award winning and his life has since taken a little bit of a turn. He reflects a lot on his personal financial journey, what he learned about blogging, building, community and what he's up to today. A little trip down memory lane with J Money. Thanks for tuning in again and I hope your weekend is so Money.
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Progressive Insurance Advertiser
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Podcast Host/Intro Voice
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