Q&A: $500K in Savings, Defining High Interest Debt, & the Best Way to DCA

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0:30You're about to make a trade. Which you do you listen to? Is it get optioning those options? Or let's do a little research. Learn more at finra.org slash trade smart. Hey, everyone. Welcome back to the Rich Habits Podcast, question and answer edition. Before we get started, I want to remind everyone we are hosting a webinar, a live webinar where Robert and I are going to be teaching you guys more about startup investing. We've had a lot of people say, hey guys, I've been doing this stuff now for a year or even longer, and I've got my base built. I've got the 50 to 100 ,000. I've got hundreds of thousands of dollars invested into the index funds you talk about.

1:10I'm ready to diversify. I've already got some crypto. I've got some real estate, but what else is there for me? And so for our aggressive investors, people who want to take a little bit of risk and begin to diversify into not just publicly traded companies, but large privately traded companies, think SpaceX, Figure AI, OpenAI, Canva, companies of this nature, we're going to be hosting a webinar on August 8 at 4 p.m. Eastern time to show you exactly how you can do this. We're going to break down what the process is like, all the different things that we'll look out for behind the scenes, some tax considerations, as well as how you guys can invest alongside Robert and I into massive privately held companies across a bunch of different sectors.

1:54Robert, I just got an offer to invest into this insane defense company. I don't know if you saw, but Chamath Palahapitiya just started writing about the company on his sub stack two days ago. But long story short, the round was led by Andreessen Horowitz, one of the largest, most respected VCs in the country, in the world even. And so you get these opportunities all the time. And so what I'm saying is we want to open the opportunity for you guys to invest in those Series A, Series B rounds and really see all that upside potential up until the IPO as well. Yeah, and it's really going to be a lot of fun for us because, like you said, we're pulling back the curtain for the average person that follows along and watches the podcast and help you better understand the risks involved, help you understand the upsides involved and just everything in between.

2:42So this is going to be a really great webinar. I've been at venture investing for over 20 years. I've had some massive wins, some massive misses. we've all talked about the Uber story, but it's just been a great run for me in this sector and Austin as well. And we're just really excited to share it all with you, but also share our deal flow because once you get those at bats in through this sector of investing and you really understand the terms, the deal flow, how the deals function, it'll really help you make better decisions in the future, whether you invest alongside of us or go out on your own.

3:20So I'm super excited about this webinar. So join us. There's going to be a link in the description below to register for the webinar. Join us on August 8th at 4 p.m. Eastern time. And now let's take a moment to hear from this episode. SponsorPublic.com. If you trade options, you've got to ask yourself, why wouldn't you choose an options trading platform that puts investors first? At Public.com, there are no commissions or per contract fees. And more importantly, it's the only platform where you can earn a rebate on every single contract traded. That means you save on your options trading costs and keep more of your capital in play.

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4:34He opened up these accounts for us about six years ago and we maxed them out for the last four years in a row. After that, we made a job change and had a big transition, but now we are ready to max them out again each year. I've been listening to your podcast and I know that I want to have a Roth IRA set up for myself instead of a traditional. So here's my question. Should I convert my traditional into a Roth, pay the taxes on it now, or leave it as a traditional IRA and then just start a new Roth IRA from scratch in a different account? Robert, what do you think about this question? I think it's a great question, Nicole.

5:09Thank you for submitting. It's a little tough because we have incomplete information. We don't know how much is in Nicole's current traditional. Definitely you need the Roth. Now the question comes down to, do you get rid of the traditional, pay the tax hit now, and then you're scot-free for the rest of your life? That's probably what I would do. But without knowing how much is in the traditional, it's a little bit tough to tell, but either way you need the Roth. So for me, it's get rid of the traditional, open the Roth, convert everything over, or start the new Roth, keep what's in the traditional, don't move it, But you have to understand the key component of this equation.

5:45And that is, we don't know what the tax man is going to do over the next 20, 25 years as you head into retirement. And you have to realize that the more money you have that is not tax-free in retirement, the more you're going to get dinged later on. So we don't like to kick the can down the road here at the Rich Habits Podcast. We like to get it out of the way so we know exactly what we're going to have in retirement. So that's my take on this. I like that answer, Robert. I'm going to try and use some context clues. They said that they opened these accounts about six years ago and they've been maxing them out for four years in a row, which means they should have between maybe$30 ,000 to$35 ,000 in each account.

6:22So if you do convert that and you are a top 25 % taxpayer, which means your adjusted gross incomes between$85 ,000 and$150 ,000 a year, your effective tax rate is about 17%. So let's round that up to 20 % just in case. And then let's say they've got, call it$30 ,000,$35 ,000 in these accounts. We're talking about a$6 ,000 to$7 ,000 tax liability whenever they convert these from a traditional to a Roth. So I agree with Robert entirely as these numbers are small, right? $6 ,000 paid for now. I mean, you're pretty much just saying like, all right, I'm going to sit out for one year, right? $6 ,000,$7 ,000.

6:59I'm going to sit on the sidelines for a year to make sure that the next 25 years, I've got tax-free growth and tax-free income in retirement. So that's where my head's at. I 100 % would convert the existing traditional into a Roth and then max out the Roth IRAs every single year in perpetuity until you retire, hopefully with millions of dollars. I love it. Yeah. I think that's the way to go. And it's a great question. And I just am really happy that everyone is thinking more long-term now. When we started this podcast a year and a half ago, it seemed like so many people were lost and didn't have a strategy.

7:34And over time, it seems like everyone is coming in, guns blazing, knowing what to do. And it's really all about optimizing. And we're here to educate you in a way to where you can optimize your gains now and for the future. So this is a great question. Our next question comes from Christopher from Santa Barbara. Christopher says, I'm 43. I live in Santa Barbara and I work in real estate. I bring home anywhere between$350 ,000 to$500 ,000 a year. I have$40 ,000 invested into the markets. I have half a million dollars sitting in a money market account earning 5 % because I want to use this money to buy a house.

8:11However, it feels like the real estate market is kind of high right now and I don't want to buy at the top of the market. So my question is this, do I use the money to go buy a house, which feels like it's the top of the market, or do I use the money to build my$40 ,000 nest egg into something much greater? And if I do that, am I also buying the top of the stock market? How do I deploy this capital? Want to kick this one off, Robert? Yeah, Christopher, great question. You've done some of the hard work by getting money put away and you're a high earner. That helps a lot. I don't like the fact that at this point in your financial career, you only have $40 ,000 invested in the market.

8:52And I also don't like the fact that you're thinking about taking your whole$500 ,000 and using that nest egg to purchase a home, whether you're going to house hack or not. And I don't think you're thinking of house hacking. So for me, it's a no. I think it's more of take the 500, leave a hundred in if you want a nest egg for emergencies, like your emergency fund of the 400, I would take 200, get it into the markets. And yes, it's okay. If you're buying at the top of the markets right now, because you can dollar cost average in over time with the 200K, then I would put 200K somewhere else better to be able to maximize your gains over the money market.

9:33That could be a basket of index funds. It could be treasury bills. It could be a high yield savings account on public.com. But I hate seeing that much money sitting and then you converting it from there to being dead money in one single property. I think there's far better ways to utilize what you do have to diversify your portfolios overall, build your base, and set you up better for your financial future. So you're saying take 200 of that, dollar cost average it into the index funds and ETFs we talk about. So let's call it, I don't know, 50 ,000 a month, right? $10 ,000 a week if you want, maybe 20 if you want to get aggressive there.

10:12And then take the other 200 that's in the money market account that he's saving to buy a house with. You want to invest that money? I think some of it should be invested because you don't know when you're going to buy a house. And if you're going to buy a house, a lot of people say, well, I've got this 200K sitting because I'm going to buy a house. Two years goes by, that 200 could have turned into 250, 280, 300. They still haven't bought a house and the money's still parked making no money. Now, at least in this instance, it's making whatever it's making in the money market, but I think there's better places to put it.

10:46And if he wants to leave the 200 in the money market and making the 5%, I'm okay, but I don't like the fact of taking all 500 and putting it into one property. I think it's a death sentence for growth because unless you're in a very, very explosive market, the average return you're going to get in capital appreciation in most markets is 4 % or 5 % and you can crush it way better with a basket of index funds over time of two, three, four years than you would leaving it sit at 4 % or investing it into the property. Yeah. Honestly, my take on this is the guy makes 350 to 500K a year. He has 40 ,000 invested in the markets.

11:25Take all 500 of that, invest in the markets, and then start saving$100 ,000,$200 ,000 a year from your earnings that you make because you make a lot of money. Take half your income, crime me a river. You're making half a million dollars, dude. Go take 200K of that for the next two years, but now you have$400 ,000, two years have gone by, which means that if we were at the top of the market, it's crashed by now, if that's what you think that's going on in Santa Barbara. If we're not at the top and we just keep going up, then that's another problem you have here, but that's your prerogative, Chris.

11:52That's what I would do. Dude, I'm seeing 43 with 40K invested making this much money makes no sense to me. This guy needs to start investing a lot more aggressively, but I also want him to know that it's okay to live on less than you make. That's obviously not been something, assuming he's been making this money for a while, something that he's not been doing considering how little he has invested with making so much money. So maybe Chris, I'd encourage you to live on$200 ,000,$250 ,000 a year. I know it's expensive in Santa Barbara, but then also take the extra$150 ,000 to$250 ,000 a year and save that for a house.

12:27And then you do that for one or two years, you now have the same amount of money ready and you can go out and buy the house of your dreams. Yeah, I love it. The bottom line is you're making way too much money, Christopher, to not have a much, much bigger base of money that's in the markets. And that could be analysis paralysis. It could be just whatever it is that you're very risk averse, but you need to get more exposure in the markets. You should have some crypto at your age. You should have maybe some REITs and just some of these other tools that we have in the tool shed to give you diversification, but better earnings than 5%.

13:01Our next question comes from Maddie F. Maddie says, hey guys, I've been listening to your podcast and I love every single episode. In one of your episodes, you talk about prioritizing paying off high interest debt. But here's the question. Where do you draw the line in deciding what rate is actually high interest? For example, my car loan has an interest rate of 7.8 % and I have three and a half years to go on it. So I'm not sure if I should pay that off sooner and avoid paying high interest if this is even considered high interest. So what are your thoughts? I'll take a stab at this one, Robert.

13:31In my brain, I've always thought high interest debt is debt that is higher than what the stock market, generally speaking, has performed against over a long history, right? So think 8%, 10%, 12%. Credit cards, for example, are high interest debt. Most personal loans are high interest debt. Some HELOCs can be high interest debt. And so if it's over that like 8%, 10%, 12%, it's definitely high interest debt. You're right on the edge there, Matty, which means that I would probably want to pay it off? In my brain, if I can take a car payment that is costing me 8 % a year, 7.8%, 8 % a year, and I can get rid of that car payment, and then I can go put it in the markets and make the same 8 % per year after inflation, then I'm happy.

14:17And so if I were you, Matty, I'd really consider paying it off. I don't know how big the payment is here. And certainly there's a lot more factors. Are you already investing? Do you have a Roth IRA maxed out for the year? Do you have your emergency fund. This is not scary high interest debt. It's not something you need to feel like your hair is on fire. You need to go pay it off. It's on a credit card at 33%. So you can kind of take a deep breath. But another example of this is like my girlfriend, right? She's got 20 something thousand invested in the markets. She has a nice$10 ,000 emergency fund, but she has student loans that are at like five and a half, 6%.

14:47So she prioritized investing because she knows that the index funds go eight, 10, 12 % per year compared to this six-ish percent student loan. And so, Matty, I'm sure there's much more to your financial picture we're not seeing, but I do want to encourage you that if you are at this 7.88%, it should be something you want to pay off, not something you want to keep around for a long time. Yeah, I agree. I think you're right on the cusp, Matty, with this being considered high interest. And I think it can go either way. Again, with us not knowing your total financial picture, I would say chip away at it, get it paid off, and then pretend it's not paid off and take that same amount of money and get it into the markets and pretend you have that payment because consistency in investing is key.

15:31And that's what I would do. But again, we have incomplete information, but that's my opinion based on what's provided. So Robert, what would be a scenario in your opinion that Maddie doesn't need to pay off the car early? I think a consideration that she doesn't need to pay the car off early would be if she has her budget in order, she has a good mix of index funds that we talk about in her Roth IRA already, she is dedicating money every single month to maybe her Roth, her crypto accounts, and potentially maybe some REITs or some other high performing investment. Then I would say just keep it business as usual at the 7.79%.

16:13But if she's just getting started, doesn't have a nest egg, doesn't have all of these things in place, it might be better to just knock this out at first. Totally agree. And Robert, I think it's funny because a lot of people, especially Dave Ramsey, are focused on net worth, net worth, net worth, right? It's like if I bought in cash, I had no debt, but then I went out and spent$500 ,000 on a single family home and I lived in it, my net worth would be$500 ,000. But if I lost my job, sure, I don't have a mortgage that I have to worry about, but I'm not making any money because all 500 ,000 of that's invested into owning this house.

16:51Where if I had then chose to rent for call it$1 ,500,$2 ,000 a month, I didn't add anything to my net worth by doing that. But by taking that same 500 ,000 and investing it into the markets, that's going to produce income, right? The S &P is up 16 % year to date. So now at that same rate, I mean, year to date, we're talking about like 70 grand on that half a million dollar investment. So it's$70 ,000 of portfolio income. And so like, I just want people to understand there's a difference between chipping away at debt to increase your net worth versus chipping away at debt because you think that it will be better over a long term to hit your portfolio income goals.

17:27That's why I carry a low interest mortgage. I've got a 3 % mortgage on my rental house. I think it's like$240 ,000 on that mortgage. I could go 240 ,000 invested. The S &P is already up 16 % this year. It was up 20 something percent last year. And so that's the route I'm choosing to take because I prefer income over the idea of my net worth is going to go up. So it really, again, Matt, it comes down to where you are in your sort of investing journey and what matters most to you. If you're Dave Ramsey, net worth matters most. He wants everyone to be net worth millionaires. Net worth is great. I want people to make passive income.

18:06I want your portfolio to grow while you sleep. I want you to be doing these things so you can retire early. It'd be cool to say you're a net worth millionaire because you have your house paid off, but if you're not making an income, you can't retire. And my end goal, and I think Robert would agree with me, is I want to retire early. I want to be financially free, and I want my investments to pay for my lifestyle. Yeah. I mean, Dave Ramsey has some good stuff, but for the most part, his whole debt analysis of how he explains it to the younger audience is wrong. The math just doesn't math. And at the end of the day, I think the easiest way for everyone listening and following along to understand is whenever you can have positive arbitrage on your money going into your pocket instead of someone else's, that is the key.

18:48If you can borrow money for less than what you can make with it, you always borrow money. That's why the wealthiest people on earth don't pay cash for their homes, even though they have millions of dollars. They use other people's money because they can borrow it for less than what they can make with their own money. That is the key to building wealth. It's that simple. Borrow when you can and carry debt when you can. If it's low interest debt, we don't want you to carry high interest debt. Obviously, that's not good for anyone. But in this instance, Austin, that's a great takeaway. And I love the Dave Ramsey reference because I think he gets it wrong in a lot of ways here because you want to leverage debt to build wealth as long as you're making more with your money than what you can borrow it for.

19:33And I think just last comment here about this is like the very silliest thing someone can do. Credit card debt is a good example of this. Auto loan debt is a great example of this. Not exactly student loan debt, not exactly a mortgage, but taking out debt to purchase a depreciating asset. Right. That is the most terrible idea anyone can take. Right. Because, you know, to your point, Robert, if someone could borrow at five percent and they could borrow half a million, a million dollars, go buy a business that they can then make sure it cashed. flows and they can work hard in the business to grow its profits every year.

20:06And then to your point, they're borrowing at 5 % to go make 10, 15, 20 % on their money from a cashflow perspective. You're right. That is how wealth is built. But then those same people say, oh, I'm going to go borrow half a million dollars. Maybe not that much, but maybe 80 ,000,$100 ,000 to go buy the new Escalade or the new Porsche or whatever it might be. They can't afford it. And then in five years, that asset, quote unquote, has gone down in value by 50%. And so it's a mindset shift, It's like we want people to know and understand that debt can be a tool for wealth building, but a lot of people unfortunately use it in the wrong ways in a very irresponsible manner.

20:44And Maddie, we applaud you. You're asking all the right questions. And we hope that we kind of laid this out for you in a way that you understand where high interest debt, you're right there on the teeter of it. And for someone who maybe has their base built, maybe it's time to pay it off. If you have no money invested or saved, forget about it. Drive your car to work every day to make money and then get money saved and invested, right? It's not always black and white. We talk about that all the time. There's a lot of gray area with money and personal finance because personal finance is personal.

21:10Yeah. And everyone's mousetrap is different. And that's why we could spend hours just talking about this. It's like the difference between Dave Ramsey saying you should go buy a car in cash, go get it so you have no payment. It's the biggest depreciating asset besides a boat you're ever going to buy, why would you tie up your cash? Unless you're going to go buy a used car and drive it for 10 years, you should never pay cash for a car. And in fact, you shouldn't even buy a car. You should lease it and just trade out of them every two or three or four years because let the dealership worry about the depreciation so you don't have to.

21:46We could go on for hours on this one. So let's go on to our next question. Our next question comes from Blaine A. Blaine says, I've got$120 ,000 sitting in a high yield savings account. This is split between my emergency fund of$35 ,000 and a savings account of$85 ,000. With that being said, I'm looking to take$80 ,000 of that$85 ,000 and put it into the funds I hear you guys talk about on the podcast. VOO, QQQ, VGT, VTI, and SPYI. What should the allocation look like? So Robert, This is a really good question because we talk about how important it is to have your base built, right? To have as much money as possible invested into index funds that go up into the right over time.

22:28They've gone up into the right the last 90 years, right? We want to ride that wave. But we'd never really break down for people the percent allocation into sort of each one of those ETFs. So I'm going to take a stab at it first. 50 or 60 % of the funds there should be in the S &P 500. It is a index that's been around for over 90 years. Since inception, it's averaged 11.8%. 8%. Returns every single year, right? You want to have a large chunk of your base invested into the S &P 500. So let's call it 50, 60 % into VOO. Let's call another 20 % invested into QQQ. The NASDAQ, it's full of technology companies.

23:06It's more volatile than the S &P 500 because of that, but it is crushing it so far this year, last year, and it's done very well the last couple of decades. VGT, maybe another 10 or 15%. VTI, maybe another 10 or 15%. SPYI, maybe another 10 or 15%. You can really play around with these weightings however you want. But I think people need to understand the most important part and the point I'm trying to make is that the bulk of this base should be invested into the 500 largest, most profitable companies in the United States, It's the S &P 500. Yeah, I think you broke it down really well. I did this last week for our money mindset community.

23:45And for a moderate risk profile, optimal, in my opinion, it should be 45 % index ETF funds, individual stocks, 20 % to 25%, cryptocurrencies, 10%, high yield savings, and bonds as a mix at 20%. And so I think you're spot on with your breakdown of S &P versus NASDAQ within that 80 ,000. I think that is a perfect blend of exactly what I think would be optimal. Awesome. Yeah. Blaine, in your question, you also mentioned you've got a 401k in a target date fund that you max out every year. Just want to encourage you to look at the performance of that target date fund. Guarantee you it has underperformed the S &P 500 over the last couple of years because you likely have these international stocks and the bonds and whatever else.

24:33I don't know your age. You didn't include that in the question, but just be sure that you are not leaving tens of thousands of dollars every year on the table by having too much of your nest egg invested into a target date fund. Great question, Blaine. And before we jump into our next question, I want to give a quick shout out to our sponsor. Are you paying too much to trade options? If you're not trading on public.com, the answer is yes. Public is the only platform where you earn a rebate on every option contract traded. And that's in addition to no commissions or per contract fees. There's no one else out there paying trading rebates, so you won't find a better deal.