How to Save More Money

00:00:00.000 | [Beeping]

00:00:04.000 | [Beeping]

00:00:08.000 | [Music]

00:00:12.000 | [Music]

00:00:16.000 | [Music]

00:00:20.000 | Welcome back to Ask the Compound where our audience is getting smarter.

00:00:24.000 | It's kind of like the alien in the movie, you know, where it's like evolving over time and getting smarter.

00:00:28.000 | They know how to ask questions to pull my little heartstrings. They know which questions

00:00:32.000 | I'm going to answer. So we got some today that I swear we're just, it's like

00:00:36.000 | the Ben AI chat bot. Like we know what Ben's going to pick here.

00:00:40.000 | If you start off with love you guys, you've immediately got my attention, you know.

00:00:44.000 | So we have a dock full of, I don't know, a hundred questions still we haven't gotten to. We try to get to them all.

00:00:48.000 | But we get new ones every week and then we have the old ones and some of them just

00:00:52.000 | we got some good ones this week. So askthecompoundshow@gmail.com

00:00:56.000 | if you want to email us. This morning in my email inbox

00:01:00.000 | I got a January financial report from Rocket Money, who's the sponsor of the show today.

00:01:04.000 | So how much I spent last month, the percentage change

00:01:08.000 | from what I normally spend, the largest transaction, which I think was

00:01:12.000 | plane tickets maybe, and the percentage of income that I spent, right. Here's your income,

00:01:16.000 | how much you brought in, here's how much you spent as a percentage. It also shows the biggest category changes

00:01:20.000 | in spending. So travel, shopping, eating out, etc. Was it higher or

00:01:24.000 | lower from the month before? Pretty cool. So Rocket Money is the personal finance

00:01:28.000 | app that lets you find and cancel your unwanted subscriptions, monitors your spending, helps you lower your

00:01:32.000 | bills. Five million users on Rocket Money and it's saved members an

00:01:36.000 | average of $720 a year, over $500 million in canceled subscriptions.

00:01:40.000 | It's even more money than I've saved on my cable bill over time. Stop wasting money on the

00:01:44.000 | things you don't use. Cancel your unwanted subscriptions by going to rocketmoney.com/atc

00:01:48.000 | for Ask the Compound. That's rocketmoney.com/atc.

00:01:52.000 | Click the link on YouTube. I love Rocket Money.

00:01:56.000 | Duncan, everyone wanted to know why you're not wearing a suit today.

00:02:00.000 | Duncan and I were at the New York Stock Exchange the other day, and he put me to shame because he wore a suit

00:02:04.000 | and tie. I walk into the office, I'm wearing a sweater and a nice, you know,

00:02:08.000 | I don't wear a tie anymore. I gave up on it in COVID. I just decided ties are,

00:02:12.000 | I think I threw them all away. You looked very fashionable. I had a sport coat

00:02:16.000 | on, but you put me to shame because people thought you worked on Wall Street. No hat,

00:02:20.000 | hair slicked back. Very nice. Thanks. My

00:02:24.000 | hair was probably not very dressy. My

00:02:28.000 | wardrobe is binary. I have flannels, and then I have a suit.

00:02:32.000 | I don't really have many in-betweens. It's either I'm dressed up

00:02:36.000 | or I'm not dressed up. It's like my portfolio. It's a barbell. It is funny, though. Someone on the train

00:02:40.000 | started talking to me the whole way back about equity swaps. For real.

00:02:44.000 | I've worked to the part, I guess, you know.

00:02:48.000 | All right. Questions?

00:02:52.000 | First, before we dive into that, I was going to say a little cross-promotion. Everyone should check out

00:02:56.000 | Ben's blog, Wealth of Common Sense. I love this thing you wrote,

00:03:00.000 | "17 Thoughts About Money." I just wanted to share a couple of them. That's all really good.

00:03:04.000 | The second one, you have, "Money can't buy happiness," is something only rich

00:03:08.000 | people say. So true. People with money say that. Right, exactly.

00:03:12.000 | People always say that. What they mean is money is not going to be the thing

00:03:16.000 | that makes you happy. It's not going to fill a hole. Right, and that's true.

00:03:20.000 | Only wealthy people say that. It's going to make your life a lot easier, though. Right.

00:03:24.000 | No one's happy when they're worried about how they're going to pay their next bill or that kind of thing.

00:03:28.000 | The other one I really liked was, "True money contentment comes from

00:03:32.000 | accepting people dumber than you will be richer than you."

00:03:36.000 | You just have to get over that. Sometimes people are going to make a bunch of money on some cryptocurrency

00:03:40.000 | that you missed, and you just have to be okay with that. Circumstances, luck, whatever it is,

00:03:44.000 | you can't let that grate at you. It's like the thing, someone's always

00:03:48.000 | going to be smarter than you. I always say that about investing. It's like the opposite with money.

00:03:52.000 | There's someone dumber than you. You're like, "How is that person so much richer than me?" Guess what? You just have to live with it.

00:03:56.000 | It happens. Yeah, it's life. I also like number eight, "Most problems that can be

00:04:00.000 | solved using money aren't real problems," and you go on to say how it's nothing

00:04:04.000 | compared to a health scare or things like that. That's stuff that really put it into perspective.

00:04:08.000 | Yeah, and then last but not least, I really loved the

00:04:12.000 | number 16, "People who act like they have it all figured out are usually full of shit."

00:04:16.000 | That's true. Yeah, most people would agree with that. Good list.

00:04:20.000 | Because the truth is, no one has it figured out. I don't care how well-versed

00:04:24.000 | you are or how smart you are, no one has it all figured out. Very true.

00:04:28.000 | Good post, though. I like that. Appreciate it. Alright, let's do a question.

00:04:32.000 | Alright, up first today we have a question from David.

00:04:36.000 | "We wanted to start investing in a college account for our new granddaughter with regular deposits.

00:04:40.000 | Is 60/40 the best approach for a college account? That's what we would do on

00:04:44.000 | Reflex, but wanted to get your thoughts. Sounds simple, but if that's the answer,

00:04:48.000 | what's in the 60 and what's in the 40? And should it be passive or actively managed

00:04:52.000 | in some way, like simple rebalancing annually?" This actually

00:04:56.000 | raised a question I was going to follow up with you on. Is it considered active if you just rebalance annually?

00:05:00.000 | No, that's part of your allocation. I mean, whatever.

00:05:04.000 | Every decision is active if you want to really split hairs here. But I love where David's head is at here.

00:05:08.000 | I'm not going to lie. I gave some not-so-subtle hints to my parents and the in-laws

00:05:12.000 | that hint, hint, wink, wink. You don't have to buy toys

00:05:16.000 | all the time. We can also do 529 contributions. That was made clear.

00:05:20.000 | It's very easy, actually. The Michigan 529 plan makes it easy for someone to gift

00:05:24.000 | a 529 contribution. Obviously,

00:05:28.000 | I have three kids. Putting them through college is not going to be cheap. Plus, we have twins who will be attending at the same time.

00:05:32.000 | I think my oldest daughter will be a senior when the twins are freshmen. So, we'll have three

00:05:36.000 | kids in college at the same time. And the grandparents have come through. Our provider

00:05:40.000 | at Michigan, they have a bunch of

00:05:44.000 | different investment options. Now, you can pick those investment options yourself, which is easy. Some people

00:05:48.000 | just pick a simple total stock market index. Ours is mostly index funds. A lot of it depends

00:05:52.000 | on what state you're from. So, I would first check with your own children to see if they have a 529

00:05:56.000 | plan set up in the first place. Maybe they've already made elections for investment options.

00:06:00.000 | But if not, we all know I'm a big target date

00:06:04.000 | fund guy. We practice what we preach here in the compound. I invest in index funds

00:06:08.000 | and target date funds. Duncan invests in stocks that fall 98%.

00:06:12.000 | Sometimes.

00:06:16.000 | Sometimes go up, too. Sometimes go up, too. That's true. Depends when you start.

00:06:20.000 | So, the Michigan 529 plan has these investment options that are based on

00:06:24.000 | the year the child will be starting school. And it's just a target date fund.

00:06:28.000 | I looked at the Michigan options, and they range from

00:06:32.000 | 20 to like 2080. And I looked at the one for my daughter.

00:06:36.000 | She's going to be 10 this year, which is mind-boggling. This is something all parents have to say.

00:06:40.000 | Like, I can't believe how quickly the time went. It's also true.

00:06:44.000 | And I think hers is 60/40. And it's a mix of U.S. stocks, international

00:06:48.000 | stocks, REITs, TIPS, total bond market fund, and

00:06:52.000 | corporate bonds. So, it's pretty well diversified. It rebalances automatically. And it also has the glide path

00:06:56.000 | where it slowly gets more conservative as you get closer

00:07:00.000 | to the age. So, I like that option. It just does it for me.

00:07:04.000 | So, it's an active thing, but it's got the glide path. You could always make it

00:07:08.000 | more risky if you wanted to go further out. Like, pick a year that's further away. More conservative

00:07:12.000 | if you want to pick a year that's closer. But that's the thing for me that would be easiest. You don't have to get in there and tinker.

00:07:16.000 | Especially if it's going to be for your granddaughter. You want to be like, try to actively manage this.

00:07:20.000 | That way, you know when they're there. She's at college

00:07:24.000 | age. It's going to be relatively conservative, so the money's there to be spent. So, I like that option.

00:07:28.000 | But yeah, talk to your kids first. It's not the perfect option, of course.

00:07:32.000 | You could say, well, there's ways to do better. But the beauty of it is it's automated.

00:07:36.000 | It's simple. It's well diversified. Michigan probably has a top quartile 529

00:07:40.000 | plan. So, I would check which state you're in, or your granddaughter's in, to make

00:07:44.000 | sure they have similar offerings. But that's what I do. And I think it's

00:07:48.000 | easy. That's a big part of it to me. I didn't realize if I changed

00:07:52.000 | state by state. Yeah, depending on the state. Which kind of stinks.

00:07:56.000 | They should have the same all over. But Morningstar does these rankings where they

00:08:00.000 | do gold, silver, bronze, I don't know, coal for the

00:08:04.000 | worst ones. But Michigan's probably, yeah. It's like

00:08:08.000 | a silver, so it's pretty good. But some states are better than others.

00:08:12.000 | Not really a thing where it pays off for the risk of picking a bunch

00:08:16.000 | of risky stocks. Yeah, I don't think you want to go out on a limb.

00:08:20.000 | But this sort of thing, as far as your grandchildren are concerned,

00:08:24.000 | that's a great gift. That's the gift that keeps on giving.

00:08:28.000 | Yeah, though you can't roll it around on the ground like a cool car or something.

00:08:32.000 | When they're walking down the aisle some day with their tassel

00:08:36.000 | and gown on, they'll be thankful. When those student loans aren't as big.

00:08:40.000 | Alright, next question. Alright, up next we have

00:08:44.000 | I like this question. This is a cool question. This is the one.

00:08:48.000 | This person put this question in specifically for me. Yeah, right.

00:08:52.000 | They know their audience.

00:09:20.000 | I love the question because it hits on so many. I was born for this question, basically.

00:09:24.000 | Expensive trucks, compound interest, young people making terrible financial decisions.

00:09:28.000 | And I love the way that Jim put it here. The sequence of spending risk.

00:09:32.000 | I don't want to spend shame people and say, "You shouldn't buy this $70,000 truck."

00:09:36.000 | If you can afford it, fine. But especially when you're young, that makes a huge, huge difference.

00:09:40.000 | Especially if you're not saving that much. So I've written a number of posts

00:09:44.000 | over the years about excessive spending on trucks and SUVs. So I asked if a Ford F150

00:09:48.000 | is partially responsible for the retirement crisis. I think I wrote a piece called

00:09:52.000 | For people new here, Ben hates big vehicles and expensive vehicles.

00:09:56.000 | So an expensive truck is just like, you know, that's the worst.

00:10:00.000 | I don't hate them. I just hate them for certain people.

00:10:04.000 | Alright? Again, I'm not a fan of spend shaming unless

00:10:08.000 | you're spending way too much and you're not saving any money.

00:10:12.000 | And if you take up too many parking spots. Listen, the two biggest fixed expenses you have

00:10:16.000 | are housing costs and transportation for most people. Right?

00:10:20.000 | It's not the lattes. It's not the brown bag lunches. It's not

00:10:24.000 | Netflix streaming services. It's the big expenses. And if you lock yourself into

00:10:28.000 | a four-figure car payment for a truck because you want to be cool and it makes you feel better,

00:10:32.000 | I can't get on board with that. Okay. So I poked around a little bit

00:10:36.000 | and I found new car loan rates at like 6%. Probably 6-7 depending on your

00:10:40.000 | FICO score. Financing a $70,000 truck. No down payment

00:10:44.000 | over 5 years at 6%. That's a monthly payment of $1,350.

00:10:48.000 | That's an obscene amount of money for young people. I love the

00:10:52.000 | way that they frame this because they say young people, right? This is a person who's a little wiser,

00:10:56.000 | understands saving. They know that that's a ridiculously high monthly payment, especially

00:11:00.000 | for a young person because of the opportunity cost. So let's say, let's just say

00:11:04.000 | instead of that Ford F-150 or Dodge Ram, you got yourself a reasonably priced SUV,

00:11:08.000 | say like a Ford Explorer, Chevy Trailblazer. Now we're talking $30,000, $35,000 maybe.

00:11:12.000 | That cuts it in half. And let's be honest, if you're a young person, you don't need all the bells

00:11:16.000 | and whistles in a car. You don't need the sunroof. You don't need the leather seats. You don't need

00:11:20.000 | the heated steering wheels. Oh, heated steering wheel in Michigan in the winter, I gotta say,

00:11:24.000 | is one of the best inventions of the past, however long it's been around for.

00:11:28.000 | It's amazing. I'm new to that. I'm new to that life. Our new vehicle has heated

00:11:32.000 | steering wheel. I love it. That's great. The thing is, once you get those things, you are,

00:11:36.000 | that becomes a necessity, not a desire anymore. So once you get it, there's no going

00:11:40.000 | back. So just take away all the amenities at first, right? So if

00:11:44.000 | you cut it in half, go from $70,000 to $35,000, now we're talking like

00:11:48.000 | $675,000 a month in savings. It's $8,000 a year,

00:11:52.000 | $40,000 over the life of the loan. I also looked at, what about a smaller truck? John,

00:11:56.000 | show a picture here before we get to this table. This is the Ford Maverick.

00:12:00.000 | Let's say, okay, listen, I'm in construction. I do need a truck, Ben.

00:12:04.000 | Okay, do you really need the biggest truck, though? This is a Ford Maverick. You know what this MSRP is for the Ford

00:12:08.000 | Maverick, what it starts at? $25,000. Okay?

00:12:12.000 | Monthly payment goes from $1,350 to $500 a month. Now I'll show my

00:12:16.000 | table, John. So I've shown three different options. The souped up truck, $1,350

00:12:20.000 | a month. The SUV, $675,000 a month. Then the small

00:12:24.000 | truck at $25,000 for the

00:12:28.000 | truck and like $500 a month. You're saving $10,000 in

00:12:32.000 | a year and $51,000 over the life of the loan for a smaller truck.

00:12:36.000 | Right? Now, let's do the personal finance thing.

00:12:40.000 | Now let's say you take these monthly savings, right, on both of these prices. You cut it in half or you cut

00:12:44.000 | it even further. Let's say you save 75% of monthly payments, right? Not the whole thing.

00:12:48.000 | You can blow the rest. Do whatever you want. You're a young person. Here's what those savings

00:12:52.000 | look like in the stock market over 30 years. 7% on that.

00:12:56.000 | John, show the chart. Actually, give me the other chart, the next one.

00:13:00.000 | Okay, so this is what happens if you just keep that lower

00:13:04.000 | priced car and keep the spread for 30 years, right? You save that spread

00:13:08.000 | every year for 30 years. Now we're talking, you know, high six figures, $600,000

00:13:12.000 | to $800,000 range. Pretty eye-opening, right? But let's be honest.

00:13:16.000 | That's probably not realistic. If you're a big truck person, you're going to want a big truck

00:13:20.000 | eventually, regardless of what the spreadsheets say. So John, show my next chart.

00:13:24.000 | What if you just save for the five years? So $25,000, you know,

00:13:28.000 | you don't need that big souped up truck. Get the Maverick and then after five

00:13:32.000 | years when you're 30, then you do it. So just you save the difference for five years. One

00:13:36.000 | period of the loan, right? Then you can buy your truck that'll pull a 747 down the runway.

00:13:40.000 | Okay? This is just one-time deal. You save 75% of the difference

00:13:44.000 | for just five years and let it grow. Now we're talking about the difference between that SUV

00:13:48.000 | or a Ford Maverick and you're saving something

00:13:52.000 | like $200,000, $250,000 over 30 years. This is the money chart, right?

00:13:56.000 | Just one loan period. So hold off on the big truck for five years.

00:14:00.000 | Hold off a used car or a smaller truck or an SUV for five years.

00:14:04.000 | And then once you're in a better situation and maybe you're making more money, then you can get it.

00:14:08.000 | Right? So that's the idea. These are the graphs that he should show his young people

00:14:12.000 | that, yeah, fine, get it eventually. You don't need it now.

00:14:16.000 | Listen, I just think, especially for young people, if you're someone who's

00:14:20.000 | saving money and you have your budget prioritized and you want

00:14:24.000 | that $70,000 truck, who am I to tell you not to get it? But if you're a young person

00:14:28.000 | and you're not saving, you're not allowing compounding to do that heavy lifting for you.

00:14:32.000 | I say, you know, of course, the hard part is you can't simply

00:14:36.000 | buy a lower cost vehicle. You have to save the difference. Right? So I would just automate those savings.

00:14:40.000 | You know, a six figure Roth IRA in 30 years

00:14:44.000 | is going to do a lot more heavy lifting for you than a Ford F-150. Right? Boom.

00:14:48.000 | Nailed it. I'm not trying to trigger anyone, but I see a lot of fancy, expensive

00:14:52.000 | trucks and they don't have a single scratch or a drop of mud on them.

00:14:56.000 | I'm just saying, I don't really think you need the truck.

00:15:00.000 | This guy is in construction and he's saying these other construction workers don't need it.

00:15:04.000 | Not everyone needs the brand new top of the line. That's all I'm saying.

00:15:08.000 | Just do it for five years and let that money grow.

00:15:12.000 | These fancy trucks, they're nice. They're like luxury vehicles. They're really fancy inside.

00:15:16.000 | I think a lot of people don't understand that. That's what you're paying a lot for in a lot of these cases.

00:15:20.000 | You're paying as much for a big truck as you are for a luxury vehicle. That's the thing.

00:15:24.000 | It's huge. I'm not saying skimp for the rest of your life.

00:15:28.000 | Do it for at least the first one you get.

00:15:32.000 | Trade down a little bit and let that money grow.

00:15:36.000 | Don't get used to it because once you get used to it, there's no going back.

00:15:40.000 | Just be okay with the fact that you might end up in a situation where you can't tow a train out of the way or something.

00:15:44.000 | That's true. Call one of your buddies who is not as financially sound as you.

00:15:48.000 | You can bail him out of a financial hole. He can bail you out of a literal hole.

00:15:52.000 | Next question.

00:15:56.000 | My wife is a physician and we're 37. We're in the 37% tax bracket.

00:16:00.000 | While treasury yields are currently excellent,

00:16:04.000 | I'm struggling to figure out how treasuries and bonds make sense for us in the near term

00:16:08.000 | given the tax implications and a brokerage account.

00:16:12.000 | After taxes, 5% treasuries would yield us about 3.1%, barely keeping up with inflation.

00:16:16.000 | Outside of pure safety, why wouldn't I just invest in an already safe index fund

00:16:20.000 | and enjoy the 7% annual gains and take the 20% capital gains rate

00:16:24.000 | or just hold until we no longer have any income?

00:16:28.000 | All right. A lot of tax stuff here. I want to tackle this from the investing side of things,

00:16:32.000 | but let's bring in not only your tax advisor, my tax advisor, Bill Sweet.

00:16:36.000 | We were on the phone today. Bill was working out some tax stuff for me.

00:16:40.000 | I was. He's a magician. I'm always on the clock.

00:16:44.000 | It's true. I wanted to welcome you guys to the month of February too.

00:16:48.000 | February is the worst month of the year, but it's an honest month

00:16:52.000 | because it's a month that doesn't hold up life any better than it really is.

00:16:56.000 | Where's at the top of your month power rankings? Duncan?

00:17:00.000 | It's definitely on the lower end. Isn't it a leap year though?

00:17:04.000 | It's a leap year. That's kind of cool. It is. It's a long month. Yeah, making it even worse.

00:17:08.000 | I would put May on the top and February at the bottom. That's the mind list.

00:17:12.000 | This is the kind of stuff you talk about when you're a middle-aged dad. For the audience. Yeah, definitely.

00:17:16.000 | Good thing they're not changing any tax laws way into the game.

00:17:20.000 | Yeah, there was not a bill that passed the House last night at 8.37 p.m.

00:17:24.000 | The crazy thing is that it's retroactive, but that was not Sam's question here.

00:17:28.000 | Yeah, you're going to have to give us a rundown of that eventually. I didn't quite get all the details.

00:17:32.000 | I guess the way it works is your age matches your tax bracket

00:17:36.000 | according to Sam. Not really. We talked before about

00:17:40.000 | the differences in different types of bonds for tax purposes, right?

00:17:44.000 | Yes. The tax notifications, muni bonds versus treasuries versus corporates, that sort of thing.

00:17:48.000 | Now we're looking at treasury bonds versus

00:17:52.000 | taxes. You obviously know this,

00:17:56.000 | but make the case here for why stocks are so much of a better

00:18:00.000 | tax-deferred vehicle than bonds if we're investing in a brokerage account.

00:18:04.000 | To put things into perspective, Sam and his wife, they're 37% tax bracket.

00:18:08.000 | That's the top tax bracket. These are folks earning more than

00:18:12.000 | $600,000 a year. God bless them. There's a lot of work that goes into that.

00:18:16.000 | When he said my wife is a physician, that was not to brag. Yeah, that was definitely not to brag in the

00:18:20.000 | tax bracket, too. But the question Sam is kind of getting at

00:18:24.000 | is, look, these treasury yields at 5%, they're really tasty.

00:18:28.000 | Compared to two years ago, compared to any point since

00:18:32.000 | 1985, 1987, that's a really good yield on what

00:18:36.000 | the market considers a risk-free rate of return, a 30-day T-bill.

00:18:40.000 | However, what Sam's pointing out is, look, my tax rate, the IRS

00:18:44.000 | is taking more than two-thirds, or excuse me, one-third of this income.

00:18:48.000 | So his after-tax rate is only 3%. I would agree. And that happens

00:18:52.000 | across the tax spectrum. So for somebody, Ben, earning $50,000

00:18:56.000 | a year, their ordinary income rate is 12%, their capital gains rate is zero.

00:19:00.000 | For somebody earning $150K, it's 22% ordinary, 15%

00:19:04.000 | capital gains, so there's still a 7% advantage there for capital

00:19:08.000 | gains. And even at higher income ranges, it goes from 37%

00:19:12.000 | to 24%. So you're still with a large 13% gap where you're getting

00:19:16.000 | a better, effective tax rate on capital gains and things like tax-qualified

00:19:20.000 | dividends over ordinary income. And so Sam is going down the right path.

00:19:24.000 | The real benefit, though, Ben, is not just in tax rates, but it's in

00:19:28.000 | deferral. But it's the compounding, right? Correct. If you

00:19:32.000 | have a treasury that you're owning in a brokerage account, in a non-qualified account, you're paying that

00:19:36.000 | tax today, in 2024, on that earnings, relative

00:19:40.000 | to a capital gain that's getting deferred. I don't know, Ben, if it's exactly

00:19:44.000 | apples-to-apples, right? I don't know if you would compare a compound annual growth rate to a stock

00:19:48.000 | compared to a treasury yield. You know, the treasury yield is basically guaranteed by the

00:19:52.000 | full faith and credit of the United States government, whereas we don't know what the next 5, 10

00:19:56.000 | years of stocks are going to yield. We do know the dividend rate, so we can approximate it. But that's

00:20:00.000 | really the big gap, is that really you get to defer on the tax versus paying

00:20:04.000 | the tax now. Right, which is one of the reasons that those tax deferred retirement vehicles are so nice.

00:20:08.000 | You have to pay the taxes eventually, if it's not a Roth, but you're allowing the compounding

00:20:12.000 | to happen. You don't have to pay taxes on the dividends every year. You don't have to pay taxes if you

00:20:16.000 | rebalance, that sort of thing. Yep. You're exactly right.

00:20:20.000 | My question is, how often do you let the tax tail

00:20:24.000 | wag the investment portfolio a dog? Because I get that from a taxable perspective.

00:20:28.000 | Stocks look way better, but does that mean that you should

00:20:32.000 | just shun bonds altogether because the yields are going to be lower on an after-tax

00:20:36.000 | basis, and you go 100% stocks? I don't know.

00:20:40.000 | I think the investing side of the equation should probably have

00:20:44.000 | a say here, too. Correct? Yeah, 100%. In fact, that's probably

00:20:48.000 | the end of this story, and that's how I would argue it. Sam, I would look at, hey, this is an investment

00:20:52.000 | opportunity. I'm going to own this. Think about top-down asset allocation.

00:20:56.000 | Ben, you and I do this for a living. You would fail your CFP or CFA exam if

00:21:00.000 | you tried to hand-jam based on where the current interest rates are. You would decide, look,

00:21:04.000 | I want to own treasuries. I want to own stocks. Where does it make sense to own those?

00:21:08.000 | I think what I would flip the argument in his head, Sam, is say, look, it would make more sense

00:21:12.000 | for me if I have a high income, which Sam and his wife do, and I'm earning

00:21:16.000 | income, I'm rebalancing, blah, blah, blah. I would want to own ordinary income devices

00:21:20.000 | in tax-deferred accounts because the yields are great. We want to own that somewhere,

00:21:24.000 | but you want that in a tax-deferred structure anyway because then you get the higher yields

00:21:28.000 | in a tax-deferred account versus owning stocks and other tax-qualified

00:21:32.000 | assets in non-qualified accounts where you don't have to pay the tax now because

00:21:36.000 | of the deferral outside of dividends, and then you can pick and choose when you want to pay your tax.

00:21:40.000 | Think about this top-down from a portfolio allocation,

00:21:44.000 | not bottom-up from this is a good investment. Also, when do you need to spend

00:21:48.000 | the money? Some people need to own bonds or cash because it's an emotional hedge

00:21:52.000 | and they can't take the volatility of the stock market, so they need to have something else

00:21:56.000 | that takes that volatility down a notch. Other people, it's more

00:22:00.000 | for spending needs. Do you have goals coming up that you need to spend that money?

00:22:04.000 | I have money in an online savings account and some T-bills, and I know that

00:22:08.000 | that stuff is not nearly as tax-efficient, and it's not going to give me the same return

00:22:12.000 | over the long run as the stock market, but I don't care because it's there when I need to spend the money.

00:22:16.000 | That's what you have to think about first is, "Is that money going to be there when I need to spend it?"

00:22:20.000 | You skipped to the point that I wanted to end on, which is these types of vehicles are great

00:22:24.000 | for spending your money today. If you're in distribution phase, you want this high yield. You want this high

00:22:28.000 | income because the dollars are going out the door anyway. You probably do not want this type

00:22:32.000 | of income if you have a high savings rate. He calls index funds

00:22:36.000 | safe, but it's relative. They're still risky in the short term for sure.

00:22:40.000 | Correct. Final point for me, you do get a state tax advantage with treasuries, as we discussed

00:22:44.000 | on Ask the Compound '92. Was that a real number,

00:22:48.000 | or did you make it up? I just made it up. I was about to say, "Wow, you've got a good memory."

00:22:52.000 | You got me. You guys are supposed to play along.

00:22:56.000 | Close enough. Next question.

00:23:00.000 | Up next, we have a question from Benjamin. "I'm considering maxing

00:23:04.000 | out 401(k) and IRA contributions for my wife and I. My employer

00:23:08.000 | contributes to an ESOP." You're going to have to remind me what that stands for.

00:23:12.000 | Employee Stock Option Plan. That's it. And profit sharing programs

00:23:16.000 | as well. "I have a co-worker who claims there is a maximum amount

00:23:20.000 | of contributions for deferred compensation and tax advantage retirement accounts.

00:23:24.000 | Consequently, he avoids contributing to his IRA in case his total contributions

00:23:28.000 | end up being too high when combined with 401(k), ESOP,

00:23:32.000 | profit sharing, and other deferred comp programs the company has

00:23:36.000 | for high earners. Is there any such maximum?"

00:23:40.000 | See, Bill, I always complain about this to you, that we should just have one big

00:23:44.000 | pooled maximum for everyone. But there's all these different accounts and moving pieces

00:23:48.000 | and 401(k) limits and IRA limits. And then there's income limits on the IRAs.

00:23:52.000 | And then you have SEP IRAs and

00:23:56.000 | individual 401(k)s and Employee Stock Option Plans.

00:24:00.000 | Okay, so who's right here? Benjamin or the co-worker? Because I feel like you have to settle that debate first.

00:24:04.000 | Yeah, I think so. And I want to talk about a really interesting policy proposal kind of at the end.

00:24:08.000 | But I think the answer to Benjamin's question is it's super-duper

00:24:12.000 | complex. I think that's where we would land this.

00:24:16.000 | Duncan, ESOP is an Employee Stock Ownership Plan.

00:24:20.000 | And in these types of things, integrated with a 401(k) plan, there are a bunch of limits

00:24:24.000 | to keep in mind. Limit number one, there's a $23,000

00:24:28.000 | 402(g) salary deferral limit that each person can put

00:24:32.000 | into a 401(k) each year. And then there's a $69,000

00:24:36.000 | this year, 415(c) limit. And the interplay of those two limits

00:24:40.000 | is very, very important. The 415, the 69,000, that is a

00:24:44.000 | hard cap, Ben. You cannot exceed that on a per-employee basis, or you have

00:24:48.000 | to distribute the money to the employee's benefit. In ESOP, an Employee Stock

00:24:52.000 | Ownership Plan, it's this really funky hybrid of equity, company stock

00:24:56.000 | and retirement vehicles. And the total company contributions cannot

00:25:00.000 | exceed that 69,000, which also includes the 402(g)

00:25:04.000 | salary deferral limit. So the employee is correct.

00:25:08.000 | You kind of do need to know this stuff in advance. Unfortunately, most companies

00:25:12.000 | don't close their books until the following tax year, when it's too late to do a

00:25:16.000 | 402(g) limit. My general advice would be contribute up to the maximum

00:25:20.000 | anyway, because the company's going to match it or not. You're just going to get the money back if it's too

00:25:24.000 | much. But I do want to give Ben point here at the end.

00:25:28.000 | And that's the IRA limits don't have anything to do with these complicated 402,

00:25:32.000 | 415(c) limits. So the IRA's got nothing to do with it in my equation.

00:25:36.000 | So if we're doing IRA plus 401(k) plus

00:25:40.000 | the SEP limit, we're pushing 100(k). And that's not including

00:25:44.000 | any company match for the 401(k). If you balance it all together, right? And just very

00:25:48.000 | confusingly, a SEP IRA doesn't follow the IRA rules. It does for distribution purposes,

00:25:52.000 | but not for contribution purposes. So you're even bringing a third animal into this.

00:25:56.000 | It's kind of crazy to me that they give business owners such a bigger

00:26:00.000 | break on the contribution limits. Why is it so much higher? Is this just a, who knows?

00:26:04.000 | Yeah, I don't have a good answer. I think it's just the way that the tax code developed over time. And these limits

00:26:08.000 | were much, much smaller. And as they've compounded in inflation and Congress has tried to

00:26:12.000 | incentivize retirement savings, they've gotten bigger, right? But speaking of inflation,

00:26:16.000 | that's been a positive inflation as these contribution limits have moved up quite a bit in the last few years, right?

00:26:20.000 | That's true. Fair point. Yeah. And especially if you compounded over the last 20. But yeah.

00:26:24.000 | At the end of the day, I think I would look at this all in, again, totality

00:26:28.000 | and say, look, what can I control here? You can control your own savings rate.

00:26:32.000 | You probably should fund the retirement vehicle. And don't let that door close.

00:26:36.000 | And again, the worst case scenario, your company, oh no, your company contributes $69,000

00:26:40.000 | to a retirement account on your behalf. That's a great problem to have. You're just going to

00:26:44.000 | take the 23K out, get a distribution, and then spend it as you see fit. I think that's a great problem

00:26:48.000 | to have. Okay. That's what I was about to ask you. Whose job is it to keep track

00:26:52.000 | of this? Is the employer issuing this, keeping track of limits? Or you just as the individual

00:26:56.000 | have to keep track of all this? Yeah. No, the plan sponsor would, Duncan. The plan sponsor,

00:27:00.000 | whoever's running the plan. And yeah, there are some very high income people

00:27:04.000 | that get paid to do all this math and to give the answer. And the reason people want to max these things out

00:27:08.000 | if they can is because of the tax deferral we talked about in the last question. Correct. Yep.

00:27:12.000 | So it's a big deal and it's a good problem to have. But yeah, I would fund your IRA

00:27:16.000 | separate from any of this because IRAs, they don't come into this company in limits.

00:27:20.000 | Perfect. Good to know. Next one.

00:27:24.000 | Cool. Okay. So last but not least, we got a nice short one.

00:27:28.000 | We have a nine-year-old and a six-month-old. Do I need two individual 529

00:27:32.000 | accounts for them? Since they are pretty far apart, I was wondering if we can use the same

00:27:36.000 | account for both of them. All right. This is a quick answer. So you give it and then I got a follow-up for you.

00:27:40.000 | Yeah, shoot. So the answer is, yeah, you can just use the same account during the

00:27:44.000 | accumulation phase. And you can name one beneficiary. 529s have

00:27:48.000 | an account owner that owns the account. And then they're making contributions and saving

00:27:52.000 | for a beneficiary. And most 529s plans allow you to change the name

00:27:56.000 | of that beneficiary at least once a year. And so in theory, during the accumulation

00:28:00.000 | phase, Ben, let's say the first 18 years of a child's life, you can contribute to 1529

00:28:04.000 | and then split the account, do a rollover, rename the beneficiary to the second

00:28:08.000 | beneficiary, and then start distributing there. Or just use one account for your full needs,

00:28:12.000 | if that's what you really want to do. I will say, I actually used

00:28:16.000 | different accounts for each kid because it was just

00:28:20.000 | psychologically easier for me. So I could bucket them out. Yeah. And then you don't have to

00:28:24.000 | pick and choose who you love more and which name goes in the account.

00:28:28.000 | By the way, Bill, is that two live crew on your phone right there? I tried to mute my phone

00:28:32.000 | during the call because I noticed I got a notification. And yeah, it started wrapping at me.

00:28:36.000 | So that's New York for you. I have a follow-up for you. So on AnimalSpirits this week,

00:28:40.000 | we were looking at college tuition. John Throat up here. And over the past 10 years, college tuition

00:28:44.000 | has actually lagged the overall inflation rate. It really flipped recently.

00:28:48.000 | But that's surprising to a lot of people who have seen college prices go up and up and up.

00:28:52.000 | And it's finally starting to roll over a bit. So Michael, my co-host on the show,

00:28:56.000 | said, wait a minute. What if I'm actually saving too much in my 529 plans for my boys?

00:29:00.000 | Is that a problem? And I said, well, as Bill Sweet

00:29:04.000 | would say, you can eventually convert them to Roth IRAs if you don't spend it all. Correct?

00:29:08.000 | Yep. Correct. Up to $35,000 per beneficiary. Correct. With this

00:29:12.000 | FanDuel account, does he really even need a 529?

00:29:16.000 | I think he's doing pretty well. They don't have a Roth IRA option for FanDuel. But I did want to sneak in.

00:29:20.000 | Most 529 planned accounts are per contribution, but some

00:29:24.000 | are per beneficiary. And so, Ben, that would be one reason in the state of Georgia, at $2,000

00:29:28.000 | per beneficiary, you get a higher tax deduction if you do that on a, like I said,

00:29:32.000 | per beneficiary basis. Taxpayers, Maine, Ohio, Oklahoma, Virginia, Wisconsin,

00:29:36.000 | among others, would potentially benefit from having multiple 529s if they have multiple kids.

00:29:40.000 | Okay. All right. I have one follow-up for you on the tax stuff. This mortgage is going to come

00:29:44.000 | out. But what's the biggest two or three big points of the new tax legislation

00:29:48.000 | that passed last night that will make sense for people?

00:29:52.000 | Yeah. For individual taxpayers, to be honest, Ben, not a lot, particularly if your income

00:29:56.000 | exceeds, let's say, $50,000 or $100,000, because most of the individual changes

00:30:00.000 | had to do with refundable child tax credits. So if you have a child

00:30:04.000 | and you're slightly lower income, you get a higher tax refund, potentially.

00:30:08.000 | Most of the changes on the business side had to do with bonus depreciation and R&D

00:30:12.000 | credits. And they're relatively wonky. It's not a headline, in my view.

00:30:16.000 | But the headline for me is that why is Congress mucking with the tax code

00:30:20.000 | retroactively to 2023 in the month of February? That would

00:30:24.000 | mean to be the question of potential dysfunction. People are filing tax returns

00:30:28.000 | right now. So I guess just as a policy question, why are we doing this

00:30:32.000 | a year after the fact? It is crazy. There's no line in the sand on this stuff, that you can go

00:30:36.000 | backwards. Yeah. Well, Congress makes the laws around here. Are tax professionals

00:30:40.000 | like you supposed to plan ahead if you're changing the rules after the fact? I mean, that's the thing. And

00:30:44.000 | they continue to cut IRS funding, frankly. And that might be a political priority for some.

00:30:48.000 | But what it means for the rest of us is it's more difficult to file a tax return. You're right,

00:30:52.000 | Ben. If you filed a tax return already, there might be some additional

00:30:56.000 | refunds that you won't be touching for six to eight weeks because Congress is mucking with the tax

00:31:00.000 | code very, very late in the year. So we'll see how this all lands out. It's going to

00:31:04.000 | be the Senate, and then it needs to get signed by the president to law.

00:31:08.000 | But yeah, this is a moving target. And you get it live here in NASA Compound.

00:31:12.000 | Also, on the topic of taxes for our new people here and young people here,

00:31:16.000 | I find a lot of people don't understand that you can still be contributing to an

00:31:20.000 | IRA for 2023 this far into 2024.

00:31:24.000 | I just topped off my SEP IRA for 2023 this

00:31:28.000 | month. That's great. Not to brag, Ben Carlson. Retroactively, yes.

00:31:32.000 | Yeah, but yeah, April 15th is the IRA contribution limit for tax

00:31:36.000 | year 2023. And you're right, Duncan. Wow, we got so much more time. But that means if you

00:31:40.000 | put a 2023 contribution in now, you get 2023 stock market returns too.

00:31:44.000 | Not quite. Unfortunately, yeah. Time machine, we're still working on that.

00:31:48.000 | Can I get a ruling on you guys? Non-alcoholic beer during the day.

00:31:52.000 | Is that a no, or how does that land for you guys? I love it. I'm just curious.

00:31:56.000 | I walked by the NA section in the store this morning, and it's getting

00:32:00.000 | bigger and bigger. That's a good question. Yeah, I don't know.

00:32:04.000 | What does it say about me? That's what I'm curious about for you guys. I mean, you're going to get judged

00:32:08.000 | because people will think it's real. Yeah, it's kind of edgy.

00:32:12.000 | I love on the edge. Yeah, I like it. We're changing the tax code this week, guys.

00:32:16.000 | I'm living on the edge. All right. Yeah,

00:32:20.000 | sure. Have at it. I approve.

00:32:24.000 | I don't know. All right. Thanks to Bill Sweet, as always,

00:32:28.000 | for being our resident tax expert. It's good to see you in New York this week, Ben. It was fun. I was in New York

00:32:32.000 | for a couple days. Got to help these guys liven in person.

00:32:36.000 | New Compound & Friends tomorrow. Remember, email

00:32:40.000 | us at AskTheCompoundShow@gmail.com. Thanks for all the people in the live

00:32:44.000 | chat, as always. And leave us a comment or question

00:32:48.000 | in YouTube. Like, subscribe, all that good stuff. And we will see you next time.

00:32:52.000 | See you, everyone.

00:32:56.000 | (Music)

00:33:00.000 | (Music)

00:33:04.000 | (Music)

00:33:08.000 | (Music)

00:33:12.000 | (Music)

00:33:16.000 | (Music)

How to Save More Money

Chapters