I’m Earning Extra from my Side Hustle. But Does This Cramp My Chances at Investing?

28:31That loan needs to get paid back immediately. And if not, then it is distributed as ordinary income. So then she's going to have to pay ordinary income tax on that rate. So I was Curious on your thoughts as far as including that on a risk on a 401k loan. Chris, thank you so much for that. And you know what, Paula? I didn't go back and listen, but I know you and I enough. I know where we come down on 401k loans, and we probably had 85 reasons why you should not do the 401k loan. Yep. If we missed it, Chris, it was reason 867, and I love that you bring that up. That's an important thing people need to remember, Paula, because it's exactly what Chris is talking about.

29:13If you, for some reason, separate from that job and you got this massive 401k loan, uh-oh, I got to pay it all back now. What a nightmare. Yeah, I'd say reason number 4 ,872 as to why to avoid a 401k loan. Do not do it. So, Chris, I'm glad you piled on for us because just bad idea. Yeah. Very bad idea. Yeah, 401k loans, avoid. When I was a financial planner, and actually even lately, I will get questions, Paula, people going, hey, this guy at work or this woman at work said, I can just borrow from my retirement. I'm paying myself back with interest. Horrible, horrible place to borrow money from.

30:01I'll encourage people to go back and listen to us on episode 467 and how we answered Knoxville's question. But add Chris's comment to that fire. Exactly. Avoid 401k loans. That's the takeaway here. Turning our attention to student loans, our next question comes from Christina. Hi, Paula and Joe. My name is Christina. I recently asked a question on your podcast about my loan repayment plan. And at that time, I was planning on, you know, throwing as much money at my loans as possible. once I graduated and trying to get it done as fast as possible. But since then, my plans have changed a little bit, sort of tired of living in squalor, so to speak.

30:46And so I've decided to try to pursue PSLF. I just graduated PA school. And so now I am a physician assistant. I also get started with work in March, making about$100 ,000 a year. And so PSLF and trying to get on the save plan and saving as much money that way seems to be the way to go. My question is what I should do with my grace period. And, you know, if save isn't starting until June of next year, I heard that somewhere and I'm not sure, you know, if it's already in place or it's starting next year, if it's worth consolidating and skipping the grace period now, or if I should just wait the six months, maybe wait until the save plan kicks in next summer or what I should really do with that.

31:34Additionally, if you guys have any thoughts about whether this plan is good or not, I would appreciate that as well. Thanks so much. Bye. Christina, first of all, congratulations on graduating. Congratulations on starting your career as a PA and congratulations on starting work in March, making six figures, making 100 grand a year. That's incredible. Let's go through you, you threw out a couple of acronyms that the broader audience may not be acquainted with. So let's define what you're talking about first, for the sake of everyone listening. PSLF is public service loan forgiveness. And the save plan is the saving on a valuable education plan.

32:16It is the

32:22the revised pay-as-you-earn plan, right? So that's the previous plan that a lot of other listeners might be acquainted with because that's the plan that we have had. The save plan is the new plan. Now, the save plan is based on your income and your family size. So you have a certain monthly payment based on income and family size, and it typically lowers your payments as compared to other types of income-driven repayment plans because your payments are based on a smaller portion of your adjusted gross income, your AGI. So the safe plan is an income-driven repayment plan, but compared to other types of income-driven repayment plans, it generally tends to lower your monthly payments.

33:04And the safe plan, as you mentioned in your call, goes into effect this summer. And the calculation, Paula, for how they come up with what that income amount is, which I'm sure some people are asking, the government has come up with, frankly, a very simple calculation where they estimate how much of your discretionary income that you have for undergraduate loans. It's going to be 5 % of that number. So it's a fairly simple calculation. That 5 % for some people could end up being zero, where you're not paying anything. For graduate loans, by the way, that goes up to 10 % of that number. For people that have both graduate and undergraduate loans, it's going to be somewhere in between depending on the ratio of graduate to undergraduate loans.

33:57Your loans are discharged over 20 or 25 years depending on exactly what type of loans they are. And great news, if you've borrowed less than$12 ,000, your repayments could end as soon as 10 years from now. Right. And that has gone into effect. So we are recording this in February of 2024. That's gone into effect this month. So as of February 2024, if you've borrowed $12 ,000 or less, you can get forgiveness in as few as 10 years. However, the other benefits, the additional benefits of the save plan, those go into effect in July of 2024. I have a piece pulled up right now, Paula, from the Wall Street Journal, and I just love this quote, so I'm going to quote it directly.

34:46This is written by Rebecca Safier, and the piece is called Everything You Need to Know About Income-Driven Repayment, Including the New save plan. And there are four different ways, Paula, to qualify for income-driven repayment. And Rebecca writes, it can be tricky to determine which plan is best for you. However, it's safe to say the new save plan is likely to be your best bet, specifically your best bet, because of the fact that it most probably lowers your monthly payment by the highest amount, which if you're looking for income-driven repayment anyway, that's probably what you're looking for is just to minimize your monthly payment.

35:25And so I, as a general practice, whenever I'm trying to find details about any given plan or program or policy, I tend to go to .gov sites,.gov sites, to get information directly from the federal government. And so, for example, if I want information about taxes, I tend to go to irs.gov. With student loans, I've got a page, we'll link to it in the show notes, from studentaid.gov, which is the official federal student aid website created by the Department of Education. And it says exactly the same thing that the Wall Street Journal article says, which is the safe plan is likely to give you the lowest payment.

36:08The DOE corroborates that. Her question specifically is, what do I do between now and June when her payments begin? I would put this money, Paula, in a separate account. I would not put it on the income repayment side because if the loans end up being discharged, she just put more money toward that plan. But I would leave it available for that and have that money earmarked toward repayment if something goes wrong with her and the save plan. because sometimes your life changes. And when your life changes, I want to make sure I have that money available for repayment. So I would get repayment started, but do it into a separate fund and then allocate that as 10 years out or longer money because it's going to be 10 years at least until you know whether you're going to have these loans, the remainder discharged or not.

37:02When you get to that point, if they're not discharged, put that money into the pot toward your repayment. if they are discharged, then feel free to use that money toward a different goal. That's what I'd recommend. Yeah. Perfect. Perfect. That way you've got the money on hand in case you need it. And you're building up the muscle now. You're getting used to that payment in your life. Get used to it right now. I mean, the number of people, we've seen the amount, Paula, that credit card debt has gone up since student loan repayments began again back in October. Like the number is frightening. And you have this feeling that even though everybody saw October coming, there must have been based on the huge increases in outstanding credit card debt as reported by TransUnion and the other credit authorities that a lot of people still got surprised.

37:58Like, oh, yeah, right. That snuck up on me. It's like that old Brian Regan joke where he talks about being in fourth grade and he wakes up one day and goes, oh, the science project due today. I've had all semester. Haven't thought about it once. And the repayments is happening. So I would start getting that muscle working of I'm paying this money toward my student loan today. And by the way, that practice of getting the muscle working, do that. This is a note to everyone who's listening. Do that prior to any major budgetary shift. So if you think, for example, that you want to upgrade from your current starter home into a bigger home, right?

38:44And that's going to require a bigger monthly mortgage payment. Get into the habit of making that payment today. So make that payment to yourself, right? Get in the habit of seeing that money leave your checking account. Part of it goes to your normal current mortgage payment. The other part of it goes into a savings account, a separate savings account, ideally at a separate bank that's out of sight, out of mind. But get in the habit of seeing that money leave your checking account so that your budget, your day-to-day budget adjusts to that. And that's true. I'm using the example of upgrading your home, but that's true for any major life decision.

39:23If you're going from being a renter to being a homeowner, and that's going to involve a change in the monthly payment for housing, right? Do it there. If you're going to go from as a couple, maybe you're currently sharing a car, but you each want a car of your own. So you're going to bring a new car into the household. Okay, cool. Practice making that payment for a few months before you do it. Just make that payment to yourself. Any major shift that you want to do, practice making the payment to yourself for a few months before you take on the expense. That's my tip for everyone listening, no matter what it is that you want to add into your budget.

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43:16Our final question today comes from Gina. Hi, my name's Gina and I have a question for you about paying for your own retirement with an LLC. For background, my spouse is starting to build up a side hustle consulting business, and I'm going to be helping with office management stuff and billing on the side. As I'm helping make the business plan, I'm trying to decide how much to include for my wages as 401k self-employed retirement contribution and company match. I've been reading that I could do as much as 100 % of my wages, and I haven't been able to find a specific limit for a percentage of a company match.

43:51I don't anticipate reaching the$22 ,500 cap for personal contribution because I'll just be helping a little bit while I'm in law school. I will be helping either way. And this looks like a great way to reduce our tax liability while further building our retirement. Anything I should be paying attention to, particulars to worry about, other tips that you think are important in this scenario to think about. Thanks again for all that you do. And I look forward to any feedback you can provide. Thanks. Gina, thank you for the question. Before we answer, I want to make one factual correction. This is for the sake of everybody who's listening.

44:25You mentioned within your question that you don't anticipate reaching the limit, and you cited that limit as$22 ,500. That was the limit in 2023. The limit in 2024 is$23 ,000. So I want to fact correct that for the sake of everybody else who's listening, just to avoid any confusion. Now, to your question, if you don't need the money and you're okay with losing the liquidity, meaning that you're okay with locking it away into an age-restricted account, which is by definition what any retirement account is, then hey, may as well. You may as well contribute as much to the retirement account as possible if you don't need to access it.

45:10You aren't going to need the liquidity. You're okay with the age-related restrictions on tapping that money. Cool. Put it all into a retirement account. The only reason to not do so would be if there is a risk that you might need that money in the short-term future. So if you think of broadly any given retirement account, 401k, 43b, IRA, any, like, forget the word retirement because the word retirement is an occupational status. But these accounts have nothing to do with your occupational status. These accounts have everything to do with your age. These accounts, 401k, 403b, IRA, these are simply deals that you make with the government in which the government agrees to give you a tax advantage in exchange for your agreement to not tap this money until you reach a particular age, right?

46:10That's all these accounts truly are. It is a mutual exchange of age restriction for tax advantage. So if you don't need this money at any point in the near term, and if there's no risk that you might, and you're okay with that age restriction, then there isn't any reason not to get the tax advantage. And also, if you think about this, and I love the way that you stated that, Paula, if we think of buckets of money for different periods of our life, if we know we're going to need money in that bucket, the most efficient way to get it there, and we talked about this with Christine earlier in using that rule of 72 to make more money, even if you feel like you can't put a lot away when you're younger because you're at this earlier, I need a lot of money in the today bucket.

47:04you still want to put some money in that later bucket. And if you're going to put money, if you think you're going to be alive after 59 and a half, which is the age for most of these plans, well, then I want to use those tax shelters that the government gives me to make sure that I have as little friction between now and then as possible. And I do want to put at least a little there to get on that rule of 72 bandwagon to begin having my money grow money. So even if you think you can't, you think you need it, by all means, try to put a little away. And of course, with the power of compounding, the more the better.

47:40Which brings up, you know, obviously the other side of that equation, which is if it turns out you needed that money. Yep. And then it might be a little ugly. Exactly. So those are the factors that you need to weigh. The risk of. Which it's funny. Yeah. Tapping it. Risk of needing to tap it. It's funny how this goes back then to emergency fund, right? Yeah, exactly. Well, it goes to emergency fund. It also goes to something that you often talk about, Joe, which is timelining your goals, right? What are your goals? What are your five-year financial goals, your 10-year financial goals, your 20-year financial goals, and then your 40-year goals, right?

48:16And so when you timeline all of those out and you see how much money you need, within five years, maybe you want to replace your car. and maybe you want to, ideally you'd want to avoid an auto loan. So maybe you want to pay cash for your next car. Okay, cool. That means you start making a car payment to yourself every month. Maybe in 10 years, you want to buy a home. All right, cool. That means you start putting money into a down payment fund and you do that every single month for the next 120 months. And then 10 years from now, you're ready to buy a home. Once you timeline out those goals and you see what goes in the five-year bucket, the 10-year bucket, the 15, the 20, the 40, you have a good sense of how much can I lock up versus how much will I need.

49:09This is interesting, Paula, because it's another way in which the world of investing is a little bit different than the maxims that apply to the rest of your life. And let me explain what I mean by that. We've all seen that multitasking is a horrible idea, right? If I'm doing two things at once, I'm not giving any honor to any of them. I'm not fully engaged. It ends up taking me longer to complete a lot of those tasks. I get less satisfaction from those tasks. But when it comes to saving for our goals, it is much better to multitask. It is much better to put some money because if I do what humans normally do, which is I look at the next thing and I do that, the thing that we say, don't multitask, focus on that one thing.

49:56We will focus on the next closest thing. And then only when we get that goal achieved, will we then look at the next one. And what ends up happening is, is these life goals get bigger and bigger and bigger. We need more and more and more money to reach the goal. We're not right in front of it. We haven't saved any money for it. We haven't let that rule of 72 work for us and build money on its own. So multitasking, which is a horrible idea everywhere else, is fantastic here. The other place that this applies, and this one's a little bit of a non sequitur, but it certainly is a place where investing is different than everything else.

50:29If you have the investment that meets your goals, the right thing to do with that investment between now and the goal is nothing. And generally, action produces results. And investing often inaction is what produces results. Overtrading your account is a huge problem that we have. We get all nervous. We think there's a huge, quote, opportunity. And it's because I had a tuna fish sandwich that disagreed with me. So all of a sudden, because of my mental state at that time, I make some pretty dumb moves. And we end up blowing up our own goals because of that. So I love how with investing, multitasking and inaction are often your best two things to do.

51:14Right. It's beautiful. It's the exact opposite of the rest of life. Which is why so many people fail at it. Right. Yeah. It goes against all of our training in every other way. You're like, what? Wait a minute. The market's down huge. I need to get out of this. Right. No. I remember a guy told me once early in my career, he said, imagine if the directions on an elevator were the same as the way that the popular press talks about the market on a given day. Because it's never down a little or up a little, Paula. we use words like plummet and soar. The stock market soared today. The stock market plummeted today, which makes you go, oh my goodness, what do I do?

52:00Imagine if you got on an elevator every time and it said, do you want to plummet or soar? I'd take the stairs. Immediately. Yeah. So it's even the verbiage we use when we talk about it that produces the wrong thing. And that's why so many people get it wrong with money. It's unfortunate that people spend years and years and years in jobs that they dislike. Now, I'm not talking about people who are lucky enough that they love their work. That is one of the biggest wins in life is to love your work, to be doing work that is your calling. But there are so many people who are in jobs that they dislike who stay in those jobs because they haven't taken the time to learn how to invest.

52:52And just a little bit of financial education, particularly investing and also learning how to run a business, how to have a side hustle, how to have an ideally a side hustle that could eventually grow into a full-time business that they would enjoy more. whether that's being a novelist or building out their own product or offering a service or whether it's a creative field or a product or whatever it is, right? There are a lot of various ideas out there. There are a lot of callings that people have, but people don't learn entrepreneurship and they don't learn investing. And for those two reasons, a lot of people end up stuck.

53:31Two great life skills. We talk about those foundational skills. I think if you know how to work for yourself, even if you work for somebody else, learning entrepreneurship inside of any corporation you work for is huge. I learned this even working with American Express, that even working with a big corporation, realizing that I don't want to wait for my manager to train me, I should train myself, and then my manager's training is additional, was a huge win. Just this big wake up. Like, why would I wait for somebody else to train me to be great at my job? Why wouldn't I go seek that out? And then when your manager finds out that you went and seeked out that training, that's even better.

54:14But that's not the end result. The end result is I now have this lifelong education plan that I'm on that I created for myself, which is truly the entrepreneur's way of learning. Right. Exactly. And especially in a small business environment, really entrepreneurial employees are the best ones because if you're in a small business, you need your team to be entrepreneurially minded. The worst type of hire that you can have as a small business is someone who expects to be told what to do and only does highly specified regimented things, like somebody who's extremely inside the box. Yeah. Learning to think about as an employee, what is truly the intended result that I want?

55:01Not just what my boss told me, what is the true result we're looking for? And this is where better communication, you know, we call communication, Paula, a soft skill. Communication is such a hard skill. It's everything. Yeah. Such a hard skill. Yeah. It is the skill that delineates success from failure. And Gina's like, so I put money in the retirement plan? Yeah, I know. Yeah. We've strayed very far from speaking of communication. We've gone way far from her question, but I think we've answered her question, which is. Yeah, the answer is yes. Yeah, the answer is yes. Put as much as you can in the retirement plan, assuming that you don't need it for shorter term purposes.

55:38Fabulous. So thank you, Gina, for the question. And Joe, we've nailed it once again. Five questions this time or really four questions in one. Bam. Fantastic. It was a great hour. Joe, where can people find you if they would like to hear more of you? You can find me on the Stacking Benjamin Show every Monday, Wednesday, Friday. Friday's often with our good friend, Paula Pant. But we have had some fantastic, we call them mentors on Stacking Benjamin Show because we asked them to do something to talk to our stackers about what they're really good at. We had Charles Duhigg, who wrote The Power of Habit on recently.

56:14Ah, nice. And Charles talking about being a super communicator. We had a wonderful discussion Speaking of communication, Charles is such a great communicator. We also, Liz Elting created a billion dollar company and sold it and then talks about all of the things it takes to build a billion dollar company. So if somebody's striving for bigger results, it's funny how when Liz did what she thought she was supposed to do, the company went nowhere. When Liz did what she thought she should do and really followed her own North Star, the business took off to the tune of a billion dollars. So two fantastic mentors we've had lately on Stacking Benjamins.

57:01That's great. And, you know, founders often have good gut instincts. They really do. And sometimes the skill is to learn to listen to your own gut, to learn to listen to your own instincts, because founders will often have very good business instincts that are contrarian or that go against the grain of what others are doing. But there isn't nobility in being contrarian for contrarian's sake. The real value is understanding when other people are giving you advice that reflects the fact that they are playing a different game than the one that you're playing. And they might not even get the game that you're playing.

57:43Well, they often don't. They only see the side of you that they get to interface with. They don't see the entire picture. Right. It's almost like, you know, Paula, we're about to have this full on eclipse in Texarkana. And people are going to see from this perspective a different piece of that eclipse and in a different way than somebody will see a thousand miles from here. Right. They'll see it differently. And I think just to realize that every discussion is a cube and every person is looking at a different side of the cube, I think to understand there's a side of the cube that you don't answer or you don't know and to try to figure out what this side of the cube is that I don't know, to ask instead of defending how am I right to ask what's the side of this argument I don't know, I think is a pretty powerful place to play any communication that you are involved in.

58:40Absolutely. All right. Well, Stacking Benjamin's podcast is where people can find you. And for those of you who have not yet heard, we here on the Afford Anything podcast are about to become a twice a week show. And so, Joe, you're going to be joining us weekly starting at the end of April. And we're doing that specifically so Christine can disagree with my opinion more often. Oh, that was, we had the, we had this team meeting and we're like, how can Christine agree with Paula Moore? That was how we just have more episodes. So Chris, Christine, we're doing this for you, for you. And that will start after episode 500.

59:29So episode 500 is going to air for 24, 24. and from that point forward, effective episode 501, we are a twice a week show. Fabulous. So Joe, we're catching up. I don't know how you do three times a week. That's insanity. Twice a week is super fun. Even twice a week has me nervous, but three times a week, man. It is super fun. I'd rather be doing nothing else. You know the thing about love your job? I'd rather do nothing else. That's amazing. That's beautiful. Well, thank you for tuning in. If you enjoyed this episode, please subscribe to our show notes, affordanything.com slash show notes so you can get a synopsis of every episode.

1:00:14You can also chat with members of the community at affordanything.com slash community. And hey, follow us on Twitter. I'm on Twitter at affordanything. And Joe, you are Average Show Money. I'm Average Show Money. Yes. Yes. Thanks again for tuning in. I'm Paula Pant. I'm Joe Solcija. And we will catch you in the next episode. Hey, Joe, do you think we're going to disagree on something today? Oh, it's been like five shows on the calendar since we've disagreed. Right? Yeah, it's about time for one. You want to take the right position or the wrong one? You want to flip for it? For the coin flip again?

1:00:52Yeah, yeah, we're going to do a coin flip. Why can't we just have Joe gets the right position for once? okay call it i've got a coin joe call it while it's in the air sure all right three two one uh heads it is heads oh after all these years congrats joe now you think about what i can be right about