Q&A: Buy a House or Build My Base, 7% 401(k) Match, & Selling a Business for $1.5M

25:21Yeah, I agree, Joey. You are spot on with your thinking. I would just do the company match, and Austin's got a great saying that we use all the time. And I would get the rest of it into the QQQ and the VOO and the VTI and the VGTs of the world because you're going to just really, really crush that 6.5%. And we always want that positive arbitrage of earnings going into your pocket and not somewhere else. Because the last thing you want to do is go years and years where you're leaving 2, 3, 4, 5 % on the table because it just really hurts your chances of getting to your freedom number sooner. So I like where your head's at.

26:01I think it's a great question. You're spot on and right on track. And that's exactly what I would do. Yeah, something you didn't mention, Joey, was your Roth IRA. So our saying, it's very simple. Match beats Roth beats taxable. So right now, you have that 5 % match. And of course, it's being invested into whatever here, earning about 6.5 % per year. Year to date, the S &P is up over 15%. So you're losing out on about 9 % or 10 % there. But you are getting that free money, right? So if it's really 100 % match, you get 100 % return there on that match, which we love to see. So contribute up to the match.

26:36And then what I want you to do is make sure you are maxing out your Roth IRA every single year. That's$7 ,000 for 2024. You can open up a Roth IRA on any brokerage account pretty much. I've got mine on M1 Finance. I know they've got some on Robinhood, Schwab, Fidelity. You can do whatever you want. Just type in Roth IRA. Open Roth IRA on Google. And once you open the Roth IRA, that's when you begin to really have autonomy over your investments. You mentioned you feel like you're losing out on these S &P 500 gains. You are, right? But by maxing out your Roth IRA and investing into the S &P and investing into the NASDAQ, right?

27:11QQQ and VOO and the other ETFs we talk about, VGT, VTI, AIQ, Moat, things like that. You will be able to see all of the upside that comes with that and do it in a tax-advantaged manner, right? Because the Roth IRA, all the money you put in is after taxes, which means when it comes to retirement, when you're 59 and a half at the earliest 65, if you are a normal human being, you can take the money out and enjoy it tax free. Right. All those profits are tax free. So, again, match, go get the match free money, then max out the Roth. And then if you still have extra money left over, which you might because you're doing twenty three thousand a year, then that extra money.

27:48Right. It's already in your checking account. It's through your paycheck. You paid taxes on it. Open an account on public dot com. Go to public.com slash habits. You'll get some free stocks and free money, some free something there, and then start buying these same index funds inside of public. Because like you mentioned, you don't want to lose out on these S &P 500 NASDAQ gains. So go buy the same ETFs that are in your Roth on public, but it's a taxable account. And you're just going to ride the wave. You're going to build your base. You're going to be a hundred thousandaire and eventually a millionaire.

28:17And everything's going to be good for Joey. I feel very confident for Joey right now. You can tell Austin has a couple Celsius in him because, boy, he is rambling and he is on fire today. I already knew it. We're rolling, everyone. We're rolling. All right. So speaking of public, 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.

28:51Bottom line, if you're paying more than zero to trade options, you're paying too much. Switch to public and start getting rebates on every single contract traded only at public.com. Paid for by public investing, options not suitable for all investors, and carry significant risk, full disclosures in podcast description. Our next question comes from Sam. Austin and Robert, thank you so much for the information you both provide us. It's much appreciated. I'm going to try and keep this short and sweet. I'm 29 and my wife is 26. Our household income is roughly$170 ,000 a year, which means we bring home about$10 ,000 per month.

29:28Unfortunately, neither of our jobs offer a 401k match. So the only investment accounts we currently have are Roth IRAs, which we max out each year, and then a high-yield savings account for our emergency fund, which we put about 8 % to 10 % per month into. My question is this, where do we go from here? Does it make sense to contribute to a 401k without a match? Do we just shovel money into index funds within a taxable brokerage account? The only debt we currently have is on our home, which we purchased just before the pandemic. We have a 5 % interest rate on that, and we have$50 ,000 in student loans for my wife's master degree at about 5 % interest as well, which poses another question.

30:06Would it make sense to go ahead and aggressively pay down this student loan debt? I know in past episodes that you've mentioned that the Dave Ramsey method of paying down debt isn't always the best approach. Thank you all for the help and we look forward to hearing your response. I'll take a first stab at this one. So I want to start with this. I want to start with reassuring you guys that just by maxing out your Roth IRA accounts, right, two separate Roth IRA accounts, which is$14 ,000 a year, is going to yield you over$9 million in retirement. So from age 29 to age 65,$5.88 a month at a 12 % annual return.

30:42Maybe it's 10, maybe it's 8, maybe it's 14, right? Let's call it 10, 12 % here. We can be optimistic because that's what life's about, being optimistic. You guys are going to have millions of dollars. Even if I'm 50 % wrong with my assumptions, you guys are going to have over$4.5 million in your retirement accounts. So when you are kind of feeling down like, oh, I can't do the 401k. There's no match. I shouldn't do it. All I have is the Roth IRA. All you have is four and a half million dollars. You're right. Like cry me a river. You guys have a lot going for you here. I don't want you to feel bad about your situation.

31:11You guys are crushing it, especially with the income. So because now we've sort of talked through the Roth IRA, yes, max out the Roth every year. Put it, please be aggressive. Don't put it into these target date funds that'll put you into bonds or cash or whatever else. We want you in NASDAQ 100 QQQ. We want you in S &P 500 VOO, VGT, things of that nature. You're young, you can be aggressive, time is on your side. So now that we have that out of the way, let's talk about what else you can do. You said, do we just shovel money into index funds inside of a taxable brokerage account? The answer is yes.

31:44And I know you might kind of feel like, wait, I don't know if I should do that because what about the taxes? You pay taxes on profits, right? So if we're paying taxes on our profits, that means we did something right. I think a lot of people, Robert, make the mistake, and I've made this mistake in the past, but I've learned from this mistake, and I want more people to understand. People make bad trading investment time decisions because they're so afraid of taxes. For example, someone's going to be like, hey, I go out and buy this stock. It's up, it's down, it's whatever. I saw this one guy, he talked about how he was up so much money on some investment that it was just right there.

32:19He wanted to get out of it, but he refused to sell it because it wasn't a long-term capital gain. He wanted to wait at a whole year first. I'm just like, dude, we're talking about like maybe$5 ,000 of extra taxes on a$100 ,000 profit. Who knows what the next six months going to do to the stock? Like you should probably figure that out, right? And this was a very sort of short time horizon thing for him. And so I guess what I'm trying to get at here is I don't want Sam and his wife to make the mistake of not investing into a public taxable brokerage account because they're afraid of taxes. Taxes are just life, unfortunately.

32:51And you guys are doing a great stuff with the Roth IRA. So, you know, that's awesome over there. But, you know, paying taxes on profits isn't something to be really down in the dumps about. It's something that is just kind of part of everyone's journey. Yeah, I love it. And then the last thing I'll bring up is the student loan debt. I don't think I would touch it. There is so much talk about new programs and forgiveness and rebates and all of this stuff. For me, if I see student loan debt below six and a half percent, I say you keep paying the minimums, see what the government does, especially in an election year, and then reevaluate down the road when you get yourself further along in your investment journey and you've got your base built.

33:31Because too many people will shovel all of their money into paying off student loans, but not have a backup plan, not have an emergency fund. And that just doesn't make sense to me, especially if your student loans are at 5.5 % or less interest rate. Yeah. Just to add some color here, right? You know, let's say at 30 years old, from 30 to 65, you know, you guys are over here bringing home$10 ,000 a month. So 120 ,000 a year, you guys are investing aggressively and you're like, let's, you know, maybe instead put that to the student loans so you can pay it off in two years. Right. So let's say it'll be 31 at the time.

34:04If instead of being dead focused of paying off these student loans over the next two years, you were dead focused on taking$50 ,000 and investing it into the S &P 500. And if we have an annual return of only 9 % from 31 to 65, that$50 ,000 turns into over$1 million at 65. So by aggressively paying off your student loans, that's what it's costing you, right? That same$50 ,000, if it's not deployed and working for you while you're young and while you have time on your side. Now, don't get me wrong. I don't want anyone to retire with$50 ,000 of student loan debt, just like I don't want people to be in their 70s with a mortgage, right?

34:42Debt has its place, but debt also doesn't have its place. And so that's where Robert and I really disagree with Dave Ramsey. We're like, it's very much a gray area. And if you can use debt as a tool, especially if you're younger here and you have this$50 ,000 of student loan debt and you're just fine with payment, you're rocking and rolling, everything's great, you're making all this money and you have time on your side and you want to really build your base and get money working for you because you know it's going to work hard over the next 35 years, that's what we think you should do, right?

35:08We're talking about a million dollars in retirement here. So Robert, I totally agree. I would keep the debt around at least, you know, until you have the equivalent amount. So that same 50 ,000 invested somewhere else. So once you have that same 50 ,000 invested and it's rocking and rolling, then, you know, go crazy, go pay it off, do what you want to do. But don't make the mistake to what Robert said of getting so focused on paying off this low, medium to low interest student loan debt while not having actual money working for you in the meantime. 100 % because we don't know what the government's going to do, but also we have such a younger audience and I just want them to understand that compounding is their friend over decades of time.

35:50And if you're spending all of your time now and every dime worrying about some of these lower interest, student loan debts versus building your base to allow it to do its job, you're really going to miss out on so much in retirement money later on. And so I love this question and I love tackling this question because I think it's so important. Our next question comes from Maxine. Hey, Austin and Robert, love the podcast. I make sure I listen every single week and it's definitely made me more conscious about my financial decisions. I was wondering, at what stage is it appropriate to include options trading in my investing journey?

36:26Is this something later on for more seasoned investors once the base has been built, or is this something I should do alongside building my base? Understandably, trading options is more complex, but I will be interested into hearing your thoughts. Keep up the great work. Robert, I'll you take this one. Maxine, you're spot on. I think that options trading is a great tool to have in the shed, but I don't think it should be in the beginning. I think you should have your base built. You You should really understand how to build a really nice portfolio. That's what we're here to help with. And once you get that portfolio of index funds built, then your next step is to get a portion of your investable capital into, say, maybe a cryptocurrency portfolio, maybe some individual stocks, maybe a couple REITs.

37:11There's so many other things that go along with diversification of your base once it's built before I would say you start focusing on options trading. just because it is a little more technical. It takes more time, more research, and more upkeep. And I think there's so many other things you can do prior to trading options to really build your base and set yourself up for financial freedom. And don't get us wrong. I trade options all the time. I use it as a way to generate income. I also trade options as a way to hedge against volatility in my portfolio, right? You can buy put option contracts on a big position that you might have already and use that against earnings risk, right?

37:50earnings call volatility. So there's a lot of different ways that sophisticated investors can use options as a way to generate income with covered calls. I do this all the time with Tesla and as a way to mitigate portfolio volatility risk, assuming things might be wonky in the markets and you don't want to see that volatility, which is something that a seasoned and educated investor, sophisticated investor like myself is happy to do. So as you build your base, don't worry about the option stuff, keep it simple, stupid, right? K-I-S-S. So take that, buy the ETFs, buy the index funds, build your base.

38:22And then once you've done that and you've done what Robert said, right? Get you some REITs, maybe some crypto, maybe you're doing some angel investments, right? You're really building out that diversified portfolio. As part of that diversification might be learning to trade a little bit of options, right? Learning to sell your first covered call or buy a put option contract against volatility risk or whatever it might be. Like that is just a, like Robert said, a tool in the tool shed. It's not something to base your whole strategy around. It's just a way to have a little extra insurance against volatility risk and making sure the portfolio continues to go up into the right.

38:54Love it. Love it. Love it. All right. Our last question is a good one. It comes from Nate. Nate says, Hi, Robert Nostin. My name's Nate. I'm 24 years old, and I purchased a service business for$330 ,000 right out of college at 22. Over the past two years, I've been able to triple revenue and quadruple SDE, which is projected to be$600 ,000 for 2024. For those of you that might not know, SDE is essentially Nate's take-home pay after taxes, right? He's going to pay himself$600 ,000 in 2024 as profits from the business. I now have an offer to sell the business for$1.5 million in cash. I still owe$250 ,000 on my original business loan at 5%.

39:36The only reason I would entertain this offer is because I am looking to relocate back to my home state of Iowa in the next year and a half. And here's my question. Does it make sense to sell or should I continue to try and grow the business to receive a higher multiple? If I do sell, where do I even put the money? I would likely use$500 ,000 of it to leverage myself into buying a new business that could profit$800 ,000 per year. I do not currently own any real estate besides my personal condo that I owe$400 ,000 on at a 7 % interest rate. So maybe I buy some rental properties. And question number two is, do you guys have any tax strategies to share that could help me offset some of this$600 ,000 in income?

40:15Side note, I've already maxed out my Roth and my simple IRA from previous years. I have$175 ,000 in a business checking account and$40 ,000 between brokerage accounts and crypto. I know I'm currently sitting on too much cash, but I am in sort of this analysis paralysis in searching for my next business opportunity. I've always had an entrepreneurial spirit. And I'm really excited to hear your answers. Robert and I, we disagree on this one, which is going to be a fun conversation. So Robert, make your case and I'll make mine. All right. So we could spend three hours on this question and we don't have three hours.

40:45So I'm going to try and keep it short and sweet. No, man, let's air it out. Let's air it out. I think our audience would really love some like, you know, 10 minute answer. Nate. So here we go. First and foremost, yes, you're sitting on too much cash. You need to get way more money out of these accounts, invested into your brokerage account, diversified over the index funds we talk about, maybe some more in crypto, maybe an emergency fund and a high yield savings account. And then also secondarily, at your age, selling at a$1.5 million, which is I think a 2.3X multiple on this business, I don't know why you wouldn't keep it for another year or two and try to maximize revenue and earnings to get more money put away.

41:27because right now the scary thing for you, everything you have looks great on paper, but unfortunately it's just on paper. And if you wait too long in the business, you risk it going down, then that could hurt you. But also think about it right now. If you sell this business at 1.5, you owe 250 ,000 to pay it off. So you're down to 1.25. Then you take 500 ,000 and you go invest in another business that you have no idea if it's going to do well or not. So that$500 ,000 could go to zero. Now you're down to$750 ,000, which is still fantastic for your age, but you're so heavily entrenched and engaged financially in the business, you haven't pulled enough out yet and invested elsewhere to give you leverage, safety, and diversity.

42:19So I think in my opinion, I would hold the business for one more year if it's growing, I would take that year to sock away as much money as possible in other investments. I would get at least$125 ,000 out of the business checking account, get that into at least a high yield savings account, making you five and a half percent. And that's where I would start. And I would work my ass off on the business for at least one or two more years to try and get the multiple up. Because right now, if you believe 600 ,000 is going to be the net revenue profits for you for the year of 2024, and you're gonna sell it for 1.5, you're really giving them a great deal at that multiple, whereas I think you could get it to 1.8 or$2 million with a little more work and a little more tidying up of the business.

43:12And that would get you set up so much better to where you'd be fully, fully at that one and a half,$2 million mark to be able to put away and set yourself up for retirement. That does sound like a pretty good answer, Robert. Good luck, Austin. Okay. I'm going to take the other side. Bird in the hand is better than two in the bush. My dad always told me that. So if you have the opportunity, in my humble opinion, at 24 years old to sell a business for$1.5 million in cash and then take$250 ,000 of that to pay off your original loan, now you have$1.25 million that you pay taxes on. Let's say you pay a quarter million of taxes there on that.

43:53And now you have a million dollars. A million dollars is now in your checking account after taxes, after everything said and done. I'm not saying that it's a bad idea to take that$500 ,000 and go chuck it to the next business. Like, obviously, you know what you're doing here. You can do this. Like, go be my guest. But you now have a little bit of retirement slash insurance in the back of your head, right? There's no more like, oh, I did this. Is it going to work? Like, I think I can do this. It's like all of the uncertainty is gone. You have a million dollars in cash. Take$500 ,000 of that, go start your next business.

44:24Take$500 ,000 of that and go put it into a taxable brokerage account and invest it for you. Congrats, you're retired now. You're 24 years old and now this$500 ,000 will grow into tens of millions by the time you're in your 40s and 50s and 60s, right? I guess what I'm trying to get at here is if I had the opportunity to lock in a million dollars of post-tax profits in my checking account while still having the opportunity to invest in, you know, start my next thing at half a million dollars and then also have half a million to say, yeah, I'm 24, got half a million. It's in these awesome brokerage accounts.

44:57It grows by 10, 12 percent a year. I'm doing great. Like it'll be a million by the time I'm 30. I think that's a great place to be. What I don't want is a recession to come in 12 to 18 months and unemployment spikes. Now there's no one that wants to buy your business. Your four best employees go away. You know, something happens and now your business is, you know, you went from 600 and SDE to 420 or 500 and now you only have a$700 ,000. It's like, there's a lot of uncertainty when it comes to this stuff. And I'm not saying that you should not take uncertainty. Uncertainty is cool. That's how people make the big bucks, right?

45:33They make big risks, big money. All I'm saying is you should come from a place of authority and power and financial flexibility the next time you have that uncertainty. Right now, you have not at least disclosed to us what your financial situation is. For all we know, maybe you've got 30, 40 ,000 in your personal checking account and another 30, 40 here in investments, right? That's great, but it's not half a million great, right? And so what I'm saying is, get your ducks in a row, go get the bird in your hand, go get your million and then go start the next business, 500K, go do your thing and have 500K invested.

46:09And now you're really feeling good about what's in the bank, what opportunities ahead for you. And here's the best part too, Robert, why I also think that it's a good idea to sell because maybe the next business, you said you wanna leverage it to buy a business that could profit 800K a year. Maybe you wanna get investors involved. How cool is it now to go to investors and say, yeah, I sold my last company for 1.5 million in two years. That's what I have as a track record. Do you want to participate in this next deal? And so now you have a track record. Now you have a case study that you can take to investors that will maybe even make it so you don't have to leverage that much all 500, maybe only 200 or 300, depending on what you want to do there.

46:47So I don't know. We're on different sides of the equation here. I just, I really think he should sell, take his money and run. All right. So I'm going to make two little changes and you rallied at the end and you came out strong. So I'm going to go with you on one side of that. And if you do decide to sell the business, rather than going and just taking 500K of that newfound, beautiful cash that you have, don't do that. What got you here is some sort of creative financing or owner financing. So your next business, here's the real hack. Don't use 500K. Use 100 of it or 200 of it. Get investors for the rest of it.

47:23Give up a little bit of equity or get owner financing and try to invest in an opportunity zone. So then you can avoid some capital gains taxes from the sale if you're going to sell by investing in an opportunity zone or integrate a 1031 exchange in here somewhere for the new business. That way you can offset some capital gains taxes and keep more money for yourself. That's the last kind of mousetrap that I can build out of this very long equation to try and help you figure out the best way to do it. Man, I'm just so proud of Nate. 24 years old, 1.5 million opportunity. Oh man, sound like you're a rock star, Nate.

48:03Super proud of you, dude. I remember those days. I remember at 24 years old, I had just gotten this big, beautiful home on the water. I had my laundromat. I had my quadplex. I had the two bars and restaurants. I had a small little coffee shop and I was 24 thinking I was the coolest thing ever. It was an amazing time in life for me. Yeah. When I was 24, I think I was wearing Crocs and drinking beer on Broadway. But look at you now, buddy. Look at me now. Yeah. Four years later. No, no, I'm just kidding. I was 24 hours working, obviously, at a Mettafist. Yeah. You were crushing it at 24. So great, great question.

48:44This was an awesome, awesome episode. So many incredible stories and great questions. We have so much going on with the Rich Habits community and the Rich Habits podcast. And I feel just so blessed and grateful each and every day that so many of you follow along every week and you engage with us. That's what's so important is that so much of our community and our members engage with us to let us know, you know, what we're doing right, what we're helping you with. And really, because our goal here is to really break down and make wealth building and financial freedom appear to be easy because it is if you have the right tools and the right information being provided to you each and every day.

49:28And that is one of the best things that Austin and I are able to provide for you. And I love our 30 year age gap. It's just makes it an incredible situation and makes us really uniquely qualified to share all of this information and these stories with you to help all of you on your journeys as well. Couldn't have said it better myself. Everyone, thank you so much for listening to this week's episode of the Rich Habits Podcast question and answer edition. Don't forget, we have a newsletter. It's in the link in the show notes below. Rich Habits newsletter. Over 43 ,000 of you have already signed up.

50:01It's crazy. I checked it yesterday and it was like 42 ,950 and I checked it right now and it's 43 ,080. Like I mean 100 people are just jumping in here every single day. It's pretty crazy. So super grateful that you guys trust us with your email address. It's a free newsletter. We're never going to charge you for it. We put a lot of time and energy and focus into writing this for you every week and we're just super grateful that you give us your attention to listen to the podcast and to read the newsletter. Everyone, thanks so much and hope you guys are enjoying the fourth. Here we have the Lemu Emu in its natural habitat, helping people customize their car insurance and save hundreds with Liberty Mutual.

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