Q&A: $350K Salary, Paying Rent Upfront, and Our Favorite Books

0:00This is a real good story about Bronx and his dad Ryan, Real United Airlines customers. We were returning home and one of the flight attendants asked Bronx if he wanted to see the flight deck and meet Captain Andrew. I 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. Hey everyone and welcome back to the Rich Habits Podcast, a top five business podcast on Spotify, question and answer edition.

0:38Myself and Robert might sound a little bit different, hopefully a little bit better because we have upgraded our microphone setup and the vibes are high. We're feeling good about this y 'all. Yes, we are so excited and I can't believe how good this thing sounds. I'm going to be able to read your souls from here on out. So I'm going to make sure to give you guys the best information possible as Austin and I continue to grow the Rich Habits podcast. So with that being said, let's kick off this Q &A episode with our first question from Famshier G. Famshier G asks, what are some of your favorite financial literacy books?

1:12I recently found your podcast and now I'm hooked on financial literacy, which is awesome. So glad you got to find us. So I would say my two favorite financial literacy books for anyone on sort of the spectrum of beginner to expert. The beginner side of the equation is The Little Book of Common Sense Investing by John C. Bogle. He's the guy who founded Vanguard, and we all know what Vanguard is. But it's a great book that breaks down dividends, index funds, all the easy stuff so you can go from, I know nothing about retirement, long-term investing to, wait a second, I feel pretty good about this.

1:48I can start moving in the right direction. So that's the first one. The second book that I really like is called 100 Baggers by Christopher Mayer. And that's for like the stock nerd. If you're a stock nerd like me and you like to learn about the profits and the gross margins and like the different ratios and things like that, 100 Baggers is a really great book that's going to introduce you to some of those concepts. And a couple that I'd like to add is The Richest Man in Babylon. I know, Austin, you like that one as well. I just really like it for kind of the rudimentary simplicity that the book provides.

2:19but it gives you this mindset of understanding money, finance, and just really how to do it in your life in a way that matters. So you can kind of internalize and understand your direction with finances. And then I would say the other one, since we've already discussed, think and grow rich would be the millionaire next door. I love that one because we live in a life right now in a society where everything is kind of based on this comparison-based lifestyle. And I think that that book, although written many years ago, really kind of touches on what we deal with today in modern society through social media.

2:57And I love that because it teaches people that to live within your means is very, very important to automate your investing, but also to understand not to try and keep up with the Joneses. It's not all about what you think your next door has. And just really understanding that I'm getting ready to do a tick tock on this to get people to really understand that most of the people out there with the flashy cars and the house that, you know, is the best house on the block and all of that generally are living beyond their means and their debt to income ratios are very high. And so it's a slippery, slippery slope for many people in America and around the world.

3:36And so those are the two books that I think can really help move the needle the most for people. Really good answer, Robert. So our next question comes from TJ. TJ says, I have$30 ,000 in student loan debt with interest rates ranging from three and a half percent to five percent. Should I pay down my student loans or save for a down payment on a house? Which one should I prioritize? TJ, I would say neither. I would keep paying those student loans, pay the minimum payments at that three to 5 % interest, leave it be. Because at the end of the day, right now, the markets are doing very, very well.

4:09If you take the S &P, I think at 18 or 19 % this year, QQQ, the NASDAQ is at like 47 % return for the year. So you really want that positive arbitrage going in your favor rather than into paying down these low interest debts. And then secondarily, I wouldn't get the house first, unless you're going to house hack, I wouldn't go buy a primary home. So if you really want to buy a piece of property, I would take that money that you're talking about that you save for that down payment. I would go find a duplex, a triplex, or a quadplex. I would use the new Fannie Mae loan, the 5 % loan. And what that loan is, there is no real name for it, surprisingly, is you can get a 5 % loan, 5 % down, up to$1.3 million, up to four doors.

4:55And the criteria for approval is much lower than many other conventional loans. So I would take the money, get the 5 % mortgage, 5 % down mortgage through Fannie May, buy a duplex quadplex, something like that, and house hack for that first one or two years. Then by that time, you should be ready to then go buy the primary home if you're ready or house hack again. But you're going to find that you're going to have the capital appreciation, you're going to have the depreciation, and you're going to have the tenants paying your mortgage. So it's the best first step for you moving forward on your financial journey by buying a property that cash flows rather than a primary home that's just going to tie up that down payment and your money every single month.

5:40That's what I would do. That is a really, really good answer, Robert. Now, something I want to double click on, you mentioned house hacking a couple times here. For the new listeners that might not know what house hacking is, can you kind of walk through maybe with even some rough numbers of some rough ideas of mortgages and rents, collected, stuff like that. What house hacking is and why it's so important for people like TJ who are trying to buy their first house, why we recommend to not go out and buy the primary home, but instead to go house hack. Just kind of give us the play-by-play there would be great.

6:10Sure. I would love to. I think it's one of the most important first steps for any person looking to build wealth and that is interested in real estate. So the simplest form of house hacking is instead of buying a single family home. Let's say you go buy a$300 ,000 property and you've got to put 20 % down. So you've got$60 ,000 that's going to be tied up. Instead of doing that, go find yourself a duplex and it could be in the same price range. It might be a little more, but the key to it is you're going to be able to use one of these loan programs. So you're taking less money out of pocket, out of the gate.

6:44And let's say in that area, you buy the duplex and there it's a duplex with two, two bedroom, two bath units, you're going to rent out the one unit. And let's say that that unit probably rents for 1400 a month, maybe 1800 a month. So that right there is going to eat away at let's say 70 to 80 % of your mortgage and your PMI per month, leaving you with a much smaller chunk that you have to cover. So not only is that person paying most of your mortgage, but also you get to enjoy the depreciation, the capital appreciation, and the fact that you're spending so much less per month for your living situation.

7:23So that's the simplest way to look at house hacking is buying multiple doors, living in one unit and letting the rest of the units pay the mortgage and the expenses. And to also now fast forward what that might look like over three, five, seven years, you know, Robert, after you live in this house for a couple of years, you've done the house hacking thing, and you're like, wait a second, maybe I'm ready to go buy that primary house, start a family, move in that different direction. You now have two units, two doors, essentially, to your point that you rent out for$1 ,500,$1 ,700,$1 ,800 per month.

7:57Wow, that's$3 ,600 that you now have in rental income. Now, sure, you still have to pay out the mortgage and the PMI and stuff like that, but that is now cash flow into your pocket that you wouldn't have had before if, to Robert's point, you just went out and bought the primary home and kind of did the normal everyday thing, right? Yeah. One of my favorite tips, and I did a TikTok on this a while back and it did really well, is telling people that are on the verge of getting married, say you just got engaged and your wedding's going to be a year, year and a half out, is for each person in this relationship to go use, say, an FHA loan or one of these 5 % Fannie Mae loans and go buy their own properties.

8:38So let's say the rules state you have to live in the property for one year and you haven't moved in yet together as a couple because you're not married. If you each go buy a duplex, triplex, or fourplex, and then you take the benefits and you double that because you're each owning this property, you're each getting the mortgage paid for. Then imagine that a year later you move in together and you buy your primary home. Then you have four, six, eight doors, all cash flowing for you. Then your primary home is essentially going to be free for you monthly because you've laid the seed and the foundation to creating this future wealth.

9:14Most people rush right in as soon as they start making money or as soon as they're going to get married, they rush right in and buy a primary home. And then unfortunately, once you combine forces and you're married, the banks and the government look at you as one entity. so you lose that right to explore and take advantage of some of these strategies. So TJ, I know that was a super long-winded answer here for you, but I think it's really important that we dig deep into these specific answers because there's a lot of people who are probably in the same situation, right? They might have some student loans, they might have some low interest debt hanging around and they're thinking, well, how do I think about the debt in pair with buying real estate?

9:55And so hopefully this house hacking example inspires some of you to go out and purchase a duplex or a triplex or even a quadplex. Really good question, TJ. So our next question comes from Jessica G. Jessica says, my husband and I are 35 and we are both high income W-2 earners. Together, we make around$350 ,000 per year. We've both been maxing out our 401ks for a couple of years. And as you all have said a million times, we are not performing as well as the market. It's starting to get frustrating. Each of us have around$250 ,000 in our 401ks, so about$500 ,000 total. The question is, should we roll over this money out of our 401ks into traditional IRAs where we have more autonomy over our investments?

10:40All right, Jessica, so really good question. I wouldn't be so hasty if you said like, yeah, for the last year or two, we've been underperforming the market because we kind of had some weird markets, right? 2022 was a massive sell-off year. 2023 was a big rebound. really dominated by the Magnificent Seven and the S &P 500, right? So even if you were in some of these different maybe index funds, I could understand if there was some underperformance. But you said that you've been underperforming for years now. And that kind of scares me. The only other thing before I give you my answer, and this sort of goes back to our interview with iShares and it's, you know, risk adjusted returns and sort of what that looks like for every individual.

11:21But you guys are 35 years old. And if it were me, I would want to be as invested and aggressively moving up and down with the markets as possible. And so just knowing that you haven't seen those awesome ups and obviously the downs as well is sort of alarming. So what would I do? I definitely would consider rolling over the existing 401k into a traditional IRA so there is no taxable event. So you can have the autonomy that it seems like you're looking for, Jessica, over your retirement accounts. Obviously, we talk about the index funds, VOO, VGT, VTI, QQQ, SPY, things of that nature. However, I would imagine as high income earners, you all are probably excited about maxing out the 401k every year considering it's going to save you combined about$10 ,000 to$12 ,000 in taxes on an annualized basis.

12:13So I wonder if there's like a happy medium where maybe you can roll over into the traditional IRA and have autonomy of your existing half a million dollars while also investing new money into the 401k, allowing you to bring down your taxable income on an annualized basis. That might also help. But again, it's like how much are you underperforming in relation to, you know, there's so many different ways to think about this. So Robert, do you have a perspective? BJ's Wholesale Club makes holiday hosting so easy. We called in the ultimate host to talk about it. Mrs. Claus here. You think Santa has it tough delivering all over the world?

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13:24I keep what works and send back the rest. It's so easy. Make style easy. Get started today at stitchfix.com slash Spotify. That's stitchfix.com slash Spotify. Yeah, without us having all of the information, I think you're on the right track. But I'm going to take a different approach. I don't hear the Roth IRA mentioned anywhere in here. And so I'm a little confused on why we wouldn't integrate the Roth IRA into this situation and then maybe look down the road to get into that backdoor Roth IRA. Because right now, yes, the tax savings are there by maxing out the 401k. But then like you touched on, there's just so much gains that are being left on the table here with this underperformance.

14:08So I think we need to just really look at what can be the best strategy for high earners like this in this situation. And without more information, it's tough to really call out our thoughts as far as the best way to do this. But I think you covered it pretty well of, you know, what to do. I personally would probably back off on the 401k a little bit, get the Roth IRAs up and running and get them maxed out because then you have autonomy and you can get much higher gains than you would in the 401k. 401k, that's probably where I'd start just to get on a better track and not leave so much money on the table.

14:41And I think the last thing I want to suggest to Jessica here is go to your HR department and be like, hey, listen, I'm underperforming the markets in my 401k. Maybe I don't have full information as to what I'm able to invest in. Here's the options you gave me. They've all underperformed the markets, right? Like what should we do? Maybe there's a way that you could even not maybe not cause an uproar at your employer, right? But like, if enough of y 'all get together and say, listen, you guys are giving us shitty options, maybe that would be the kick in the butt for your employer to say, okay, well, let's change vendors, right?

15:15Let's go away from X vendor and instead try Y vendor because they have better options for our employees, right? So maybe that's also a way to think about this as well. But regardless, really good question, Jessica. And I hope we added enough color here. I know we only have limited information, but best of luck. So our next question comes from Tim S. Tim says, I've been looking into diversifying my portfolio with international ETFs like EWY, but I've read something called PFIC tax. What is this tax and what are your thoughts on diversifying into international ETFs versus just sticking with the domestic options?

15:51So Tim, when we saw this question, Robert was vaguely familiar. I'd never heard of it. So I looked this up on Investopedia and what PFIC stands for is Passive Foreign Investment Company. And what I'm seeing here means that if the company is earning at least 75 % of their gross income in a passive manner, right, not derived from regular business operations, think maybe real estate or like, I don't know, crypto mining or something, and at least 50 % of the company's assets are investments which produce income in the form of earned interest, dividends, or capital gains, then it is in fact a PFIC company.

16:31Well, what does that mean for you and why do the taxes matter? So what I understand is in 1986, the IRS passed a new law that essentially closed a tax loophole, which some US taxpayers were using to shelter offshore investments from taxation through these PFIC companies. I'm not seeing that it is the case today. I would imagine if you are earning income from these investments, you got to pay taxes on them. So I don't think this is something to really shy away from, right? If you see this, you get kind of spooked. I don't think that that really matters. Maybe you have to file a different form with the IRS, ask your accountant about the money you received from foreign entities.

17:10I'm sure it's all very like fleshed out now, right? This was like 40 years ago, but it wouldn't really like spook me. If you want to invest into a international ETF, like be my guest. I'm not doing that. I always like to bet on the United States. I think there's a lot more innovation here than in other countries, but that's just my humble opinion. So my take on this is I'm not sure why you like EWY. That can come at a later date or email us or DM us and explain that investment and why you like that one. I do invest in companies. I've got an investment right now that's doing really well in South Africa.

17:42And I will be required to pay taxes on those dollars as it's migrated back to the United States as income, even though it is in an LLC in that country. So definitely you have to look at that. But I would also open kind of your thoughts up to other international funds that maybe could do better like AIQ or maybe VT or something like that. Something that has the international flavor and the upside of international markets without putting yourself kind of in that place where you don't understand the markets as well. And looking at EWI, I just don't see the returns and the upside. So maybe there's something you know that we don't see, but definitely make sure you follow the rules and make sure that the net ROI is worth it for the additional work you have to do when investing in international markets.

18:33Well, Tim here used the word diversifying into international markets. And we talk about, Robert a lot, the idea of opportunity cost, right? Tim, by investing$10 ,000 into these international markets, you are now missing out on$10 ,000 you could have had invested into the NASDAQ, which is up 40 % this year, right? So just understand and kind of weigh your options there. It's like you're diversifying into international markets because you might think that there's a crash coming. And so you want to like keep funds or like, whatever's going on in your head, make sure that you are taking into account opportunity cost.

19:07That's super, super important. Love it. Great question. But at the end of the day, it's always about optimizing your money and making sure you're not over diversifying into investments that may not end up having the best returns for you. Really good question, Tim. So our next question comes from Ryan. Ryan says, I'm from San Diego. I'm self-employed. I max out the 401k. I do the IRA. I do profit sharing through my work. I invest in Fundrise. I have this all going on with E-Trade and I do that every week. I focus on time in the market and not timing the market like you all suggest. Round of applause for Ryan.

19:44Now here's his question. I'll have around$10 ,000 to invest at the end of the year. What would you invest in if you were me? So Ryan, before I get into that, just kind of confused though. You said you're self-employed, but you're also maxed out the 401k. Maybe it's a solo 401k, but then you also said profit sharing at work. So I'm going to answer the question as if you are a full-time employee somewhere, and you also have a side hustle, which is the self-employed section of this question. So let's just try that. So Rocket Enroll with the 401k, that's great. I'm assuming you have autonomy over that.

20:13You're really happy with how the returns have been every year. You're feeling good. IRA stuff is great. Roth IRA, maxing that out. $7 ,000 next year is going to be really exciting. So maybe even carve out 7 ,000 of this 10 ,000. So when January 1 hits, you can immediately deposit that into your Roth IRA and have that completely invested throughout all of 2024. I would also, I did not hear anything about crypto inside of this question. We like crypto. We want to have a little bit of taste of crypto. That might be 5, 10, 15 % of your total invested assets. For me, it's a little bit more. For Robert, it's a little bit more, but we're kind of nerds and we like it a lot.

20:50But for the average person, I think 5, 15%, somewhere in that range is really, really healthy. But Robert, I'll let you take a stab at this as well. Yeah, that was a great long-winded answer. And for me, it's all about crypto. Now, not knowing Ryan's age, I don't think he provided that. But yeah, for me, I would say I would get as much of that depending on your risk tolerance into crypto, because that is one of the key pieces you're missing in your portfolio. And you need to have diversification into the cryptocurrency space. I just think it's just really not a good thing for anyone because the upside risk far outweighs the downside risk in crypto moving forward.

21:30Now that we're getting to legislation, we're getting to full adoption. Things are moving forward with all the largest funds and companies in the world and agencies and banks and governments. I just think that it's a crime not to have a portion of your portfolio in crypto. And depending on your age, I think you could go 5%, 10%, like Austin said. We're higher, but we also have a very large base in all of our other investment strategies and portfolios. So you just have to look at it that way. But definitely for me, it's crypto, crypto, crypto. That's what I would do. And stick with the basics. You could literally start with Bitcoin, Ethereum, Chainlink, XRP, maybe some quant, and just stick with the basics of the ones that have the most adoption and the biggest, you know, long-term upside through safety.

22:17Don't start YOLOing into a bunch of meme coins. That's not a good strategy. And Ryan, if you are kind of intimidated about opening up that Coinbase account or opening up one of these, you know, crypto accounts to get a little bit of diversification into those assets, you can probably go to your Fidelity and you can type in B-E-T-H, like the name Beth, and that's going to be the ProShares Bitcoin and Ethereum market cap weighted strategy ETF. Essentially, by having some money in that, you'll be able to see the upside of both Bitcoin and Ethereum throughout the next several years in your investment portfolio.

22:49It is a really great alternative for those who don't want to actually have custody of the cryptocurrencies. Really good question, Ryan. Now, this question is brought to you by Grit Capital, the best finance newsletter. If you haven't started reading it yet, you get all the finance knowledge you need in just five minutes a day. It's full of memes. They make it personable, headline news, everything you need to know to stay current on all financial events. Go check out the link in our show notes below or just go to gritcap.io and drop in your email address and get smarter five minutes per day. Now this question comes from Nate M and it's more of a suggestion than a question, Robert, and I actually really agree with him here.

23:25He says, can you all please address the myth of paying rent in advance? It's making rounds again on social media and it's upsetting me. The money should not be sitting in the landlord's high-yield savings account earning interest at 5.5%, but instead should be in the renter's high-yield savings account earning interest at 5.5%. Even if it's just an extra$10 per month, compounded over 10 years if invested is a serious chunk of change. Nate, I'm right here with you, man. I've actually not heard of this myth of paying rent in advance. It's not something I guess I would encourage anyone to do because he's completely right.

24:00Time value of money, money in your possession and money that's being put into a high yield savings account, earning eight, 10, 15,$20 a month extra because you are setting it aside and not paying it to your landlord early. That money is extra money, right? You can take that and you can go invest it. And like we said, we're up 40 % this year in the NASDAQ, 20 % in the S &P 500, right? That is compound interest that, you know, Robert says it all the time. If your money does not have velocity, it's dead money. And by having your money put in these high yield savings accounts and earning money for you versus earning more money for your landlord, right?

24:35Who wants to do that? It just, it makes so much sense not to pay extra on your rents and pay all your rent in advance for the year. But Robert, you've been a landlord before. What are your thoughts on this sort of idea? I've got a deeper, deeper plan for this and it should be done on the blockchain and very soon. I think it's crazy that these landlords and me being one of them get these deposits and we can do whatever we want with it as long as we can return it when the term is up. So, you know, technically those deposits should be put somewhere. And in my opinion, there should be an app and a platform built.