My Husband Makes Double My Income, But Saves Nothing! Should I Be Worried?

0:00Joe, have you ever paid off a home? I have not. I've always subbed that because I had low interest rates and I had low manageable payments and instead saved for my long-term goals. Ah, interesting. And I took the opposite track. I decided that that was going to be priority. And so I have seven doors and I paid them all off free and clear. I hear a discussion coming. I do too. Well, welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. Every choice that you make is a trade-off against something else. And that doesn't just apply to your money.

0:34It applies to any limited resource that you need to manage, like your time, your focus, your energy, your attention. So what matters most and how do you make decisions accordingly? Answering these two questions is what this show is all about. My name is Paula Pant. I'm the host of the show. Every other episode, we answer questions that come from you, the audience, and my buddy, the former financial planner, Joe Saul Sehi, guy who got kicked out of the financial planning world. Booted to the curb. Yep. I think I booted the financial planning world to the curb. Oh, who dumped who? That's right. I feel like it's high school.

1:17I got to dump it before it dumps me. so yeah he joins me every other episode to answer these questions what's going on joe oh i don't there's questions all around us you know a question i just had answered yesterday paula what's that i found out that humans eat way more bananas than monkeys well there's more humans on the planet than monkeys right there's eight billion of us no what do you mean like per individual. Yeah. Like I've eaten a ton of bananas, but I've never eaten a monkey. Ew. Ew. Ew. Gross. Humans eat more bananas than monkeys. Ew. Joe. Well, that's our show for today. And we're out.

2:04No extra charge for that, Paula. Gross. Okay. Moving on. Here's what we're going to cover in today's episode. Tatiana is about to pay off her home one day before her 39th birthday, what should she do next? What should her next financial priority be? Rachel has a reputation as the finance person among her friends, but she's a little stumped about closed-end funds. What does she need to know? We're going to answer these questions in today's episode, starting with Tatiana. Hi, Paula. Long-time listener with a question on what to do with quote-unquote disposable income. My mortgage will be paid off in 60 days, just one day shy of my 39th birthday.

2:51This is a goal I've been working incredibly hard towards independently for 13 years. I purchased the property before meeting my husband and have no other debt, no credit card debt, no loans, and my car is paid in full. I'm self-employed with a small business making a salary of about 50k. My husband makes about 100k and pays home expenses such as utilities and groceries. He's working towards a pension through his employer with about 16 years to go, and he has an unmatched Roth retirement account. Unfortunately, he doesn't do a very good job with his retirement contributions and has no independent savings or assets other than a paid-off vehicle.

3:32We will not be having children, but we do have a goal to purchase a boat and get into the cruising lifestyle, which can be extremely expensive. Not sure if that will be a long-term lifestyle or just something we have fun with for a couple years. We really won't know until we try, and we have about$40 ,000 in joint cash savings to start that dream. I'd like to know what would be best to do with my income once I don't have a mortgage. Rebuilding my cash savings is definitely a priority. But after reaching a comfortable amount, maybe open up a retirement account of my own. And what type of account would you suggest?

4:07Or maybe I should make some low-risk investments. Definitely open to all suggestions. Thank you so very much for all of your wonderful advice. Tatiana, first of all, congratulations on paying off your home. That is incredible. And you mentioned you earn an income of$50 ,000. You know, you're not making crazy six figure income where you're, you know, making$500 ,000 and paying off this home on a on a$50 ,000 income. You're able to have a fully paid off home at the age of 39, one day shy of turning 39. In fact, so at the age of 38 and 364 days, you are able to have a fully paid off home. That is absolutely incredible.

4:52So huge, huge, huge. Congratulations to you. for accomplishing such a big goal. Now, what should you do next? If I'm understanding your question correctly, I'm getting the impression that you don't have much in the way of retirement savings. And I say that because you asked within your question, you said that you want to rebuild your cash savings, which I think is a great idea. And then you said, and open up a retirement account. Am I correct in interpreting that to mean that you don't have a retirement account? Because if you don't, then that is absolutely your first priority. Open a retirement account and put as much money as you can into it.

5:35You mentioned also that your husband doesn't seem to have any retirement assets. I'm a little bit confused about his situation because you did mention that he has a Roth retirement account. You said it's an unmatched account, which is fine. Plenty of people have unmatched accounts, but if he has a Roth retirement account, you said that he doesn't have any independent savings or assets other than a paid off vehicle. Does that mean that he has access to a Roth retirement account, but that there is zero saved inside of it? Or does that mean that he has a Roth retirement account, but there's a very, very small amount saved inside of it?

6:12That part I could use a little bit more clarity on, but But regardless, it sounds as though he has, at a minimum, access to a Roth retirement account. It would be great for him to put some money in there. I know that he's working towards a pension, which is good, but he's 16 years away from that pension. So having additional savings to build out the retirement planning stool, right, the three-legged stool of retirement planning would be a great idea. So in addition to his pension, he should be contributing money to that Roth retirement account. Meanwhile, you also need to open up a retirement account if you don't already have one and build out those retirement savings of your own.

6:53That is absolutely the first priority that I want both of you to have. I would start thinking about the amount of money that you spend today and at the very least to be able to emulate that same lifestyle and then think of, do you want to live a different lifestyle then? And then there's tons of calculators at all of the big money management websites, probably the place where the Roth is that you mentioned, they probably have retirement calculators there. Just go begin modeling that and then see how much money is the right amount to put away. You knew the amount of money to put away to make sure that you paid off that mortgage before your 39th birthday.

7:29You want to do the same thing with retirement. If I have this goal, I want to live this lifestyle. I need to put X amount of money away and I need to put it in investments. Now, you talked about low risk investments, Tatiana. There are many different types of risk. And when you talk about low risk, you're probably talking about market risk when most people mention that. There's another risk. My problem with when you use a quote, low risk, aka low market risk investment for retirement, you are very safely not going to save enough money to get anywhere. So what we truly need to do, the bigger risk is we need to beat inflation because we saw how much over COVID and right afterwards, like inflation running just rampant, moving everything so much more expensive than it was just five years ago.

8:22If we don't beat inflation dollar for dollar, every dollar you want to spend above that pension for retirement, you just can't do it. You can't live today and save enough money to live tomorrow. So the two types of investments that have beaten inflation over long periods of time are stocks and real estate. And the way to do that, the way I think to mitigate your risk with stocks is to buy a well-diversified fund that buys a lot of different companies. So you're betting on the economy, which will beat inflation, versus betting on one company to do it. So a great company, a lot of people in our community like to start with is a mutual fund called the Vanguard Total Stock Market Index.

9:07It's a fantastic place to start because you buy a little bit of everything. Your risk is that the entire economy folds. So for me, I'll take that risk and I will then be fighting the bigger risk, which is that I don't beat inflation. By the way, I love the fact that your husband has that pension. That pension represents so much money that you don't have to put away that other people do. That's a great story. A pension by security. Now what you're working to do is by flexibility, right? Having money saved for you and your husband is going to buy you. We want to spend a little bit more this month.

9:44We want to do something special this month. If you have enough savings, you can do that. With a pension, you really can't do that because you're going to get the same check every single month, and that will be your set budget. So buy yourself some flexibility by really getting going on that retirement savings. Right. As far as the goal of buying a boat and living the cruising lifestyle for a while, that is fantastic. I love that idea. It'd be better if they invited us. But before that happens, I see that as secondary to first securing your future when you are in your 70s and 80s and 90s. Right.

10:23Retirement is absolutely goal number one. And once retirement is secure, then you can turn your attention to a financial goal that you have for your 40s or your 50s. But taking care of the 90 year old version of you has to come before doing the fun thing for the 50 year old version of you. Yeah, it is funny. Just as humans, we have a tendency to front fill our stuff, right? The goal that's in front of us is the one we think about, that long-term goal. I'll deal with it later. And yet compounding interest can work so much in our favor if we backfill instead. Right. So we start with the 90-year-old version.

10:58We secure that. Then we go to the 80-year-old version, secure that. Then the 70-year-old version, 60-year-old version. And once that's all secure and cake, then I go, okay, now I can party on the boat with Paula and Joe. Yeah, exactly. Exactly. Congrats on paying off the home. That is huge. That's incredible. That's going to make this job a lot easier. Exactly. Yeah. All of the money that you have been putting towards the mortgage that you now have available to you that you can put towards a retirement account. And that means you can really accelerate the growth of your retirement savings. And I think you're going to see that your retirement investments grow very, very quickly now that all of the money that was going towards your mortgage can get put into a retirement.

11:46Yeah, it's a huge cash flow benefit having that bill eliminated. So congratulations. You know, when you're a kid, you dream about being an astronaut or working with wildlife or all these cool things. And then when you grow up, you think about not just what you want to do, but also you think about this other layer to it, which is how do I want to impact the world? What legacy do I want to leave behind? And how do I want to do that through my work? For a lot of people, that's when you start dreaming about owning your own business. But to do that, you're going to need a website, a payment system, a logo, a way to find new customers.

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15:49our next question comes from matthew hey paula i'm a long-time listener and really appreciate your common sense approach to money problems i have a question about mortgage refinancing i recently got out of a long-term relationship and had to buy out my axe and refinance our jointly owned house somewhat quickly under my own name. This was the right move emotionally and personally in terms of moving on and wrapping things up, but because I did not have a lot of control over the timing, I got stuck with a very high interest rate on the mortgage, 8.1%. The mortgage is for roughly$78 ,000 and the result is a$920 payment.

16:24I can afford this on my current salary. My take-home pay is about$4 ,250 a month and I have a lodger who pays half the mortgage, but I was thinking it would be financially wise to refinance when rates fall. Obviously, the economy is unpredictable, but it does seem likely that interest rates are going to fall in the next couple years. I was wondering how you would approach the question of when to pull the trigger on a refinance. Should I just set a mental target rate, like 5%, and plan to refinance the moment when rates fall to that or below? Or would you take a different approach? Thanks so much.

16:55Matthew, that is such a good question. First of all, you've done all the right things. Kudos to you. I get that this is a sucky situation, but you made the best decision in a sucky situation. And you should be proud of yourself for that. You're doing it right. And you're asking the right questions. And this is such a good question. And it applies to anyone who's listening who is in a similar position because there's so many other people who are listening to this show right now who also have a high interest rate on their home. and they're wondering, when rates start to drop, when should I refinance?

17:37Now, for a little bit of context, the Federal Reserve meets eight times a year. The next meeting, which is going to be in March, they are widely expected to hold rates steady. The meeting after that, which is going to be April 30th and May 1st, is if they lower interest rates, that will be the earliest point at which they could potentially lower interest rate. It's widely agreed that that's not going to happen anytime before their April 30th, May 1st meeting. Even if they do start lowering interest rates at the April 30th, May 1st meeting, and there are some armchair commentators who think, you know what, they might not even do it that early.

18:16They might actually wait beyond that. But that's all speculation. But even if, in the best case scenario, they do start lowering interest rates at the April 30th, May 1st meeting, it would only be by a handful of basis points. So we're not going to see any significant changes in interest rates until the end of the year. Now, how much is that going to be? Time will tell. Bank rate is expecting that new mortgage originations by the end of 2024 will probably be around 6%. But again, all of this is speculation and it's, you know, even the Members of the Federal Reserve Board do not know the answer to this.

18:57And the reason for that is these answers will be determined based on economic data that comes out. So seeing what the jobs report looks like in the month of March, the month of April, the month of May, seeing what the inflation numbers look like in those months, those numbers, that economic data will inform the decisions that the Fed makes throughout the year. And it will inform the number of times across the eight Fed meetings this year, the number of times that the Fed lowers interest rates across those eight meetings, and the degree to which they lower interest rates across those eight meetings.

19:33All of that will be determined on a meeting-by-meeting basis based on the economic data that we have at the moment. In addition to that, major geopolitical factors, such as wars being fought overseas, all of those have effects on supply lines. They have effects on oil. They have effects in an interconnected world on price shocks and economic movement. And there are black swan events that we cannot predict. And so all of that is to say, we don't know how quickly rates will drop, nor do we know by how much rates will drop. And it isn't just that we don't know that. It's that the members of the Federal Reserve Board themselves do not know that.

20:16This is all being decided in real time. So that leads to the question, when should you refinance your mortgage? And what I would say is, given that we don't know the extent to which rates will drop in total, what I would do is set a guideline based on the difference between your current rate and the rate that you could get if you were to refi. And so if there's a difference of about one and a half to two percentage points, that's the rate at which I, the difference in rate at which I would refi. So your rate is currently 8.1%. If you can get a rate of about 6.1 % to 6.6, 6.7%, somewhere, somewhere within there, I would refi at that point.

21:10And the reason that I'm benchmarking it to the delta between what you have and what you could get, rather than any speculation about how far rates will drop, is because we don't know how far rates will drop. The Fed themselves, Jerome Powell, does not know how far rates will drop. Nobody knows that. Nobody can know that. So the question is not how far will rates drop. The question is, what is the delta between the rate that I have versus the rate that I could have at this very moment? When that delta reaches between one and a half percentage points to two percentage points, when it gets to that range, that's when I would pay the cost of refiing.

21:52I think there's a couple things that Matthew can explore today. Because the way that I look at this, Paula, is I just go through my available options right now. So obviously Matthew said that it was affordable and that he can continue along the path that he's on now, but he'd prefer a lower rate. But let's say that that wasn't the case. Let's say that he had to, because what I really like about the show is when we explore the options that are available and people can then see what my true choices are. And the way I see it, there are two choices if he was going to pull the trigger right now. and one is he can make a bet and I love how perilous that is Paula based on everything that you said because I think people make bets all the time and they truly don't have all the data and even knowing that the people making the decision don't have the data yet shows you even how much more perilous it is but if you're going to make a bet that means you go into an either an adjustable rate or a balloon product so for people that don't know what those are a seven-year balloon is where the bank, instead of guaranteeing a rate for 15 or 30 years, they only have to guarantee it for, in the case of a seven-year balloon, seven years.

23:05And because they only have to guarantee the rate for seven years, they will give you a lower interest rate than if they have to bet what interest rates are going to be 15, 20, 30 years from now. But balloons are risky because you are on the hook for paying off the entire balance when the balloon comes due, or you could refi, but there's no guarantee of anything if your plan hinges on a refi. Which is why I love going through all these options and how they work. Because I see people with seven-year balloons all the time. They will choose it. They'll look at the interest rate. The interest rate is pretty low.

23:37Oh, what could go wrong in seven years? Which is exactly what could go wrong in seven years. What could go wrong in seven years? Exactly. The second choice you have is an adjustable rate mortgage. So an adjustable rate mortgage, the rate is going to adjust. These are going to be all over the place where maybe it's a low rate for three years and then it will bump up, maybe bump up again, then bump up again, and it will finally hit a final rate. So that buys you a little more time sometimes than a seven-year balloon will give you. but you're still betting on rates coming down over a set amount of time, or you're locking in probably a higher rate than what you have right now over the long term, which means that you're going to have to refinance again.

24:21The third thing, the third option is, is of course a refinance right now. I'm on bank rate right now as we're talking, Paula. And right there on the front page for refinance, it has a company and it says 6.374 % 30-year fixed refinance. Well, hell, 6.374. We're very close. We could do that right now. Oh, but wait, there's more. Wait, there's a lot more. One lesson that mortgage experts have told me over and over and over is when you read the rate on any website, this is a company's best lie. And the reason is, is there are two factors always included in a mortgage. There's the interest rate and there are the origination costs, which there's a bunch of fees that come with your mortgage.

25:12And generally, the company that's offering you a very low rate is also going to lop a bunch of fees on the top end, which are going to make that rate pretty close to the same well everybody else is drinking out of. These companies, these banks don't have a lot of room for wiggle. I mean, they're all playing in the same pool and it's an incredibly competitive environment. And because of that, when you see a company that's offering a wildly different rate than everybody else is, you can't go skipping down the hallway going, I found this thing. You didn't find anything. What you found was somebody who's hiding information from you.

25:5199.9%. I wouldn't say 99.9%. Let's put it this way, Paul. I've been doing this for over 30 years. I've never found that not to be the case. Never, ever, ever. And sure enough, as I look into this, 6.374%, 1.792 points. You're going to buy points to get that mortgage. So they're showing you a great rate with paying points means you're going to pay an upfront cost to drive the rate down. He could do that today. He could do that. And he locks in this 6.374. But if he does that, he's paying these huge points, which is going to bring it up toward where he is today. Right. And in addition to that, once you've paid points, you're incentivized never to refi again because you've already got the rate down.

26:36So then the next question is, is there a way to avoid all that? And a way that we would do this when I was a financial planner is called a no points, no cost mortgage. A no point, no cost mortgage. You have to be very clear with the lender. This is what I'm looking for. No point, no cost mortgage. That doesn't mean points are rolled in. I've had lenders look me in the eye and go, oh, yeah, this is no point, no cost. See, it's all buried in this paper. No, no, no, no, no. I want no points. I also don't want to pay any cost. I want the cost rolled in. So guess what they, when they do that, Paula, guess what they do?

27:17they roll all of those costs than the interest rate. So the interest rate is going to be higher than if I pay the cost up front because they're going to make their money some way. But if it's lower than what I have today and I need cashflow today, for me, there is no downside to doing that. There is no, besides the fact, there is one downside, Matthew. And the fact is you're just resetting the 30 year loan. He's two years in, he's got 28 years to go. Now he's going to have 30 years to go. Now you can also mitigate that. You can ask the bank if they can do something called recast the mortgage with a no point, no cost loan.