RPF0471-Friday_QA
00:00:00.000 | Are you ready to make your next pro basketball, football, hockey, concert or live event unforgettable?
00:00:05.440 | Let Sweet Hop take your game to the next level.
00:00:08.080 | Sweet Hop is an online marketplace curating the best premium tickets at stadiums, arenas and amphitheaters nationwide.
00:00:14.800 | Sweet Hop's online marketplace makes it easy to browse and book the best seats.
00:00:19.360 | With no hidden fees and a 100% purchase guarantee, you can feel confident when you book your premium LA tickets with Sweet Hop.
00:00:26.440 | Visit suitehop.com today.
00:00:30.960 | It's Friday, we've got the phone lines open. That means it's time for Q&A.
00:00:34.800 | [Music]
00:00:50.800 | Welcome to Radical Personal Finance. It's a Friday Q&A show.
00:00:54.000 | This is the show that's dedicated to providing you with the knowledge, skills, insight and encouragement you need to live a rich and
00:00:59.600 | meaningful life now while building a plan for financial freedom in 10 years or less.
00:01:03.040 | Friday is where you can call in and talk to me. We can talk about your plans towards financial freedom,
00:01:07.520 | talk about any comment or question that you want to talk about. I show up with a calculator,
00:01:12.240 | a pen and a notepad and we do our best to come up together with some useful inputs.
00:01:16.800 | [Music]
00:01:23.280 | Friday Q&A shows are opened up to patrons of the show, about 250-270 of you, something like that,
00:01:29.760 | who support the show financially each and every month on a voluntary basis.
00:01:33.760 | You can sign up to become a patron at radicalpersonalfinance.com/patron.
00:01:37.760 | We'd be thrilled if many more of you would do that.
00:01:40.560 | I've struggled a little bit with the Patreon program figuring out, let me rephrase that,
00:01:44.320 | I've struggled a lot with the Patreon program trying to figure out how to set things up and
00:01:48.320 | what to offer and what not to offer. I've really struggled with that. It's been one of the things
00:01:52.880 | that I've found more challenging to figure out what to do, what I can do. But one of the best
00:01:57.200 | things about it is it has worked out really well for me to open up these Q&A calls to listeners
00:02:03.120 | who want to call in. And by opening it up to paying clients, that allows me to keep the number
00:02:09.680 | small enough to be manageable, but it allows you, any of you who are interested, to gain access to
00:02:16.000 | these Q&A shows. So today – so if you'd like to call in for a future show, just join on the
00:02:20.960 | Patreon program at radicalpersonalfinance.com/patron, radicalpersonalfinance.com/patron.
00:02:27.200 | Today, to get started, we're going to go to Kevin in Atlanta, a brand new patron.
00:02:31.200 | Kevin, welcome to the show. Let's see what you've – what would you like to talk about today?
00:02:34.640 | Hey, Joshua. Thanks. So my wife just recently left full-time employment to stay at home with
00:02:41.360 | our kid. And she's working part-time and she left a 401(k) at her previous employer.
00:02:49.120 | She's also running a side business. And at the time, at the present time, we don't really need
00:02:52.960 | the money coming in from her side business. So I'm exploring options for transferring the 401(k)
00:03:00.000 | to possibly a solo 401(k) or set IRA and creating an account with our business, or if I should just
00:03:07.280 | roll that into an IRA or what my options would be. Okay. How much money do you expect her to
00:03:13.200 | be making in this side business, reasonably speaking? Last year, it was roughly less than
00:03:21.200 | $30,000 last year before taxes. So probably in that neighborhood, maybe a little bit more this
00:03:28.960 | year. And you guys don't particularly plan to spend her income from the side business?
00:03:34.000 | She puts about a third back into the business, and that's it.
00:03:38.960 | So the $30,000 was the gross income, and then you had about a $20,000 net profit.
00:03:43.120 | Correct.
00:03:44.480 | And you're not planning to spend that $20,000 net profit in your personal budget?
00:03:48.560 | We don't really need to at this point.
00:03:52.960 | Awesome. What kind of business or what industry has your wife been able to build where she can
00:03:58.640 | do this and be focused in her work as a mother? It's a multi-level marketing company.
00:04:04.720 | Wow. Awesome. Very cool. How long has she been working at this?
00:04:09.760 | About three years.
00:04:13.120 | Okay. So she must have really given it her all then to be able to generate that after three
00:04:17.920 | years. She's been working hard. Awesome. So I ask because I know that's an often...
00:04:23.520 | that's a question that many mothers have, is try to figure out, "How can I make a living at home
00:04:32.240 | while being flexible so that I can spend time with my children but still bring money into the
00:04:37.760 | household?" And to be able to do it with a multi-level marketing company is awesome. It
00:04:42.000 | just requires a tremendous amount of work. So in your question, there are two different
00:04:46.000 | questions that should be disassociated. Question number one is, "What should we do with her old
00:04:51.120 | 401(k)?" That's an independent question. And question number two is, "What should we do
00:04:57.040 | about establishing a new potentially plan, retirement plan for her current business?"
00:05:06.240 | And the reason that you should disassociate them is probably there's very little reason to try to
00:05:12.720 | bring these plans together. The simplest thing to do with an old 401(k) is when you leave the job,
00:05:19.200 | just simply roll it over into an independently held traditional IRA. Was her old 401(k) invested
00:05:27.360 | in a fairly mainstream way? She just has some mutual funds. She was getting a company match,
00:05:31.520 | and she just kind of has some normal mutual funds inside of a 401(k)?
00:05:34.800 | Yes, she does, but it's very high fees for the company that manages it.
00:05:39.920 | So then that's a compelling reason to move it over. And the best piece of thumb advice,
00:05:45.200 | or rule of thumb advice, is that when you leave a job, you should take your 401(k) with you.
00:05:50.320 | If you're not at your old job, your 401(k) shouldn't be there anyway either. And the
00:05:54.720 | reason is simply that the number of companies that will work to service you in a 401(k) plan
00:06:01.920 | are going to be limited, and her investment options will be limited to whoever that
00:06:06.000 | servicing company was. So in the open market, if she goes out and just simply transfers it and
00:06:12.160 | rolls it over to a traditional IRA, she can work with any kind of company that's out there. And
00:06:17.440 | there's a lot of competition in that space. So she could get fees very low. She could
00:06:22.480 | lower her expenses significantly, most likely. She could have access to any kind of fund
00:06:27.280 | investment. There'd be many kinds of fund investments that wouldn't be allowed in her
00:06:31.680 | traditional 401(k) at her job, her old one, that you could do in the world of just simply a rollover
00:06:38.480 | IRA. For example, if you and she wanted to get exotic with your investment plans, you could open
00:06:44.880 | a self-directed IRA. You could use that self-directed IRA to invest in certain types
00:06:52.560 | of businesses that most people don't get into. You could use that self-directed IRA to invest in
00:06:56.960 | real estate or some kind of other strange, unique investment plan. Or you could roll it over, and
00:07:02.320 | you could go as mainstream. You could purchase index funds from the lowest cost provider and
00:07:07.360 | just set it up and have it simple. So your options in the world of an independently held IRA are
00:07:13.920 | huge. And of course, there are no tax consequences to simply making the transfer from a traditional
00:07:18.880 | 401(k) to an IRA, a traditional IRA. There's no tax consequences to that. And it's very simple to do,
00:07:25.920 | roll it directly from the current company over to the new account provider. So that's a simple
00:07:31.360 | thing to do. And the only reasons you wouldn't do that is if there were some kind of unique
00:07:35.440 | program that you had access to in the company 401(k), if you had some sort of employer stock
00:07:40.640 | that was of interest to you to still hold, or if there was some kind of very well-run investment
00:07:46.640 | program that were uniquely advantageous, then you would consider still, of course, keeping the money
00:07:51.920 | there. But it doesn't sound like that's the circumstance here. Now, in terms of reasons to
00:07:56.000 | roll it over to a traditional IRA, then it's disconnected from any kind of business, any kind
00:08:01.200 | of business plan, et cetera. It's hard for me. I can't think of any reason why you would – well,
00:08:10.080 | the only reason I can think of as to why you would try to roll it to a new plan – let's say she
00:08:15.680 | wanted to set up a SEP IRA with her business. The only reason I could think of which would be
00:08:21.760 | why you might roll it to that type of plan would be if you were very concerned about asset protection
00:08:28.080 | but trying to think if it was a state law or a federal law that gives the same asset protection
00:08:33.440 | in terms of bankruptcy protection to a traditional IRA as to an employer 401(k). That would be – I
00:08:40.480 | guess that would be – I can't remember if it's a Florida thing. I know Florida, where I live,
00:08:44.960 | has a law that says we treat Roth IRAs and traditional IRAs just as sacrosanct as an
00:08:51.040 | employer-based 401(k) plan for the purposes of bankruptcy and for the purposes of creditor
00:08:56.000 | protection. But I don't know if that's a federal law. That's the only thing I can think of.
00:08:58.960 | And that would be also the only reason why I would leave an old company 401(k) where it was,
00:09:05.120 | as if for some reason I were in a contested situation or I were being sued or subject to – well,
00:09:12.000 | subject to a potential judgment against me. So in terms of her options for her new business,
00:09:18.480 | it's going to depend on how much money you want to save and how much hassle you want to go through.
00:09:24.400 | So there are basically three types of retirement plans that – well, four. Let's go with four
00:09:31.760 | types of retirement plans that are going to be simple for her to consider. The first thing that
00:09:38.960 | she could simply do is contribute to a traditional IRA just like any person can. So sometimes
00:09:48.000 | there's no reason for someone to go through and go through the hassle of setting up a business plan
00:09:54.720 | or a plan that's related to their business if you're only going to save a couple thousand
00:09:57.840 | dollars a year. If somebody wants to set aside $5,000 a year, you could just simply do that in
00:10:02.960 | a Roth IRA or into a traditional IRA, and there's no need to go through the hassle of a simple IRA
00:10:09.280 | or a SEP IRA or a solo 401(k) plan. It's just simpler to stick with a traditional IRA, an
00:10:17.920 | individual IRA that's open to any person. So you should remember that that is an option.
00:10:23.920 | So for 2017, the amount – the contribution limit is $5,500 if you are under age 50 that you can
00:10:36.720 | contribute to a traditional IRA, so $5,500. If you only want to contribute that much to a pension
00:10:43.680 | plan, that's going to be your simplest option. Now, your next two options are going to be a SEP IRA.
00:10:50.640 | SEP is an acronym that stands for Simplified Employee – now I'm blanking on it. Simplified
00:10:58.160 | Employee Pension. I think it's SEP, Simplified Employee Pension Plan. A SEP IRA has a unique
00:11:05.200 | feature of having a much higher contribution limit. In 2017, the SEP IRA contribution limit
00:11:12.720 | is $54,000. But a SEP IRA is very simple and easy to set up. The paperwork is standardized.
00:11:20.400 | There are almost no administrative responsibilities, so it's very, very simple and easy
00:11:27.760 | to set up a SEP IRA. You can do it very, very easily. The catch with a SEP IRA is your maximum
00:11:36.480 | contribution is either $54,000 or 25% of your earnings or 20% of your self-employment earnings.
00:11:50.560 | So in order for you to be able to contribute the full $54,000 into it, she would need to be earning
00:11:58.640 | a few hundred thousand dollars. So that's going to be harder for her and that's probably going
00:12:04.480 | to make it less appropriate for her to do. That would be the problem with a SEP IRA.
00:12:10.080 | But for a business owner who does have high earnings, a SEP IRA is simple – and if 25 – let's
00:12:15.760 | just say 25% for easy remembering. If investing 25% of your profit is sufficient for your desire
00:12:22.080 | of how much you want to actually get into a pension account, that's the appropriate type of
00:12:27.200 | plan. Your next option would be a simple IRA. And a simple IRA is – obviously, it's – just from
00:12:35.840 | the name of it, it works basically like a traditional IRA except that the earnings requirements or the
00:12:42.720 | earnings amounts are just a little bit higher. So for 2017, you can contribute to a simple
00:12:50.400 | account up to $12,500. So you can contribute either up to 100% of your net earnings or $12,500.
00:13:03.040 | So given her context, this might get her closer to the amount of money that she wants to actually
00:13:10.400 | put into there. She's kind of right on the border amount of it. That's the benefit of a simple IRA.
00:13:17.040 | Again, these are – not to say simple too many times, but these are – SEP and simple IRAs are
00:13:25.120 | very simple and easy to establish. The third – the fourth option would be an individual 401(k).
00:13:31.600 | The trick with an individual 401(k) is that it's possible because the way that the
00:13:37.840 | contribution limits are calculated, it's possible that she might be able to get more money into an
00:13:44.000 | individual 401(k). The reason for it is depending on how the documents are written, she can make
00:13:50.400 | both an employee and an employer contribution to the account. So as an employee, she could contribute
00:13:59.040 | up to $18,000 per year and defer up to $18,000 of her income, her wages, into the account if
00:14:07.200 | she's under age 50. Of course, that would be $24,000 if she were over the age of 50.
00:14:12.160 | And then additionally, she can set aside and stipulate that there is also an employer
00:14:19.920 | contribution to the account and that employer contribution can be calculated and possibly,
00:14:27.120 | based upon the formula that's used, allow her to put a significant amount of money in there.
00:14:32.800 | Theoretically, it could be possible even for her to put in place a plan that could allow her to
00:14:38.960 | essentially contribute all of her earnings into the – into an individual 401(k) because she
00:14:44.960 | wouldn't technically have to take the wages out from her business and pay them out to herself.
00:14:51.360 | She could set it up so that her employer contribution and her employee contribution
00:14:56.480 | went into the account and the total contribution limits are about $54,000-ish between those two.
00:15:04.320 | So when you line that up, that one might be the best way for her to go about getting the
00:15:09.440 | most money in it. Individual 401(k) is a little bit more complicated than a simple ORSEP,
00:15:14.080 | but it's not impossible and it's grown in popularity. But it's definitely going to be
00:15:19.440 | more complicated than that. The final option would be time of year that she's going to do it.
00:15:26.960 | Remember that a 401(k) has to be done during the tax year. So if she's going to make
00:15:32.320 | 2017 contributions, they all need to get into the account during 2017,
00:15:36.560 | whereas the other plans can be done after the tax year. So she could sit down in March of 2018 or
00:15:43.120 | April of 2018 while filing her taxes and allocate and designate her previous year's contribution at
00:15:50.880 | that time. So those are some differences between those. Does that clear things up for you, Kevin?
00:15:58.240 | Make sense to you? Yeah, it does. One thing, would the solo 401(k) offer a tax advantage? I mean,
00:16:04.880 | would that go in pre-tax? How would that work? The tax implications of all four of those accounts
00:16:15.440 | that I mentioned, a traditional IRA, a SEP IRA, a simple IRA, and a solo 401(k) are identical.
00:16:22.080 | All of them are allowing you to put pre-tax money into the account, and then she'll pay taxes on the
00:16:28.080 | money when she takes it out of the account. Right. Okay. Yeah, that sounds good. That kind of
00:16:35.600 | helped me narrow it down, get an idea of what my best approach should be.
00:16:40.240 | Awesome. You're going to want to obviously go based upon the advice that you get. If you sit
00:16:47.120 | down with your accountant, your accountant can guide you through. The SEP IRA is the
00:16:52.160 | accountant's best friend. If you do a solo 401(k), you'll need to work with your various
00:16:57.600 | plan providers so that you can get those documents set away. But it's become much more popular and
00:17:03.040 | much simpler. Any large brokerage company is going to be equipped to help you with the documentation,
00:17:08.160 | the sample documentation for that. Awesome. John in Pennsylvania, welcome to the show.
00:17:14.560 | What do you want to talk about today, please? Hi, Joshua. Thanks for taking the call. I wanted
00:17:20.800 | to talk to you and ask your advice on how to help a friend who seems open to improving their
00:17:30.480 | personal finance situation. My friend, she's a late 20s woman that's living in Los Angeles,
00:17:43.120 | and she works in a fairly small design space for fashion, some kind of sales role that she's in.
00:17:52.240 | And it was a very small company. She called me with her immediate crisis was trying to decide,
00:17:56.560 | should she go to a new job that was soliciting her, it was a bigger corporation,
00:18:01.520 | but making less money immediately. I had advised her to go to the big corporation because of some
00:18:08.640 | other things she had told me. But in the end, she ended up staying under some pretty weird
00:18:13.760 | circumstances, like her employer, either being evil or very kind, had one benefit where they pay
00:18:21.360 | off the consumer debt of their employees very slowly. I'd never heard of that before. But
00:18:28.880 | anyway, there was some really weird things going on there. But for better or worse,
00:18:34.240 | she stayed with the company, the small company. And that led to a discussion of
00:18:38.880 | want to get out of debt and just do more things better as an adult, I guess you could say. She's
00:18:48.240 | very smart girl, but she just doesn't have some of those basic personal adult skills down pat yet.
00:18:57.600 | And I was hoping to help her with some of those. But since she showed some interest and inclination
00:19:03.040 | to be open to learn and things like that, I didn't want to scare her away by saying, "Okay,
00:19:07.440 | let's attack your expenditures right away. I don't want to have her running for the hills."
00:19:12.560 | So I'm just wondering what your approach would be to help a person along to start exposing them to
00:19:19.520 | some of these things. I don't really know personally, like Dave Ramsey's bodies of work at
00:19:24.080 | all to point her to any of that. I thought your stuff might be a little too much at first to
00:19:29.520 | point her to this podcast. So I don't know, I'm just looking for a general approach on how to
00:19:34.480 | help someone without scaring them away. Or maybe I should just start on showing them the importance
00:19:40.160 | of why this stuff is important. - What is your relationship with her such that she came to you
00:19:46.320 | for a money discussion? - Sure. So I was trying to be a little vague, but yeah, she's my sister-in-law
00:19:52.560 | and that's important because she really doesn't feel like she wants to go to her family for all
00:20:00.480 | the reasons that probably family carries weight with. And I think I'm kind of a good in-between
00:20:07.040 | where maybe I'm not as judgmental as her family would be, or maybe I have more knowledge than
00:20:14.480 | them in certain areas, but I'm also not directly related by blood. So I don't know, maybe I'm just
00:20:21.040 | a good in-between. And she's come to me for some advice in the past and I've given probably
00:20:26.800 | varying qualities of advice, but for some one reason or another, she called me about this job
00:20:30.560 | thing and that led to kind of some high-level discussions over finances. She's apparently,
00:20:36.320 | and her consumer debt's not insane. From what I know of other people's debt, it's 3,000 or so in
00:20:43.520 | consumer debt with like a 14% interest rate, and she has about 10,000 in student loans. But I'd
00:20:49.280 | like to help her kind of tackle that before going on to other things, maybe more other things I might
00:20:57.040 | be better at coaching her through. I wanted to get this kind of debt thing tackled first, but maybe.
00:21:03.280 | I don't see any way for you to win by getting involved. I appreciate your heart to want to
00:21:11.040 | help her. And obviously, you want to help her to do what's best, but I don't see any way to win by
00:21:20.080 | really getting involved. Let me expand on what I mean. I don't think that you should not help,
00:21:24.160 | but in terms of the way that you help, I think that you got to think very carefully about it.
00:21:32.480 | So general rules that I think are really important. Number one, we don't give help to
00:21:40.960 | people unless they're asking for help. People don't have a question, don't give an answer.
00:21:44.720 | So obviously, she's satisfied that and she's come to you and asked for your help. So she asked you
00:21:51.280 | a question. So that means that you do have a place to help her. Rule number two is don't
00:21:57.520 | give away advice for free. I don't give advice for free. Make sure that she's paying for it or
00:22:02.720 | anybody is paying for advice in some way, because if you give advice away for free, people basically
00:22:09.440 | think that it's worth about what they paid for it, which is nothing, and they're likely not to take
00:22:14.480 | any action on it. Doesn't mean they have to pay financially, although that's fine. It'd be a
00:22:19.040 | little bit weird for you to charge your sister-in-law for talking to you for an hour, but
00:22:23.280 | at least you want to make sure that they're paying for the advice by doing something with it. So I
00:22:28.400 | would be very slow in a family relationship to offer advice and then continue offering advice
00:22:35.600 | unless I'd put a test of some kind in place to see is this person actually going to do something
00:22:42.640 | with the advice. If somebody's not going to do something with the advice that you give,
00:22:46.800 | then there's no point in you continuing to give advice. You're just simply going to sour
00:22:50.400 | the relationship, turn them off, possibly just go far beyond the relationship. There's just no
00:22:57.280 | benefit to it. So the other thing that makes it tricky is when you get into individual specifics
00:23:02.800 | in family relationships, it gets trickier still. I have financial conversations with
00:23:13.040 | some of my family members, and obviously now after I've been giving professional financial advice for
00:23:19.920 | basically 10 years now, in this context that now sometimes people come to me and look to me,
00:23:27.440 | but I really do not ever want to get involved on a detailed level with people because what happens
00:23:36.080 | is if I, let's say I go through somebody's budget, when I do this, when I'm asked for advice,
00:23:41.120 | when people are paying for it either financially or by actually doing something or demonstrating
00:23:45.840 | to me that they're serious, I have to be so careful not to tell them what to do.
00:23:51.600 | I had to be so careful not to say, "You spent how much at Starbucks?" or "You did that? Are
00:23:56.880 | you kidding me? You went to Whole Foods. Don't you know that if you had gone blah, blah, blah,
00:24:00.320 | blah, blah, you could have done this?" I had to be so careful because that kind of thing
00:24:03.920 | just destroys relationships. So when I give advice to friends and family, I do it very
00:24:09.520 | broad-based and I try to not get into specifics of telling them what to do because if you tell
00:24:17.360 | somebody what to do, then in a sense you've gained a certain responsibility to a degree
00:24:22.800 | for the outcome of their decision. So I try to teach principles and I have the benefit, of course,
00:24:27.600 | that I can usually say, "Well, listen, I did a podcast on this. So if you're interested in this,
00:24:31.600 | but you may not have that place." So the best way that I would give advice in that situation
00:24:38.240 | is happy to have a phone call, talk her through a decision, kind of in the same way that I'm doing
00:24:42.880 | right now on a Q&A call. Maybe you can ask some thoughtful questions and you can lay out the pros
00:24:48.320 | and cons of different approaches. You can say, "Well, the advantages of this are this, the
00:24:53.360 | disadvantages are that." That would be good. If she has an additional follow-up call on a specific
00:24:59.440 | question like, "Hey, should I invest my money or should I focus on paying off my credit cards?"
00:25:05.040 | You might give her your thoughts on that. I would try to accurately represent the different
00:25:09.840 | positions. Well, some people would say this, here's why, some people would say that.
00:25:13.520 | But I think the best way that you could help her would be by trying to put in front of her
00:25:17.840 | an external third-party educational resource that would be helpful to her.
00:25:22.640 | So if it's in the context of a book, what I would try to do is – or if she's a reader
00:25:26.400 | and you think she might read a book, what I would try to do is I would try to think what type of
00:25:30.880 | commentator would connect with her. If she's young and female, I would look through the Susie
00:25:36.640 | Orman books and I would say, "Is there a Susie Orman book that would kind of give her – get
00:25:41.040 | her started?" Or something like a David Bach book, very, very vanilla entry-level personal finance.
00:25:48.080 | If she's struggling with debt or if she has – I don't know in her earning structure,
00:25:53.680 | it doesn't sound like she has a lot of debt, but she has a lot of debt. Certainly Dave Ramsey,
00:25:58.000 | you can't go wrong with giving out your total money makeover to her.
00:26:01.920 | That book has been hugely persuasive to other people. If she's not really a reader,
00:26:07.280 | I would look around and maybe just suggest a podcast for her. As you said, my show might be
00:26:14.160 | useful or there might be another show. As far as I don't know – what's the girl? Not Farnoosh.
00:26:21.360 | Money Girl, I haven't listened to her in a long time. But there are other podcasts
00:26:26.080 | that are going to be more entry-level, more kind of vanilla stuff that might have that.
00:26:30.400 | But I think your best bet is to suggest to her some resources and buy a book and say,
00:26:35.520 | "Here's why I bought this," or "Here's what was super useful." If she's looking for more
00:26:39.520 | comprehensive advice, Liz Weston has written so much – so many good books, just more encyclopedic
00:26:46.560 | type of books that are useful. There are other authors that have done a good job of trying to
00:26:50.720 | bring together the advice. I think it's far safer to point her to a resource. If she asks you a
00:26:56.640 | question, how I would answer it, I would say, "Here's what I would think," but I would point
00:27:00.480 | her to a resource by somebody who's writing on that. That way, you've absolved yourself of a
00:27:04.720 | little bit of the personal responsibility that might get very touchy in a relationship to say,
00:27:10.560 | "You should do this." To the extent that you do say that, which there's a place for it,
00:27:18.080 | I would be careful to respect her autonomy – what's the word? – her sovereignty over her
00:27:26.720 | own life and her own decisions. If she wants to borrow money and use credit cards and put cars
00:27:36.000 | on payments and things like that, you have to be very careful that you don't bring a sense of
00:27:42.640 | condemnation to your personal relationship with her just because you think that that's an unwise
00:27:48.080 | decision. If you do that, what'll happen is it can sour the relationship, and then she doesn't
00:27:54.160 | come to you in a time where, if she were to do that, everything is falling apart. I would be
00:27:59.120 | very careful, and I would seek to give resources rather than to get personally involved on a
00:28:07.200 | detailed level. >> Steven Rubinstein
00:28:10.240 | Okay. Yeah, I think that's great advice on sort of why I was cautious about getting into this.
00:28:16.480 | I have seen her brother help her out in situations in the past. I've told my wife,
00:28:23.600 | "I don't want to get directly involved because I feel like, whether this is right or wrong,
00:28:27.440 | I feel like if I'm helping someone directly with money, if that's something that I just give them,
00:28:35.760 | then it's a gift. If it's a debt that I expect them to pay back because it was due to some stupid
00:28:40.560 | life decision or whatever, then I'm going to be feeling like I own that person's income until I'm
00:28:48.240 | paid back, and that's probably not a good way to get into letting out money." I just didn't ever
00:28:53.520 | want to have that kind of dichotomy between the two of us. My instinct is, when I hear her kind
00:29:00.000 | of delving into these things and wanting help, my instinct is to say, "Let's seize this moment and
00:29:06.400 | really help her out." But who knows? It could have faded. The whole interest in it could fade
00:29:11.600 | in a couple of weeks, and I'm still left there having written out a whole plan to help her,
00:29:16.720 | and she's just lost interest. So I guess a slow trickle of third-party advice, like you said,
00:29:23.280 | is maybe the best way to go and just see what she grabs onto or just try to keep exposing her to
00:29:28.160 | things without rolling my sleeves up and getting into her finances intimately myself. So yeah,
00:29:36.240 | I think that's a good approach. - There may also be a place where
00:29:39.840 | maybe you want to buy her a session with a financial advisor. If she's young, I would
00:29:44.800 | look in the XY Planning Network gang, look on their website, and there's probably a young advisor
00:29:52.560 | who might really click with her, possibly in her area where she could see in person, and maybe you
00:29:57.120 | could buy her a consultation, an hour, a couple hours of time with a financial planner. Obviously,
00:30:04.640 | you want to help people. - That's a good idea. I like that a lot.
00:30:06.960 | - Awesome. Yeah. Obviously, you want to help people. But when it's your sister-in-law,
00:30:11.280 | I would be very careful, very, very careful to not overstep the boundaries of sovereignty.
00:30:22.480 | She's not your wife. She's your sister-in-law. And as such, I want to be careful to allow her
00:30:29.040 | to make her own decisions, share with her what I've learned along the way, share with her some
00:30:34.240 | of the lessons that have been useful to me. But I think you're better served by focusing on giving
00:30:41.360 | her resources so that she can look to other people and you can continue that place of friend and
00:30:48.560 | brother-in-law. That's how I'd approach it. All right. Final call of the day, Jim in Seattle.
00:30:53.600 | Welcome to the show. - Hey, thanks for taking my call.
00:30:57.120 | - What would you like to talk about today, sir? - Yeah, I wanted to spark a little bit of a
00:31:02.400 | conversation about the benefit of liquidity when paying off moderate interest rate, moderate
00:31:11.680 | balance debt. - Moderate is always hard because you go right off the middle and the answers are
00:31:19.840 | never obvious. Tell me more. - Exactly, exactly. So I guess frame of
00:31:24.240 | reference has been me and my wife, millennials, we're used to very low interest rate environment.
00:31:29.920 | And we've paid off a lot of our student loans, four out of five that have all been, we've been
00:31:36.480 | able to say, "This makes sense to just save up the money and pay it off," because they've all been
00:31:40.800 | either high interest rates or higher interest rate around the 10% mark, lower balances under
00:31:46.640 | $15,000, household income's about 150 years. So it hasn't been a big deal. And it's been nice to be
00:31:54.800 | able to save up each chunk because it gives us the flexibility to choose to allocate that money
00:32:00.320 | whenever we are ready to pay off a balance. The last one we're staring at is a 6.8% interest rate.
00:32:09.680 | Like the majority, I think a lot of federally insured student loans are, and a balance is
00:32:16.400 | about $70,000. So with that being in my mind, high interest rate is my credit card high,
00:32:22.160 | but it's not like our mortgage. It hurts to see that balance of interest going out each month,
00:32:29.680 | but it's sizable enough to where it's going to take a few years to pay off.
00:32:35.680 | And we lose a little flexibility. I've got some thoughts, but I wanted to hear your input
00:32:42.240 | considering some of the ways you've tackled this question before, how you've talked about how,
00:32:46.880 | at this point, if you're ever to get a mortgage, you either finance as much as you could,
00:32:51.040 | or you'd pay it all in cash just for the flexibility. Granted, that's a little bit
00:32:56.880 | of a different type of debt as far as it being secured and impacting your life. If I default
00:33:02.160 | a student loan, it doesn't ruin my life as much as if I default on my mortgage and I get foreclosed
00:33:06.720 | on. But I just wanted to hear your input. You do also have a difficult situation because
00:33:13.200 | let's just call it 7%. A 7% interest rate is, as you identified, it's not low. It's not a 3%
00:33:22.800 | where you just say, "It's under the rate of inflation. It's not hurting us too big." But
00:33:27.280 | it's not 25% on a credit card. So that does make it difficult. So your household income is $150,000.
00:33:33.200 | You and your wife own a home. How much is the home worth?
00:33:36.000 | Home is worth about $275,000.
00:33:39.600 | And what's the balance on the mortgage?
00:33:41.040 | Recently purchased, probably around $260,000 on a 15-year fixed at 3-8% interest.
00:33:49.280 | Great. And other than this $70,000 in student loans at 6.8% interest, do you have any other
00:33:59.440 | debt of any kind?
00:34:00.160 | That's the very last one.
00:34:02.320 | And investments, total retirement accounts, 401(k)s, IRAs, traditional IRAs, etc., add up to
00:34:10.560 | about how much?
00:34:11.120 | About $35,000.
00:34:14.480 | And cash that's liquid, savings accounts, checking accounts, money in the mattress, etc.,
00:34:19.200 | adds up to about how much?
00:34:20.080 | About $10,000. I'm worried about a month expenses. I'd like that to be higher.
00:34:25.920 | So you're spending then, the next question was, about $10,000 a month right now?
00:34:29.840 | Yeah, I guess we're probably closer to, I think we probably spend about $6,000 a month.
00:34:34.640 | Okay. All right. And in the past, when you've been saving up money, do you have any to pay
00:34:41.360 | off debt? Do you have any idea how much extra money you were able to save and accumulate
00:34:45.280 | on a yearly basis or monthly basis and throw towards debt?
00:34:48.800 | On a monthly basis, if we're really focused on it, we can probably save about $5,000 a month.
00:34:55.600 | $5,000 a month. Both you and your wife are employed in traditional,
00:35:01.680 | generally considered to be stable jobs?
00:35:03.200 | Yes.
00:35:10.720 | So $5,000 a month, we're talking on $70,000, 14 months. That's not very long.
00:35:15.520 | What are your thoughts on the situation? I'm going to cheat. What are your thoughts? And
00:35:22.320 | then I'll give you mine.
00:35:23.200 | My thoughts have been, and this does involve a little more detail than I've given you.
00:35:31.040 | My wife's a teacher, so a lot of this debt is off of her master's degree.
00:35:39.520 | And as teachers get recruited in the spring as they're graduating, you don't get your first
00:35:45.680 | paycheck till the fall, but loans from undergrads start becoming due. And what we ended up doing was
00:35:53.520 | because we hadn't listened to your episodes where you talked about all the wonderful options and
00:35:57.920 | deferment, there were a couple of interviews you've done that were really helpful there.
00:36:02.960 | But we ended up refinancing that, doing our one-time refinance through whichever agency
00:36:11.120 | they're with, I think it's Aviant, and stretched them out onto a 20-year term just to lower it so
00:36:17.680 | we could make it through the summer at the time our income was probably about $40,000 a year combined.
00:36:22.720 | So my thoughts were to refinance this down to a five-year note. Payment would
00:36:32.480 | not quite double, but come close to doubling. Drop the interest rate significantly, and then pay them
00:36:37.760 | maybe slightly accelerated or just as written on the 60 months.
00:36:43.360 | Do you have, other than your just kind of mutual funds and your 401(k), etc., do you have any really
00:36:49.760 | exciting investment opportunities that you're really concerned about in the next year or so?
00:36:59.120 | I've been going back and forth about starting my own business, which is why
00:37:04.800 | liquidity would be nice. And to get that ball rolling, I would probably
00:37:09.920 | need in the neighborhood of $50,000. But I don't know how serious I am. It's kind of at this point
00:37:16.560 | a fleeting thought that I've been flirting with, but have not actually made
00:37:23.040 | real commitments or progress towards to myself. Is your potential business idea time-dependent
00:37:31.200 | for any reason? Is it the kind of business that will probably be just as good of an
00:37:35.600 | opportunity two years from now as it is today? Yes. Okay.
00:37:39.520 | So I guess my thought would be, I did the show recently, we've got to talk about
00:37:50.400 | the financial aspect of paying off debt and then the kind of lifestyle aspect of paying off debt.
00:37:58.640 | So financially speaking, let's stay strictly there. That 7% interest rate is a big deal
00:38:06.960 | because it's very hard to think of any other kind of normal traditional investment that you're going
00:38:14.640 | to make that's going to basically get you what in essence is a 7% guaranteed return on your money
00:38:21.040 | by paying off that debt. Certainly there may be options where it could pay more, but with
00:38:28.000 | headwinds looking strong and broad-based US stock funds, things like that, certainly
00:38:35.120 | for all of our guesses, it certainly seems like the coming decades, the headwinds are stronger
00:38:40.800 | than they've been the past few decades. So when you've got a 7% guaranteed return, that's pretty
00:38:48.560 | strong. When you look around at safe things you can do with money, you can't find a 7% return
00:38:54.720 | in today's world. So that's a compelling interest rate to clear out. And for that reason, I would
00:39:01.040 | give this a high priority. Would I stop retirement investing? Would I stop 401ks? Probably not. I'd
00:39:08.400 | probably keep at least the match, but I'd give this a high priority. And I'd also give it a high
00:39:12.720 | priority for the lifestyle considerations, just in terms of having it cleared. The problem that
00:39:18.400 | you face is if you go and start a business today, you've got this debt and if you sell your house,
00:39:24.080 | yeah, you're still at a negative net worth. You still owe more than you're technically worth
00:39:30.000 | because of the student loan. If you had that student loan cleared out, you would have a
00:39:36.240 | significant amount of – if you had the student loan cleared out, you'd have a significant
00:39:40.480 | more freedom, especially mental freedom and financial freedom. Mortgage debt in some ways
00:39:48.560 | is kind of the easiest debt to have because it's secured by the value of a house. And if you ever
00:39:53.360 | want to clear it, well, you can list the house for sale and you can clear it. Student loan debt is
00:39:57.280 | that debt that's secured by the value of an income and a person. And that's really hard to get
00:40:01.600 | mentally free from until it's gone. So I think there's a compelling case in your situation to
00:40:07.600 | move towards paying off the debt aggressively. If I woke up in your shoes, I would have this as a
00:40:14.160 | big, big goal. Let me get free of this student loan debt as aggressively as possibly.
00:40:19.200 | Now, in terms of liquidity, what about this business? If you had a business or a business idea
00:40:24.880 | that you were convinced was appropriate for you, and if you were convinced that the timing was
00:40:31.360 | important, six months from now, I've got to start this business because it's a good time in the
00:40:35.920 | market or it's a very important time in our lives, then I would consider not paying off the debt and
00:40:40.640 | I'd consider starting the business. I didn't hear that. I heard, "I've got this business idea. I
00:40:44.960 | don't know if I want to do it for sure, but I might or I might not, and it's not particularly
00:40:50.240 | time-dependent. I'll be there in a couple of years." Well, if you could pay off $5,000 a
00:40:53.840 | month on a $70,000 loan, basically a year from now, just over, basically a year from now, you
00:41:00.000 | can have the student loans paid off. If it were me, I would focus on having the student loans paid
00:41:05.280 | off and then celebrate in a year, save up for another six months or another year while building
00:41:10.560 | the foundation of the business, and then launch the business. I would launch it with that mental
00:41:14.240 | freedom of not having the student loan hanging over my head. Then the third kind of comment is,
00:41:22.080 | "Well, is it valuable to save up the money to chunk towards it or is it valuable just to pay it off
00:41:30.800 | as quickly as possible?" Factors in favor of you're paying it off as quickly as possible,
00:41:35.920 | if you and your wife are working in relatively stable jobs, then I would – you'd go ahead and
00:41:41.520 | just pay chunks. If you could put $5,000 a month at it and have it gone in 12 to 15 months,
00:41:48.800 | that's in favor of just throwing it at it rather than accumulating it because that's – it's super
00:41:54.480 | motivating to look down at a debt balance and see that thing dropping every month and put a chart on
00:41:58.480 | the refrigerator and celebrate, "Hey, we're down under 60, under 50, under 40." That causes you to
00:42:03.280 | make changes in other areas of life and I've always found it to be very motivating when paying
00:42:07.920 | off debt to do that. So I think those are things in favor. I'm a little nervous about you only
00:42:12.640 | having $10,000 liquid. If you're spending $6,000 a month, if I woke up in your shoes, I'd probably
00:42:19.120 | pretty quickly increase my emergency fund first. I'd maybe save a couple of – a couple more months
00:42:27.920 | of expenses in case you or she were to lose your job and then maybe you can compromise and do it
00:42:35.280 | in chunks. But a lot of it is going to come down I think to that business. If you didn't have a
00:42:39.280 | business idea, I'd say save $20,000 in the emergency fund and pay off all the debt in the next year.
00:42:45.360 | Since you have that business idea, you might want to hedge yourself a little bit as the months go
00:42:49.120 | by just to leave that door open to quit and start a business before you have the debt paid off.
00:42:54.480 | So we're right up the middle in my advice. I don't know if that was helpful or not or if all I did
00:42:58.960 | was talk around the issue and say, "It depends," which you already knew.
00:43:02.960 | Yeah, and that was kind of one of the considerations I had with posing the
00:43:08.880 | question. Every single thing of course comes down to everybody's specific situation and
00:43:14.080 | that's why rules of thumb are frequently not useful. So that address, it's in line with
00:43:22.640 | where I wanted to head as far as definitely building up savings and attacking it.
00:43:30.960 | How excited is your wife about the potential business idea?
00:43:34.000 | Not. And I go back and forth on it as well. It wasn't something that I brought into
00:43:41.840 | the consideration because I knew that even if I did want to approach it, it's something I would
00:43:50.320 | do after the loan was cleared anyway and savings were bolstered just because... I mean, I don't
00:43:58.000 | know the percentages off the top of my head that how many small businesses fail. It's not one that
00:44:04.560 | I'm convinced of. I think it's an excellent five-year plan to start the business, but I
00:44:11.600 | don't know how sustainable it's going to be in the long term and that's probably something
00:44:16.240 | that'd be good for a consulting call with you.
00:44:18.800 | Yeah. And especially also you should consider the fact that it sounds like this $150,000
00:44:23.360 | income is relatively new. If a few years ago you were living on 40 and now you're making 150,
00:44:29.280 | this might be the time just to stay put, make hay while the sun shines and stash aside some money
00:44:35.840 | because not everybody can just bumble into $150,000 household incomes. So if you've got a
00:44:43.120 | good thing, don't immediately just jump for a potential. Stack up some money and you'll find
00:44:49.200 | that starting the business is a lot easier. Are you and your wife the type of people who spend
00:44:53.440 | money once it comes into your accounts and it starts piling up and you start to get an itch to
00:44:57.440 | buy an RV and go on vacation? Or are you the kind of people that don't really judge your – base
00:45:02.640 | your financial decisions based upon how much money is in the checking account?
00:45:05.440 | I would say it's just like most relationships, opposites attract. And so there's the saver and
00:45:13.040 | there's the spender. And –
00:45:15.280 | Which are you and which is she?
00:45:16.240 | I'm the saver, she's the spender. And that's why it's been really easy to get her excited about
00:45:22.560 | paying a lot of the smaller loans off because we've been able to get that immediate traction
00:45:28.400 | and we've been able to do it while making a lot of changes in our lives, buying a house,
00:45:33.920 | taking over some lifestyle creep. With the jump in income, we've been able to,
00:45:40.960 | in a way, have our cake and eat it too. We've been able to get the house, we've been able to
00:45:45.520 | pay cash for the car, we've been able to go on vacation, but we've also been able to
00:45:48.880 | fairly – not aggressively, but still quickly pay off debt to where it feels
00:45:56.000 | rewarding to do so. And as we stare this last loan in the face, we need to
00:46:01.040 | submit to a plan and be great to get it paid off. But we've also enjoyed lifestyle creep.
00:46:12.400 | Okay. I'm convinced –
00:46:13.680 | It would have been more intelligent to avoid it altogether, but –
00:46:17.520 | I'm convinced I know what I would do with a high degree of confidence. If I walk up in your shoes,
00:46:22.560 | based upon especially that final factor that has kind of opened up – if I woke up in your shoes,
00:46:27.120 | here's what I would do. I would try to set aside $1,000 a month transfer from my checking account
00:46:34.400 | to my emergency fund savings account, an automatic transfer with the goal of adding to that at the
00:46:40.160 | rate of $1,000 a month until we get it to $18,000, $20,000 a month, something like that.
00:46:46.400 | A little bit more comfortable than $10,000 a month. You guys have the money
00:46:50.880 | where that's really important. And since it sounds like the job is new,
00:46:56.240 | just given potential fluctuations in economic conditions, et cetera, I'd be nervous without
00:47:02.880 | having at least three months of expenses set aside, especially when you just have this one
00:47:08.880 | big debt. So I'd set aside $1,000 a month to go into that. I put a big chart on the refrigerator
00:47:14.960 | showing the debt amount, and I would put every – with the exception of the $10,000 in my emergency
00:47:21.600 | fund and with the exception of accumulating a little bit more there, I would focus 100%
00:47:30.960 | on every month writing as big of a check to the student loan company as I possibly could.
00:47:36.400 | And because having that focus, my gut is that your wife would be willing to stay committed with you
00:47:44.480 | to this goal for a year. You could put off redoing the bathroom and building the back deck for a
00:47:51.600 | year. You just bought the house. You could put it off for a year. And if you just focus for a year,
00:47:58.160 | she'll be willing to continue with the belt tight for a year. Five years would be really hard for
00:48:04.080 | her to say, "Yeah, we can do that for five years." She's going to have lots of plans, lots of dreams
00:48:08.480 | that she's going to want to fulfill in five years, but a year you could do that. And if you've just
00:48:13.600 | got this one last thing, you're on a roll, keep the inertia going and write as big a checks as
00:48:18.960 | possible to the student loans every single month. And if at the end of a year, I woke up and saw
00:48:27.760 | that I had $18,000, $20,000 in my emergency fund, and if we could pay this thing off by her birthday,
00:48:35.760 | which is August 1st or some such thing, I might just write a final check and have it gone and
00:48:41.680 | then schedule a big celebratory conversation. But if she's the spender, and she's got a whole
00:48:49.360 | list of things she wants to do, great things she wants to do with the family, great things she
00:48:52.960 | wants to do on the house, and those things are super, super important. And if you stretch this
00:48:57.520 | out for years and years, there's going to be this constant tension. Whereas if you say, "Listen,
00:49:02.880 | let's keep our belts tight for the next year and a half, get the student loan gone." Then what you
00:49:08.240 | can do is just open up the budgets. You can loosen the belt, add an extra $15,000 a year to lifestyle
00:49:17.440 | that can be spent on the new deck and the things that the kids want, et cetera. And you'll still
00:49:22.000 | be able to save plenty while being free of it and staying focused. So that's what I would do.
00:49:30.240 | Does that make sense why, how I got there with the focus and trying to help her stay
00:49:34.800 | focused on paying off the debt so that you can get there quickly?
00:49:37.840 | Oh, absolutely. Absolutely.
00:49:40.720 | Yeah. I think you owe it to her with making this, you guys have obviously worked hard.
00:49:44.960 | You're establishing careers. I'm sure buying the house is exciting and things like that.
00:49:49.600 | And I think you owe it to her to sketch out the clear plan where she doesn't have to live like
00:49:54.560 | a miser forever. But of course, you're concerned about what are we going to do? We're going to
00:50:02.560 | start spending all of our money. And so just say, "Hey, let's live like misers for another year and
00:50:08.240 | a half." And then, I don't need to repeat myself, then we'll have an extra $1,000 a month or $1,500
00:50:16.080 | a month that we can spend on anything, any of the budget categories that we want to open up.
00:50:22.240 | Perfect. Thank you.
00:50:26.560 | You're welcome. Not an easy question to answer. Somehow,
00:50:30.240 | marriage and money things are hard. I find those questions about debt and what to prioritize,
00:50:38.880 | I find those things really, really hard to answer because it's so much, it depends. But the 7% I
00:50:44.000 | paid off. Also, Jim, while you're doing that, don't forget, it's always going to be in your
00:50:48.000 | best interest to cut your interest rates. There's no reason to pay interest if you can't get it.
00:50:53.280 | So just look around. Sometimes, you can get a credit card offer from time to time if your
00:51:03.120 | credit scores are good. From time to time, you can get a credit card offer that's not only a 0%
00:51:07.440 | introductory rate, but also a 0% balance transfer fee. Of course, that's where they always get you
00:51:13.760 | as the 3% or 5% balance transfer fees. But from time to time, you can get that. So maybe you can
00:51:18.880 | use that to cut the interest rate. I'd still say focused on it, but it never hurts to play the
00:51:25.120 | games to get the 7% drop down as quickly as possible. Or if you can go down to your local
00:51:28.960 | credit union and just get a personal loan, they'll give you a personal loan at 3% or 4%.
00:51:33.600 | That's not a bad idea as well. Always a good plan to do anything you can to
00:51:39.440 | keep interest rates low. But the power of the motivation, put the chart on the refrigerator,
00:51:44.560 | celebrate how much, and plan a great big celebration of family vacation or
00:51:49.360 | giant party or something when you get that final student loan payment paid off just to commemorate
00:51:55.520 | it. I think that's really, really valuable. That's it for Q&A on today's show. If you would
00:52:00.640 | like to join on a future show, please become a patron of the show, radicalpersonalfinance.com/patron.
00:52:03.680 | You can sign up to become a patron of the show there. That gains you access to these Q&A calls,
00:52:13.760 | wherein you can call and talk about anything you want. I love doing them. These are my favorite
00:52:17.920 | shows. A lot of times I'm struggling and I'm like, "Oh, okay, I got to go to the Q&A show,"
00:52:21.360 | and I get in charge of talking with you guys and trying to figure out some of the answers.
00:52:26.080 | So I hope this was fun and useful, and I will be back with you very soon.
00:52:43.360 | This show is part of the Radical Life Media network of podcasts and resources.
00:52:51.200 | Find out more at RadicalLifeMedia.com.
00:52:55.760 | [music]
00:52:56.800 | Let's see what AI knows about football. Hey, chatbot, should I bet on my team to win the
00:53:01.360 | big game this year? Bet on Valley High Toyota to get you a great deal on a new 2023 Toyota.
00:53:08.160 | What? I'm talking about football, not a new car. Well, your team is trash and will never make it.
00:53:13.760 | Save your money and spend it on the car you need. Ouch. Score big on a new 2023 Toyota this season
00:53:20.400 | at Valley High Toyota. It's way easier than you think.