Q&A: $230K Income Living Paycheck to Paycheck, 15 vs. 30-Year Mortgages, & How Inflation is Calculated

0:00In America, half of every dollar spent on brand medicines goes to entities who don't make them. While middlemen like PBMs and 340B hospitals drive up costs, Biopharma is investing$500 billion in new infrastructure and manufacturing here at home and helping patients buy medicines directly at lower prices. Tell Washington to end middlemen markups and put American patients first. Visit phrma.org slash middlemen. When you walk into a Burlington, you're walking into amazing prices and great gifts. that's main character energy because at burlington the holiday savings aren't the only things turning heads discover quality finds and perfect presents for everyone on your list even those who are hard to shop for toys and jewelry to new beauty brands and styles these gifts go seamlessly from our stores to under your tree seriously with these savings why shop anywhere else hey everyone and welcome back to the rich habits podcast a top 10 business podcast on Spotify.

1:05This episode is our question and answer edition, which means you email us, you send us Instagram DMs, or you ask your questions inside of the Rich Habits Network. We take those questions and we answer them live here on the show. We love doing these episodes. You all love them as well. You guys actually starting to like these more than our normal Monday episodes, and we couldn't be more happy about it. Yes, it is awesome to see the Q &A episodes not only have the questions become more complex, but they are growing in popularity. And I think it's just great because everyone gets to be involved in what we're talking about, the answers, and all of this in-depth information that we break down each and every week.

1:44Super exciting news. Before we jump into this week's episode, we got allocation for the Rich Habits Network to invest in SpaceX. As you all know, by joining the Rich Habits Network, not only are you able to get exclusive access to myself and Robert, we have these weekly live streams, we have six hours worth of video coursework. There's all these cool perks that come with joining the Rich Habits Network, but one that we're specifically excited about is we get to share investment opportunities that come across our desk with all of our listeners. Just last week, we were able to share an exclusive opportunity to invest into SpaceX.

2:17I think, Robert, there was 10 or 12 people that invested into SpaceX from inside the Rich Habits Network through this opportunity. About a quarter million dollars was invested from the Rich Habits Network, you know, community members into SpaceX. They got the stock. It's a whole thing now. So it just goes to show like, we have some really cool stuff that we're working on. And we try so hard to share and give you guys the best opportunities possible by being a part of the Rich Habits Network. And by joining us, not only will you have opportunities like that again in the future, but again, you can ask us questions during these live streams we host every single week.

2:47You can ask us questions directly on the platform. You can leave questions. You can network with others. Oh, Robert, we also gave a pair of AirPod 4s away to someone that paid off their credit card debt. I mean, we're doing all we can to support our community members, get them excited about building wealth. And I couldn't be more happy as to where the Rich Habits Network stands today. Yeah, it's definitely one of my favorite things I've ever been part of and built. And so the cool part is, is looking forward to a year from now. You know, the Rich Habits podcast is a top 10 podcast. The network is growing so, so quickly.

3:21The responses we're getting really speaks volumes to the effort we're making and the information we're providing. And, you know, as educators, I just love it every day because I feel like we're giving our community that edge that they want to be able to really crush it in life, business, and in their portfolio. So it's really exciting for me each and every day to be able to do the research and do the work with you and build this awesome community. So I'm really excited for the future. So before we get in, I want to give a quick heads up that time may be running out to lock in the 6.6 % yield at public.com.

3:57Right now, bond yields are at their highest level since 2009, and you can take advantage with a bond account on public. But here's the thing. The Fed has officially begun cutting rates, and there will probably be more rate cuts this year and into 2025. Now, the good news is that with a bond account, you can potentially lock in a 6.6 % yield until 2028. And when the Fed lowers interest rates further, your yield remains the same. But you must act fast to take advantage of some of the highest bond yields in years. Discover how you can lock in a 6.6 % yield until 2028. The new bond account only at public.com forward slash rich habits.

4:38And just so we're on the same page, Robert, a bond account is a self-directed brokerage account with public investing. They are a member of FINRA and SIPC. Deposits into your bond account are used to purchase a set of 10 fractional investment-grade high-yield bonds. Yield represents a monthly average that's an annualized rate of return before fees as of September 23, 2024. The yield is subject to change daily and the yield at the time of purchase may differ. All investing carries risk. This is not an investment recommendation. Be sure to visit public.com to learn more. You know, Robert, it's kind of funny.

5:09We've been talking now about the Fed cutting rates for almost three months. We've published a couple episodes about it at this point, not just as to how it will impact your portfolio, but how to now generate additional yield in your portfolio with these lower interest rates that are now happening. The Fed cut rates by 50 basis points, right? So half a percent last week. And we're seeing that all across the markets, right? We're seeing sort of the small cap Russell 2000. Some of these others indices really rally. For example, Robert, yield on T-bills now have dropped dramatically from 5.3 % to 4.6 in a matter of weeks.

5:43So we told you guys this was going to happen. We gave you the heads up and we gave you the blueprint, the playbook to follow as the Fed cuts rates, how it's going to impact your money and what to do with your money to help navigate this entire situation. Robert, what did you think about the rate cuts before we jump into the episode? Yeah, I thought it was okay. You know, we expected it to be, you know, 25 basis points. They ended up going 50. But the good thing is right now is that the market did not respond negatively. So that was a good sign that there is some help in the market because everyone has to realize that was the first rate cut in four years, which is just really, really important.

6:20And so what does that mean to the average person listening to this podcast? It means cheaper credit card bills, cheaper interest rates if you're looking to buy a house. So the mortgage rates should come down and are already coming down. So it is a good sign for the market as long as the reaction to it is positive and we don't see us turning into a recession right out of the gate. So I'm excited for the weeks coming ahead. But I just want everyone to understand I believe we will still see volatility over the next 40 days leading up to the election. just because that's the nature of the beast. And that is why, Austin, it's so important how each and every week we break these things down for everyone and we just don't employ a set it and forget it strategy in our education because there's so much happening in these markets right now and you have to be on top of the changes.

7:06What is gonna affect the markets? Where are the markets going? And so this is so important and I love this conversation because of that, of just giving people that window of a heads up so they know how to react rather than having a panic reaction when the markets change. Robert and I published a very detailed newsletter last Thursday after the Fed cut rates. It included a ton of charts, data, historical trends, everything in between. We will link that newsletter, the Rich Habits newsletter, in the show notes below if you want to read that. It goes into depth as to what the Fed did, why they did it, what they're looking for, what could happen in the future, how it might impact your portfolio, all that stuff.

7:46So definitely go check that out in the link in the show notes below. Now, our first question comes from Kenneth T. Kenneth says, Hey Austin and Robert, I'm 59 and I'm a late starter to investing. I've only got$140 ,000 in an employer IRA. I've got$80 ,000 in my public.com brokerage account. I have no debt, but I am making regular deposits into this IRA and I'm investing that money into the ETFs that you all mentioned. Now, here's my question. Should I convert this IRA into a Roth IRA at my age? If so, how do I go about doing that? Robert, what do you think about this question? Yeah, I would say Kenneth should just stay put.

8:21I don't see a point. Maybe you do, so you can take it away when I'm finished. But I don't see a point of rolling it over at 59 years old. You might as well stay there. You haven't had the years and years of growth and compounding that a Roth provides tax-free. So I think you're fine leaving it into that regular brokerage account and just keep rolling and doing what you're doing. because at this point, you're not going to be able to take advantage of the Roth enough to probably make a difference. No, I totally agree. I think, Kenneth, if you had asked me this at 39, I'd have probably said, heck yeah, why not?

8:54Right. 20, 25 more years of investing of that compound growth that Robert was alluding to. And the reason why Robert and I sort of take age into consideration here is because this, once you convert a traditional IRA, a normal IRA into a Roth IRA, that conversion process means you realize the entire balance of that retirement account as income in the year that you convert it, which means you would theoretically realize this$140 ,000 balance in your IRA as income during the year of 2024 and have to pay federal income taxes on that. The reason being is because all of the money you deposited into this account, you did not have to pay taxes on.

9:35You didn't have to pay federal income taxes on, right? It was a tax-free sort of contribution. It brought down your tax bill income for the year. Hunky-dory all is well until now you're in your 50s and 60s and you want to begin taking the money out. That's when you owed the taxes. So Kenneth, I wouldn't do it. You're already old enough. If I were you, I would continue to contribute to the account as much as you possibly can. Obviously, no debt is a really good place to be in. You've got a quarter million working for you. That could double to about$500 ,000 here by let's call it 65, 66 years old because the rule of 72 tells us that an investment growing at 10 % per year doubles every seven years and we definitely can get that in the markets.

10:09Last year, the markets went up 28%. So far this year, the markets are up 20%. So I wouldn't at all feel bad about your situation of being a late bloomer. You have a lot to be excited about. Our next question comes from Stacey. Stacey says, I have a question around retirement accounts. My husband doesn't get a 401k at work and doesn't consistently contribute to his IRA. I have a 401k, but next year I'm actually going to be a partner at my law firm and that comes with the requirement to contribute to a defined contribution plan that's going to be at least$43 ,500 per year. I plan on maxing that out and I also want to max out the 401k since we don't get that benefit from my husband.

10:49After listening to some of your podcast episodes though, we're beginning to rethink this strategy. We do not have autonomy in the 401k because it's mostly target date funds. What do we do with this$23 ,000 that we would have put into the 401k, assuming we don't do that and maybe instead use it to build a bridge account or something else? For what it's worth, I have about$250 ,000 in this 401k, and I think that's a pretty good place to start. In the past, we've been heavily focused on the 401k and the 529 plans for our children, but now we're starting to think we might be behind from an early retirement perspective.

11:24Robert, I'll kick this one off. So you guys are definitely not behind. I mean, you didn't share your ages here, but having a quarter million dollars in your 401ks, that's a great place to be. You mentioned how your husband doesn't consistently contribute to his IRA. Maybe he has, though, in the past, and you have a couple, you know, 10, 20, 30 ,000 into that account, you probably are contributing yourself here. But what I think is very, very important is for us to figure out exactly how much as a household we're making and how much of that income we are investing toward retirement. If you all as a household, for example, are making$250 ,000,$300 ,000 a year, I mean, being partnered at a law firm, we're going to be making much more than that.

12:02If you are making a couple hundred thousand dollars a year and you're now contributing, call it 10, 15, 20 % every year toward these retirement accounts, you guys are in a great place, a really good spot. But if you are now making$200 ,000,$300 ,000,$400 ,000, and you're only contributing that$20 ,000, well, then I'd encourage you to contribute a little bit more. But it seems like in your example here, as you begin to make partner at this law firm, you will have to contribute$43 ,500 a year. In my experience, I would argue that contributing$44 ,000 a year essentially into retirement accounts are enough, considering you're probably in your 40s, maybe early 50s at the latest here.

12:39That's going to carry you greatly into having an awesome, well-funded nest egg for your retirement. And then that$23 ,000 that you would have said you contributed to the 401k, you can now take that money to, one, help your husband max out his IRA, and two, begin sort of contributing toward this bridge account. You said you wanted to have an early retirement, and the only way you're going to have an early retirement is if you have hundreds of thousands of dollars sitting in a normal, traditional brokerage account on public.com that can generate a healthy yield for you, bridging the gap between early 50s, mid 50s, and to when you can really touch that money at 60 years old.

13:15So that's my perspective. Yeah, I love it. I'm glad you touched on the bridge account because I think that is the key missing link here is you don't wanna have everything tied up in these 529s and the 401k. And so I think it's a really good time for you to consider that bridge account because with the 43 ,500 that's gonna be required in your defined benefit plan, I would take everything else and start putting it into the bridge account and moving some money that way because like you said with the 401k currently having those, you know, let's say less than autonomous investments in that, you know, we want to make sure that you're just making as much money with your money as you can and not all 401ks are built equally.

13:54and we just want to make sure you're not leaving a lot of money on the table by dumping everything into the 401k. So I love that breakdown, Austin, and I think the bridge account is definitely the way to go here. And great job, Stacey, on making partner. And for everyone that's thinking about submitting a question, when you have really in-depth details for what your pain points are and your questions are, always try to give us as much detail as possible. Ages are very important. How many kids do you have? Do you have multiple mortgages? How many car payments do you have alongside of it? So we have a better picture of how we can wrap a bow on this and really give you an in-depth answer.

14:32100 percent our next question comes from brawlio brawlio says is a brokerage slash bridge account treated the same as a roth ira when it comes to withdrawing your original investment amount for example if i deposited a thousand dollars and i invested it into voo and over time it turned into fifteen hundred dollars so a five hundred dollar profit am i able to now withdraw my original deposit of a thousand dollars without it being taxed i'm not withdrawing my profit just my original investment? Robert, do you want to take this one? Yeah, Braulio, great question. And a lot of people are confused on this.

15:06The answer is with this brokerage account, this bridge account that we call it, you have autonomy to do whatever you want. You can take out all the money. You can take out your initial investment because you control the account and it's not through a company and you can do whatever you want. However, there are tax implications. And Austin, I want you to break it down because we want you to understand, you know, when we're talking about building these bridge accounts, we want you to be building them for retirement, not to be in and out of, not as a trading account. I think maybe what you should think about based on this question is having a bridge account and a trading account, because what you don't want to be doing is just continually going in and out of this account and withdrawing your initial investments, just because I don't think it's a good strategy to try and build this for the long term.

15:53But I'd like to hear your thoughts, Austin, not just on the tax implications, but possibly having two accounts. I have multiple accounts because I don't ever like to draw from any of my brokerage accounts that are retirement accounts, but I'd like to hear your thoughts. So Braulio, to answer your question, you are confusing two separate actions as it relates to these accounts. So yes, you're correct. With the Roth IRA, you can withdraw your original deposits, although we don't recommend that. We want you to be investing your money, but you can withdraw your original deposit and not pay a penalty and not pay taxes, right?

16:31That's totally normal. However, what's different with the Roth IRA versus a normal bridge brokerage account over here is the withdrawal process is where things get tricky. With a brokerage account, the trading process is where things get tricky. So in a Roth IRA, you can trade or sell or buy whatever you want inside of this account, how often as you want and not pay taxes, right? It's all in this account. It's in this little bucket and any trades you make in the bucket are not taxable events. With those Roth IRAs, the only taxable events and reasons to worry about is when you take money out of the account, if that's early or whatever it might be, right?

17:06In a taxable, normal bridge account, brokerage account, like on public.com, every trade you do is a taxable event, not the withdrawal process, the trading itself, that's the taxable event. So if you're putting$1 ,000 into a public.com account, a normal brokerage account on any other platform, and you're investing that$1 ,000 into the S &P 500 VOO, and VOO over the last two, three years or whatever goes up 50%, that 50 % gain that you had, if you sell that$1 ,000 original investment that's now worth$1 ,500, you sell it all for cash, that trade was a taxable event. Not the fact that you're only going to take out$1 ,000 from the account and leave in the other$500.

17:48That doesn't matter. The fact that you made the trade, that is what matters. And because you made a$500 profit from that trade, even over a two, three, four year period of time, however long it took you, you have to pay taxes on the profits of that trade. And so the profits of that trade in this example are$500. So because you held it because the S &P doesn't go up 50 % in a year, you probably held it, let's say, for example, three or four years, that's a long term capital gain. So you're now taxed at a long term capital gain rate, which could be as high as 20%. So now you're paying$100 of taxes on that$500 of profit that you made.

18:22I think you might have misunderstood what a taxable event is in each account, right? Again, the Roth IRA, the trading doesn't matter. What matters is taking the money out. In a normal brokerage account, the trading is what matters. It doesn't matter how much you put in or pull out at any time, right? You can do that as much as you want. But when you make a trade and you make a profit in that account, what happens is you look at all the profits you made from the trade for 2024, and then you compare it to all the losses that you had made from those same trades in 2024. And if you made a net profit in the account over that period of time from a trading perspective, that's what you owe taxes on.

18:57It doesn't matter when you take it out. It doesn't matter how much you put in or whatever. Did you make a profit? Yes or no. If yes, pay taxes April of the following year. Yeah, I almost feel like great breakdown. I almost feel like we should do an entire episode to get people to understand that are at that point in their investing careers where they're doing active trading of stocks, individual stocks, because I think there's a lot of confusion between short term and long term capital gains. And a lot of people just really don't understand what their net profit really is on a trade because they're not taking into consideration these short-term capital gains, which are taxed at a higher rate than long-term capital gains.

19:37So I think maybe down the road, we should talk about doing maybe a webinar or an episode about this because it's so important for people to understand. No, I totally agree. And you asked earlier about having two accounts. I think that's not that great of an idea, especially for the average investor here. You want, to Robert's point, have a bridge account. This is a retirement account, right? You don't want to be trading and having fun in your retirement account. And And for the average person, you probably don't have enough money to be gambling on single stocks. So I don't think it's a very good idea.

20:06If you want to now invest into a single stock inside your retirement account, I think that could be a fine idea just depending on what the stock is and how well you know it. But generally speaking, for 90 % of people listening, you should have index funds in your portfolios, including your bridge account. And if you want to add some niche exposure to big tech, you have different ETFs for that. or if you really understand a company like Robert and I do and you want to invest into a single stock, that could be a good idea. Just make sure you've done your research first. Yeah, I love it. I only have the separate account for the illustration for all of our listeners and followers to not be trading in and out in your retirement account.

20:42And I practice that myself. And that is why I have two or three accounts that are just for individual stocks that I trade. But you're right. If the average person doesn't have their base built and they don't have all of this laid out, then I think it's important for them to be careful of what they're doing there. As another heads up, time may be running out to lock in this 6.6 % yield at public.com. When you invest in a bond account, you can lock in your rate until 2028. But with more potential rate cuts on the horizon, you might want to act sooner than later. Discover how you can lock in a 6.6 % yield until 2028.

21:15The new bond account only at public.com forward slash rich habits. Robert, we've been warning people about how the fact that these yields are going to come down when the Fed cuts rates, it was 7.3 % six weeks ago. Now it's down nearly an entire percentage point. So people, if you want to have that steady income, you want to have that sort of fixed income in your portfolio, public.com's bond account at 6.6 % is still a really great way to do that. Yeah, I mean, we're just here to educate and help you find the free money. We are always stretching the limits of information out there, finding you this public bond account, finding the NEOS accounts like the SPYI and the QQQI.

21:55So just keep that in mind. We are always just trying to find you the best gains and the best opportunities for your portfolios. Our next question comes from Sue. Sue says, hi, Robert Nossen. My husband and I are lucky enough to have a pretty decent income of about$230 ,000, but we're struggling to budget, especially for retirement, assuming we want that 15%. Plus our kids, 529s, we've got life insurance to pay for, personal savings for updates to the house, buying new cars, we got groceries, insurance, utilities, and activities for the kids. Everything in between is making us feel very overwhelmed.

22:29Between our mortgage, which is well within our budget at$2 ,850 a month, our groceries and child care, which costs another$2 ,600 a month, it's taking more than half of our monthly income. I should also mention that our monthly income is closer to$12 ,000 and the rest come from bonuses where we try and play catch up, but it never seems to be enough, especially with the amount that we lose in taxes. Do you have any guidance or any advice? I don't see how we could possibly put away$3 ,500 a month for retirement because that plus all the other expenses we have would mean we're living on next to nothing.

22:59We don't even have car payments. Thank you so much. Sincerely, an overwhelmed mother. Oh my gosh. Sue, I'll let Robert kick this one off. Sue, I want to say this first and foremost. First, thanks for submitting the question to the Rich Habits podcast, but secondarily, breathe. You are not alone in this plight. You guys are crushing it. You're making a lot of money, but also what is happening with inflation, cost of living and everything. Lifestyle creep is eating you alive. Life is expensive. And if you don't find a way to be able to watch your budget and get it within your means, you won't be able to save this 15 % for retirement every month because kids are expensive, homes are expensive, everything is expensive.

23:42So what do we do? First and foremost, I noticed you said you have a savings account. I would like to point out, I hope that's in a high yield savings account and not just sitting in a savings account with your bank or credit union, because at least if it's in high yield, you're going to make four or 5%. That's going to help a little bit to take the edge off of this situation. But I think you and the hubby need to sit down, do a deep dive. How can we change things? Because it always comes down to you either have an income problem or you have a spending problem or both. And it seems like in this situation, you just have a big, wonderful life with great kids.

24:17But the problem is you can't carve out that retirement savings because everything costs so much. Soccer is expensive. Travel is expensive. The cars are expensive. Insurance, food, everything that goes with it. And so I agree with you. Your house payment at$28.50 a month based on your income is within reason. But somewhere along the line, you guys are overspending and causing yourselves to be in harm's way by not being able to put away that 10 or 15 % a month. Yeah. So tactically speaking, I think I'm just going to ramble here. The first one is you mentioned activities for the kids. I don't have children, but I do listen to podcasts that the hosts do have children and they have talked about in the past how they're spending 30 40 50 000 a year on some of their kids to play sports and you know be in the clubs and do these other different like athletic things i'm not saying that you shouldn't be doing that but i just also think that you should be considering not doing that if that makes sense i don't want to tell you how to raise your kids but just if you're really stretching yourself thin because your kids activities definitely reconsider that sort of trade-off there.