9: New Housing Rule, Tax Loopholes, 401(k), and Debt

0:28Americans told Washington what they want. starting a business can seem like a daunting task unless you have a partner like shopify they have the tools you need to start and grow your business from designing a website to marketing to selling and beyond shopify can help with everything you need there's a reason millions of companies like mattel heinz and all birds continue to trust and use them with shopify on your side turn your big business idea into sign up for your one dollar per month trial at shopify.com slash special offer. Hey everyone and welcome back to the Rich Habits podcast. My name is Austin Hankwitz and I'm joined by my co-host Robert Croak.

1:05Robert is a seasoned entrepreneur in his 50s with more than 200 million dollars in company exits under his belt and I'm an entrepreneur in my late 20s with a background in finance and economics. Since quitting my full-time job in corporate finance a few years ago, I've built a seven-figure media business and advised some of the most well-known fintech companies around the world. As the show name might suggest, every episode, we talk about rich habits as they relate to business, finance, and mindset. However, we try and bring you two unique perspectives along the way. One from an industry veteran who is Robert and the other myself, someone who is still in the process of building wealth and getting it all figured out.

1:44So Robert, why don't we jump into things? What are we going to be talking about in today's episode? Let's do it. This episode is going to be a little different. We're going to be starting it off by sharing our reactions to the new home buying changes proposed by the Biden administration. Then we're going to share with you how we personally would go about buying a home. And for the first time, we're going to be doing a Q &A. And we're so excited to answer some of your questions. We've received hundreds of questions via DM on the Rich Habits podcast Instagram. And so we thought for this episode, we'd narrow it down to three questions that were very topical and relative to the economy as it is today.

2:20Yeah, this is going to be a fun episode. But before we get into Q &A, we've got some really good stuff for you guys here in the beginning. As it relates to this new home buying strategy, home buyers with good credit scores will soon encounter a costly surprise, a new federal rule forcing them to pay higher mortgage rates and fees to subsidize people with riskier credit ratings who are also in the market to buy houses. The fee changes will go into effect May 1st as part of the Federal Housing Finance Agency's push for affordable housing, and they will affect mortgages originating at private banks across the country.

2:56Home buyers with credit scores of about 680 or higher will pay, for example, about$40 per month more on a home loan of$400 ,000. And then home buyers who make down payments of 15 to 20 % will also get thrown with extra large fees. I'm all for home affordability and giving people the opportunity to buy a first home, right? I am a user of the FHA's 3.5 % down to buy my house. That was an awesome$10 ,000 or$11 ,000 down payment that I was able to save up for over several years. Like, I'm super gracious for that. I don't understand it, Robert. What's your take? Yeah, I don't get it either. I actually, you and I spoke to the same person about it yesterday, and it just doesn't make sense to me.

3:42I don't see the logic of ever punishing the people that do better and have prepared better in their finances and for their credit. And so I actually thought it was a joke when this was published. I reached out to a couple people. I fact-checked it. And when I saw it, I couldn't find a reason anywhere published of why. So for me, I'm still in the dark as to why this is a good idea and why people that are better prepared financially and with their credit should be punished. I don't get it. Talking about credit here, I snagged a screenshot I found on Twitter. I think it was CNBC or one of these news stations talking about this new mortgage fee structure.

4:20it says 620 FICO scores get a 1.75 % fee discount on their mortgage. I'm assuming that's a mortgage rate discount. And 740 FICO scores and up pay a 1 % fee. So if you have a low credit score, you're going to get a discount where if you have a good credit score, you have to pay more. It's just completely backwards. It makes no sense to me. I just don't understand it, man. It just, Oh, that's frustrating. Yeah, I just think we have so many different parts of some of these new strategies and programs that are out there financially that just don't make sense. And that's why I believe a lot of it is just this misdirectional guidance that they're giving us because of the Fed now coming out, because of the dollar weakening, and so many things going on in the economy that it's just really hard to understand how this stuff gets through Congress and how it even gets announced.

5:13And it's beyond me because, I mean, it doesn't even make rudimentary math sense at all, especially from an economic standpoint. I guess there will be TBD of more to come. If Robert Croke was in charge, what would he say? What would he do? How is someone going to go out and buy a home the smart way? You know my feelings on the home buying topic. At the end of the day, I don't think anyone buying their first property should be buying a home. I think they should house hack and buy a duplex, a triplex, or a fourplex. So unless you're married to kids and want to be in a specific school district, I just don't think your first real estate purchase would be a primary home because it's not a good investment.

5:50So many people go against me on that, but it just doesn't really add up. In my opinion, if you're going to buy a home, now is just as good a time as any to buy homes because they are at a discount. And yes, I know there's concerns with the higher interest rates, but you can always refinance when the interest rates come down. But you can't get the savings that you could get right now of the principle of the purchase price of the house. Because keep in mind, if two years ago you were going to buy a$500 ,000 home, you would have likely been against multiple bidders and it would have been$600 ,000 to buy that$500 ,000 home.

6:24Now, two years later, yes, the interest rates are higher, but you can get that same$500 ,000 home for probably$450 ,000. So if you take that stretch of equity to purchase price and you really look at it, it's okay to buy a home now because of the fact you can always refinance when the interest rates come down. But I'm still a proponent that renting is fine as well because so many people, when they're making that big purchase, whether it's their home or a new car, they lie to themselves. They really do. And I think it's just part of making yourself feel better about your financial situation. where let's say in your mind, you say, I can afford a$2 ,500 mortgage payment.

7:06So you go in, you start looking at homes, you get it calculated by your mortgage lender of what you can buy for$2 ,500 with whatever your down payment is. But then you forget that you have to add in insurance, PMI. You have to look at maintenance, HOA. When you add all of that up, that$2 ,500 house is all of a sudden 3 ,200. and that fully skews your debt to income ratio massively by like 6%. And that is one of the biggest problems with these home buying purchases that people are looking at is putting the totality of the monthly cost into perspective against your debt to income ratio and your budget.

7:46And that's one of the biggest mistakes people make and why so many people in this era are house broke. Yeah, that goes back to sort of what we were talking about last week, this idea of being sort of house broke, house poor, having too much of a housing payment every month. It's kind of scary to think that call it four, five, six hundred extra dollars a month goes to sort of these things where if to your point, someone might have been renting and they can understand how much that all in cost is up front, or perhaps something happened where they do have a very structured housing fee, that extra couple hundred dollars a month invested over 20, 30 years is a game changer.

8:21and i think back to your point as well of the buying a primary home as your first real estate property is a bad investment i'm on the same page i do though believe that if you are able which obviously is not the case right now and i got extremely lucky with interest rates right but to your point i think it really depends on a lot of factors but nine times out of ten those factors are not aligned for a lot of people and if you're able to sort of come about this from the strategy of house hacking or being very methodical about the totality of that payment in relation to your debt to income ratio, like what Robert was saying, it's just a so much better peace of mind and strategy about buying that house rather than just kind of winging it, which I feel like a lot of people make the mistake of doing.

9:00Yeah. And to cap that off, I think it really just comes down to that lifestyle creep is real and so many people become victim to it. And, you know, their friends got the new BMW. They got to get the new BMW. Their friends moved into this neighborhood. They have to move into this neighborhood. And that five to$600 a month of lifestyle creep that might be just for the home itself can really be the difference between millions of dollars in retirement or having very little in being scared at your retirement age. Because if you take that$500 or$600 in your 30s or 40s and it's compounding for 20, 30 years, it makes a world of difference in the end result of your wealth journey.

9:39So it's just very important. I couldn't have said it better myself. Let's jump into the Q &A. Want to kick us off with the first question? Yeah. So we had a question from Whitney D and she asked, what if we can't contribute to our Roth IRA because we make too much money? Now, this is a great one for you, Austin, and I know you'll crush it. So let's get into it. What Whitney D is talking about here, essentially, are these ceilings that if you make more than this amount of money, you just simply can't contribute to this retirement account. The IRS will not let you. So there's actually a tax loophole that allows someone who makes more than these ceilings.

10:14So for individuals, it's$144 ,000 a year. If you file jointly, it's$228 ,000 a year. If you make more than that, here's how you can still contribute, Whitney D, to your Roth IRA. It's called a backdoor Roth IRA, and it's essentially a tax loophole that makes it seem like you're not exactly contributing to your Roth IRA when you really are. So here's how it happens. What you do is you open up a traditional IRA, which anyone with any amount of money they make and contribute towards. So you're still in the clear with the IRS on that side. You open up a traditional IRA, you contribute that$6 ,500 to your traditional IRA, and then immediately before investing any of the money, you convert that traditional IRA to a Roth IRA.

10:57Most online brokerages make this very simple. You just do a conversion. It's a step or two. It's not that hard. And then you repeat the process every single year after that. So it's super straightforward. Again, that is open the traditional, contribute to the traditional, and then convert it to a Roth and you're off to the races. So essentially you're still contributing to a Roth IRA, but you're not doing it directly. It's an indirect contribute, which is why it's a tax loophole and why people are able to go about it. But here are a couple things to keep in mind, especially if this is your first time doing it.

11:30So there's something called the pro rata rule that essentially is a penalty against you if you have existing funds inside of your traditional IRA. So just make sure if you are doing this that you have not contributed towards your traditional IRA yet. It makes it a lot simpler and cleaner. So be prepared for that. The next thing is make sure that you're not withdrawing any of this money in the conversion process, right? This is not you taking money out and putting it into a Roth IRA. It's a conversion. There's no money coming out and hitting your bank account. That's key. That is a really, really big point right there.

12:01And the last one here is form 8606. It's a form you'll have to fill out on your tax return the following year, just telling the IRS that this is something you did with your money. Yeah. And so one of the key takeaways for me, and you hear Austin and I talk about it a lot, is that we're just big proponents of the Roth IRA. And for those of you that are higher earners, the backdoor Roth IRA kind of conversion and strategy that Austin just discussed, it's just very important because you always want to get the tax-free money later on. Because remember, the Roth IRA is after-tax contributions. So it's just very important for your strategy to be looking at these various ways to get the free money.

12:42So let's move on to our second question of this episode, which is going to lead us into some more of this free money and some really good strategies. And that is Heidi M. asked, max out the 401k at work or the Roth IRA or both? So why don't you start us off? And we both have some different views on this one, but let's let's rally together and get this put away. I think what's interesting about this question is one, she's asking a great question. She is. And if you think about it, you kind of have to do both, right? So how I would approach this and how I was doing this before I became a full-time content creator and entrepreneur, I would invest into my 401k up to the employer match.

13:23So I'd get the free money, right? Free money is free money. You want that. Then after I'd contribute up to the match, I'd look around and say, do I still have money I need to invest? If the answer was yes, I would then max out my Roth IRA up to that$6 ,500 limit because I want those tax-free gains, the free money that Robert was alluding to before. And then after I did both of those things, and if I still had money left over, I'd go back to the 401k and I would max out that 401k. I did not make enough money to do all three of those things. I stopped after the Roth IRA. But if I did, that's what I would do.

13:58And the reason why is because at my job, when I was working at this healthcare company, I had full autonomy over my investments. I got to choose where my 401k was invested. I know that's not the same for everyone listening. I know they put you in some different target date funds and Robert's going to get into that. But why I did that is because I, one, want to have money in retirement, but two, could just park that to an index fund and let it grow and everything was fine. So, Robert, what's your perspective on this question? How would you go about these sort of steps? And what is maybe something people should be on the lookout for as a trap?

14:29A lot of you that I talk to on a weekly basis just really don't know what the performance of your 401k is. You don't know what it's invested in. You don't know if what's invested has your best interest in mind. And the way to look at this is most 401ks, let's say, of the last 15 or 20 years, you really don't have a say of what it's invested in. There's very limited options. Those options are controlled by your company's advisor that runs the 401k program. So a lot of times these 401ks underperform or you're maxing out a 401k and going above and beyond what the employer match is doing. And that just doesn't make sense for your money.

15:09At the end of the day, my opinion would be if your employer has given you 3 % match, you put in the 3%, everything else goes into the Roth IRA till you max it out. And then at the end of that, rather than going back and maxing out the rest of the 401k, I would look at what your options are. Like Austin alluded to, not all 401ks give you the autonomy to be able to invest in what you want to invest in. And you just don't want to be in underperforming assets. you'd be better off taking the additional money and having just an index ETF portfolio because then you can control it and you're gonna probably in most cases have a better performance.

15:49So keep that in mind because a lot of you talk to me on a daily basis. I just want you to be careful because a lot of these 401ks are gonna put you into these target date funds. And what that means for those of you that aren't aware of it or sure of what it is, it just means that if you're gonna retire in 30 years, they're gonna find this target date fund that meets your retirement age. So 30 years would be 2053. The problem with these target date funds is there's no flexibility in these funds because they're predetermined what they're going to invest in over that 30 years. And they just don't make adjustments for things like COVID, for things like war, for things like the dollar, you know, going down and being a weak dollar.

16:30So there's no real flexibility in those funds. So generally they just have weak performance versus a traditional portfolio of index funds and ETFs. So in my opinion, the 401k is definitely not an investment strategy. You should always get the free money from your employer, but I wouldn't go above that because there's better ways to invest your money. So just make sure that you max out your Roth IRA every year and then the rest of it, I would really look towards a portfolio of ETFs and index funds that you can manage and make sure to get great performance. BJ's Wholesale Club makes holiday hosting so easy, we called in the ultimate host to talk about it.

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17:47I got to sit in the driver's seat. I grew up in an aviation family and seeing Bronx kind of reminded me of myself when I was that age. That's Andrew, a real United pilot. These small interactions can shape a kid's future. It felt like I was the captain. Allowing my son to see the flight deck will stick with us forever. That's how good leads the way. And so for the people who are trying to move in and out, it's these target date funds are very specific onto how much you should have in bonds versus in equities. And just to me, I would much rather just stay invested in equities. I know the index funds.

18:19I know their performance. I'm comfortable with the risk. That's kind of what that looks like. And these target date funds, to Robert's point, are very structured and there's not a lot of flexibility on that risk and what that looks like. So I largely agree with what you're saying here. And I think another important call out is back to when you were talking about, instead of going past that match and maxing out that 401k, right? The autonomy, because if you do have autonomy, I would argue it's a pretty good idea. But if you don't have that autonomy and you look at your 401k and you're only getting 3 % on average, you're like, hold on, I'd one, call HR and get mad at them.

18:49And then two, say, okay, I'm gonna get my match. And then I'm gonna now think about how can this money be invested into your traditional ETFs and index funds through a online brokerage account, right? Very normal stuff. You can go to public.com and open up one. There's a ton of different platforms that do that. So our last question here comes from Abraham V. Abraham asks, should I pay consumer debt off before investing? Robert, you have a really good quote here that I want everyone to write down and put on a sticky note, put it on your mirror, keep it on your car dashboard, look at it every day.

19:22What's the quote, Robert? You can't out-invest consumer high interest debt. And what that means to me, and I get asked this all the time is, hey, I've got$20 ,000 in savings and I've got$18 ,000 in credit card debt or hospital bills or taxes. What should I do with the$20 ,000? Should I invest it in what? And it's just a crazy question to me because if you have money sitting and you want to invest it, let's say you're hopeful to make 8 % or 10%, but then your consumer debt is 20%, 22%. 22%, the automatic full stop only decision is pay off the high interest debt first and foremost. And a lot of people don't understand that.

20:05And that's where the quote comes from. I think the average credit card APR right now is 24%. So the question is, would you rather pay 24 % in interest on your debt or earn on a good year 15 % right in the stock market? You're still at a net negative of 7 % pay off the high interest consumer debt. If that is a credit card, if that at a hospital bills, for some people that might be a car note. I mean, you might have debt on your car right now that is 12, 15, 18 % interest rate, which is absurd. But I, unfortunately, that's a reality right now because of interest rates. I would much rather pay that off and focus on paying that off and then invest versus trying to do a bunch of things at once, right?

20:46Sure. You can go, you know, invest in the stock market, make your eight, 10, 12 % a year. That's great. We highly recommend it. Compound interest is absolutely a thing and we want everyone to retire wealthy, but on that road to retirement, you need to be thinking about how many holes are in this bathtub and how do I plug the holes before I fill the bathtub with water, right? If you're filling the bathtub with water at 12%, but 25 % of that water's fallen out, you're going to have nothing. All the water's gone, right? Plug the holes. Plug your holes, aka this high interest debt, before you begin investing.

21:18So when you do start investing, you're not competing with money that's leaving your bank account anyway. Yeah, I think it's a mindset issue. So many people I deal with, I see it on TV shows, I see it everywhere. They have money in the bank, but then they have these glaring debts that are sitting out there, bad debts. You and I are both okay with debt, but it's bad debt. We would call it consumer debt that is problematic. And they will hold on, sometimes not even investing this money, while this debt is just accruing this high interest every single month. And it makes no sense. But I get it from a mindset perspective.

21:54They're like, look, I have money. But they're ignoring this over here. And it doesn't go away. Consumer debt, bad debt, that's high interest debt is never going to go away until you make it go away. And so the best thing you can do is get rid of it as quickly as possible. so you can get on your road to positive cash flow and being able to actually invest without getting that eaten away because you always want to arbitrage your money to the good side. And when you have that high interest debt, you can't out-invest it. What a great ending to this episode, Robert. You can't out-invest your high interest consumer debt.

22:29Everyone, thanks so much for your questions. Please, please, please keep them coming. And also let us know if you like this format where we kind of talk about something, give a hot take, give you guys maybe an update on our perspective on either a headline we're seeing or maybe even give you some quick more punchy rich habits versus jumping into all of them and then also taking questions and answers at the end i think the question and answers are fun because one we get to shout out our followers like heidi like abraham and like whitney who dm'd us on instagram and two it kind of gives a little bit of suspense right who knows what the next episode is going to be about people are going to ask questions that are going to be fun and very unique to their situations and I'm eager to answer them.

23:08So keep the questions coming. Again, that's at richhabitspodcast on Instagram. And be sure to follow both myself, Austin Hankwitz and Robert Croak on TikTok and Instagram as well. And we will see you on the next episode of the Rich Habits Podcast. Thank you, everyone.