Q&A: Dead Money, $400K in Savings, and ESPPs

0:00Hey, everyone, and welcome back to the Rich Habits Podcast question and answer edition. We love doing these weekly episodes for you. So keep sending us questions. Send them on Instagram at richhabitspodcast. Email us questions, richhabitspodcast at gmail.com. Or get in contact with us any way you possibly can, and we are going to answer your questions. Now, we are thrilled that Public.com continues to be the exclusive title sponsor of these question and answer episodes. As a quick reminder, Public.com is one of our favorite online brokerage platforms. They offer much more than just stocks. They give investors the opportunity to own cryptocurrency, T-bills, bonds, and even music royalties, which Robert, I looked at my music royalty investment.

0:43I don't know if you remember we talked about that. I want to say it was back in like Q2 or Q3 of this year when they launched the Shrek music royalty. I'm up 40%, bro. I'm up 40 % on my investment. It's kind of wild. Well, that's why people that follow along are winning at the game of finance and wealth building because we have some pretty great call outs. And I love the fact that, you know, one of the most important things in the markets today is to actively manage your money and know what you're doing for the future and having a plan. And so all of these things that we talk about, we talk about the music royalties, we talk about crypto, we talk about VinoVest and investing in timber.

1:20These are a lot of strategies that no one else on the internet is really sharing. And that's what I love most about it. So back to public, they even just launched their own high yield cash account that pays a higher yield than Robinhood, M1 Finance, Ally Financial, literally everyone else at 5.1 % with no subscription fees required. Did I mention the funds are insured up to$5 million? They're also fully liquid, so you can withdraw your funds at any time. Be sure to move your existing funds over to Publix High Yield Cash Account by visiting public.com front slash rich habits. Yes, they even built us an amazing landing page.

2:01Again, that is public.com forward slash rich habits. It is super simple. Move your funds off of Robinhood, off of M1 Finance, off of Ally Financial. You're not earning the best yield you can get. Take that savings, move it on to public and earn a whopping 5.1 % higher than every other platform out there. Now, with that being said, let's jump into these questions. I'm really, really excited. with the first one coming from Colin R. Colin says, I have a question. I have an option to participate in the employee stock purchase plan at my company. I was thinking about doing the max contribution of 10%.

2:39Now I already have a 401k and I put 5 % in there to get the match and the free money, so don't worry. Now this stock offering is over a four month period. And as you all know, I would get a 15 % discount on the stock. I work for an oil field company that specializes in P &A and robotics. The beta of the stock is around 1.7, so it's pretty volatile, but right now it's about$10 a share. However, I'm excited to buy the stock at this 15 % discount because I think there's going to be big upside. What do you guys think? Robert, this is a really good question because there are a ton of people listening right now that do likely work for a publicly traded company and might not own stock in the company they work for.

3:18Now, if it were me and I was really excited like Colin here is about the oil field company I work for, about the future, it's$10 a share. I know, see, he called out really smartly here, it's going to be volatile. He's called out the beta. He's done his research. It seems like Colin has figured out kind of weighed his options of if I invest, what the upside could look like. And if I don't, you know, what that kind of opportunity cost might be. So, Colin, if I were you, man, you seem like you got the math figured out. You've done the research. Do it. Give it a whirl. Maybe throw five, seven, if you want to do the whole 10 % there of your salary, be my guest.

3:50That might be a lot depending on what you're already doing for investing. But what I would not want to do is encourage you to check out the employee stock purchase plan while also having high interest debt. Make sure you're out of the high interest debt first before you start doing these cool investment ideas, even if you already have this potential 15 % discount on the stock. Yeah, I love this scenario. But like Austin said, I don't think I would go over 5 % on this as far as your investment into this program. And one way to look at it, and you flushed it out, is having that 15 % discount on this contract per se, it really bakes in a little bit of wiggle room for you in case of the volatility that you speak of.

4:27So I like the idea. Again, I wouldn't go all in either. If you love the company and you believe in its future, then maybe do that 5 % up to the 10%, but I wouldn't do any more. Great question, Colin. We wish you the best of luck, man. If you buy the stock, send us the ticker. We want to watch it. We want to see how it performs. Our next question comes from Gene J. Hi, Robert and Austin. Happy New Year. Thank you so much for the podcast. I'm learning so much valuable information. What's up, Gene? Thanks for listening. Gene says, I have a few questions and I'm hoping you could help me out here. I currently have$25 ,000 from old 401ks rolled into a traditional IRA.

5:02At the time, I didn't know what to invest it in, so I put it all in a target date fund. But after listening to your podcast, I'm learning I'm probably better off investing into ETFs like VOO and QQQ. So with that being said, two questions. One, should I convert my traditional IRA into a Roth, which I would just come out in here and say, yes, you should do that. It seems like it's only 25 grand. You'll pay a little bit in taxes. Make sure you have that money set aside. But I'm assuming you're probably under the age of 45, even 50 maybe. So putting it to a Roth, you still have a lot of time to build wealth and it's not a large lump sum, which means you're not going to have to have$100 ,000 tax liability.

5:39So convert it, I would say yes, Robert. Agreed. Yep. Always have the Roth if you can, because it's better to pay the taxes now than later, because you don't want to kick the tax man can down the road for sure. And then second question here from Gene is, should I take my investment out of the target date funds and then park them instead into these ETFs? Robert, what do you think about that? Well, you know that anyone listening along that we're not big fans of target date funds. So I I just like having more actively managed accounts and different funds and ETFs that are performing better than a target date fund.

6:11And so the answer for me for number two is definitely yes. Take it out of the target date fund. Get it into a mixed bag of ETFs like we talk about, like VOO and QQQ, VTI, some of those things, SCHD, maybe SPYI. Get it diversified into a basket of funds that are going to perform well, but also give you stability. because a target date fund just doesn't take into account COVID-19, wars, bear markets, all of that. It is meant to be safe and prevent losses, but you also leave so much of the upside of good markets on the table while being in a target date fund. So I would definitely get rid of the target date fund.

6:50That's my opinion. ETFs are your way to go here. QQQ, VTI, VOO. You want those index funds. Those are going to give you over a long period of time some really great returns versus maybe subpar returns, but a little bit more safety, if that makes sense. Yeah, when you're on your wealth building journey, a lot of times people don't realize if you leave 1%, 2%, 3%, 4 % on the table year over year, those cumulative returns that you're not gathering for yourself, that positive arbitrage for yourself and your portfolios really adds up. If you underperform the benchmark of the markets by 3 % a year in the target date fund.

7:28And you do that for 10 years, you left 30 % of your money on the table that you could have received yourself rather than not having the performance like we discussed. So it's very important to understand that some of these numbers might seem small in the short term, but in the long term, they really add up. I'm right there with you, man. Our next question comes from Dante M. Dante says, Hi, Austin and Robert. I'm a huge fan of the show, and I'm really excited to continue learning more here in 2024. SPYI comes up a lot in your shows, and I have a couple questions. SPYI earns a dividend, which is distributed monthly.

8:02Does it earn any other additional profit that gets reinvested back into the fund? I saw it was only up 4 % last year, but you guys keep talking about how it aims to track the S &P 500, and that was up 20 % last year. Can you help me connect the dots here? It doesn't seem like the 4 % equals the 20%. Robert, this is such a fun question because for you and me, this is like third grade. But for other people, I totally understand why you like this, right? It's like, wait a second, that number does not equal the one that you guys just said. What the heck's going on here? So whenever you're looking at any ETF, we talk about ETFs all the time.

8:37QQQ, VOO, VGT, Moat, VTI, all these other names. When you're looking at these ETFs, Dante, and anyone else listening, I want you to look at not just the price return, the actual stock price moving up and down, but I want you to look at the total return. You can find this on Seeking Alpha. You can find this on Morningstar. You can find this on Yahoo Finance, but it's going to show you not just what the price of the ETF did, but what also the dividends that were distributed also meant for the total return of that ETF. So right now, I'm going to pull up real quick in real time what the total return for SPYI was in 2023.

9:17So the total return for SPYI in 2023 was 18.5%. That means if you had invested$100 ,000 into SPYI, the total amount of money you'd have now is$118 ,500, right? 18.5%, which is great. Now it's different about SPYI because you're probably looking at the price of it and you're like, wait a second, the one-year chart looks a little bit different than 18%. It's only 4%. So what about the other, like, I don't understand. How did it go up 18? You're forgetting about the distributions. And this is with every ETF, right? Not in stock for that matter. Not only is the price changing, but when you get paid a dividend, that's also part of the return, right?

9:57And so that other 14 % or so, 14.5 % return was those distributions being reinvested and all that other fun stuff there. So whenever you're doing your research, highly recommend not looking at just the price performance of a stock or an ETF, but also looking at the total return of that stock and ETF over a one, five, and 10-year period. Yeah, I love it. And it's a really good way to break it down so people understand the total return is completely different because I get that question all the time. So, Austin, good job of breaking that down. I like it. Really good question, Dante. And I hope you were taking notes.

10:30I know this can sometimes get complicated and hard to understand, but we're here to break things down the best way we can. Now, our next question comes from Danelle A. Danelle says, first and foremost, I want to give you guys a huge thank you. You both are my lifesavers. I'm a hairstylist, so I don't get a 401k, but I did start my Roth IRA in 2020, but I didn't know I was supposed to be investing it. So you guys and your message of investing the Roth IRA has definitely helped me. Unfortunately, my money sat for four years, not making a dime. Now, I'm a single mom, and thankfully, I found your podcast, and I'm excited to start investing.

11:03My question is, if you were me at 36 years old, what would you do to speed up your wealth building journey with only a$50 ,000 a year annual income? Is it real estate? Is it small business? Or should I just stick to maxing out and investing my Roth IRA? I feel like I'm really far behind. Danelle, you are not far behind and Robert and I really appreciate the kind words and we got your back. So here's what I would do. So Robert and I made an episode called making and investing your first 100K about a month ago. And oh my gosh, this needs to be your playbook. We believe, Danelle, that people, it doesn't matter if you're making 50 or 100 or$150 ,000 a year, a lot of people still have sort of this like big burden on them that I feel behind until they hit that 100K mark and then compound interest really begins to work for them.

11:51Now you're saying, Austin, Robert, I don't have 100 grand. This is going to be so hard for me. I'm a single mom. How the heck am I supposed to come up with that money. We get it. We totally get it. But that to me should be your like North Star goal. It's an attainable goal. You can get there in seven, eight, nine years. We don't want you to feel overwhelmed of the, I need to get$3 million so I can, no, listen, that's behoovey. We don't need any of that. We want some baby steps, some nice small action items we can get after here. And 100K might sound like a lot of money, but in the grand scheme of things, it's not because you're going to get there faster than you think.

12:23Now, Robert, I'm going to let you jump in here and add some of your thoughts. And then I'll rally behind you with a couple other actionable ideas to get this first 100K. But what are your thoughts, Robert? Yeah, so many people get this wrong. They're so focused on, oh my God, I'm behind. I don't have enough money. How am I going to retire? I need to get that million dollars. But the way to look at it is really important. And that is you putting together the steps, the baby steps needed to get yourself started and get towards that$100 ,000 saved and invested. And so that's just really important for you to look at it and really condense down the ideas.

12:57Should you be getting into real estate right now? No, I don't think so. Should you be buying a business right now? No, I don't think so. What you should be doing is working on exactly what you mentioned to get yourself to that first 50, then 100K. So you have your base that is solid and is building and compounding for you year over year. Then you can start diversifying further into real estate and building businesses. Now, if you have a great real estate opportunity and you want to put a little money towards it or invest in a real estate property, that's totally fine. But it shouldn't be your main focus until you have that one hundred thousand dollar base that's making money for you every month and every year.

13:36Then after that, it's compounding. You're starting to make some passive income. Then you start diversifying into these other categories. So you're absolutely right. If the IRA is fully maxed out right now, great. That's awesome. Then you can open a traditional brokerage account and start investing in this basket of ETFs. You can put some money into the new public high yield cash account right now that's making over 5%. That's a good idea for diversification. You could get a little bit of money into crypto and buy some of the blue chips in crypto like Bitcoin, Ethereum and ETF. You want to have that base of 100K first before you start doing all of these crazy strategies, trying to YOLO and catch up because you're not too late.

14:19It's never too late. And you just have to have the right strategies in place and execute on those strategies. So, Danelle, what are the step one, step two, step three? I'll break it down for you here. Step one, it's 2024. it's time to get a budget. I want you to get a piece of paper and write down every month all the money that comes in as well as all the money that's projected to go out. I want you to write down the subscriptions. I want you to write down everything for your child. I want you to write down everything you're spending money on, right? And then I want you to write down the number next to it.

14:49After you do that, start circling the stuff that's not necessary. And I know there's going to be something. I just this year, Robert, got rid of four subscriptions that I was not using and it saved me over$100 a month now, right? Like even I do this stuff. I need you to circle the stuff that's not necessary. That's how you're gonna find wiggle room in your budget. Now you're probably saying, okay, maybe I can come up with a little bit extra wiggle room there, call it 150 bucks a month. And I guarantee if you wanted to try and get more work as a hairstylist, you could probably earn an extra 10, 20, maybe even$30 ,000 in 2024, you know, boosting your income from 50 maybe to 70.

15:22That extra$20 ,000 could be a game changer for you in hitting that first 100K mark. And even if you don't do that, even if you're only able to find$300 a month now and invest that toward your retirement here from age 36 to 66, that$300 a month is going to be $700 ,000 tax-free in a Roth IRA in retirement. That, my friend, is not far behind. You are par for the course. You're going to do great. We're very excited for you. But don't get bogged down by this idea of I need to be a millionaire. I need to be a million this, million that. You know, Robert, you had a really cool quote on your Instagram story the other day that I think Danelle would really resonate with.

16:00One day or day one? Am I going to start investing one day? Is it, I'm just going to, one day I'll start doing that. I'll get there. I'll buckle that. Or is today day one, right? We all have to start with a day one. Danelle, you've been investing since 2020. We're proud of you, but this is going to be your day one now, as you listen to this episode on January 11, 2024, to say, I'm going to go earn an extra 10 grand this year. I'm going to put it toward that a hundred K mark. I'm going to get after it. I'm excited for it. And I'm going to retire with hundreds of thousands, if not over a million dollars.

16:28And the cool thing about being a hairstylist is I know many, many hairstylists that are friends of mine. They might only work four days a week. Some of them may be five, but most of them are four or five days a week. And if you look at the simple math, if you were to add one day a week, let's say you take every Thursday off and you say, you know what, Austin and Robert are right. I've got to step up my game. I'm going to start working Thursdays. If you made$200 every Thursday for the year, so$200 a week extra by 52 weeks, that's$10 ,400 you could be putting towards your retirement. And that$10 ,400 compounding over 10 years would be well over$100 ,000 going right into your retirement accounts.

17:12And it's that easy as just adding one more shift a week. If you're doing well as a hairstylist, so simple. It's just really all about the math and the goals that you set for yourself for retirement. We're so proud of you, Danelle. You're not far behind. And we hope that anyone else listening right now that might think they're a little behind, you're not. You've got time. You are so young and there's so much to be excited about in 2024. Our next question comes from Sarah P. Now, this one's a little bit of a long one, but we thought it would be smart to include it because there's one piece of information in here that Robert really resonated with.

17:45And I'll call that one out. Sarah says, I'm trying to figure out what to do next with my financial planning. I own three rental properties that produce$3 ,170 a month. I have$1.2 million in equity in my primary residence. That's Robert's part there. I have$70K in my 401K. I just opened a brokerage account. Not quite sure how to use it. I have a Roth IRA,$30K in savings. Sarah's doing a lot of different things right now, right? Sarah is all across the board. However, Sarah said she's in the process of getting divorced, and she's planning to retire in about 10 years. Now she's thinking about selling her home, paying off the 160 ,000 she still owes and buying a smaller home to live in while also purchasing a couple investment properties.

18:25Robert, I know you talk a lot about the sort of, you know, dead money that is the equity in primary residences. Can you kind of re-explain that to people listening right now as well as give Sarah some advice? Yes, I love this. And the biggest takeaway for me is to step back a little bit on this whole scenario. Great question. And thanks for laying it out for us, Sarah. But, you know, I would first be concerned with where is the money going to go to from the equity in the home if you sell it prior to the divorce? Is the house in your name? If it is, does your soon to be ex have any rights to those funds and so on and so on?

19:00So assuming that said person does not have rights to those funds, then definitely I love the idea of selling this home, getting all that equity out of it so you can get it working. Because when you have this much equity in a property, it is dead money because it's tied up in the property. It's not cash flowing. It's not making you any money. So one of the first things I tell anyone that will listen is look at a HELOC. look at a way to pull some of that equity out for other investments and other opportunities, because the opportunity cost when you have that much money sitting in a property is just too profound for you not to pull that money out.

19:36So assuming you can sell it and you can exercise getting that 1.2 million in equity and using it elsewhere. I love this strategy, especially if you downsize the home you're going to live in and you have all of those other funds to be able to put towards other properties, but just be careful. Make sure you're looking at the Fannie Mae 5 % mortgage program that's out right now. It is a great new program that was launched on November 18th of 2023. 5 % down, you can buy up to$1.3 million and up to four doors. This could be great for you moving forward. You might want to buy a fourplex, live in one unit for now, rent out the other three, and then just really making sure you're smart with that money that you're getting the equity out of the home you're selling?

20:21You know, is there a 1031 exchange ability? What can you do with those funds to pay as little taxes as you can? So just there's a lot that goes into this strategy, but I think you're on the right track of getting out of that because$1.2 million sitting while going into markets like we're going to in 2024, I really just don't like that at all. So I think you're on the right track. And if you want further help on this, please DM me or email me or Austin, and we will walk you through further strategies on this. But I think you're on the right track. I love the fact that you're working and getting your high yield savings built up.

20:56You have the Roth IRA that's happening. All of these are great things, but you do need to get that 1.2 million working. I would agree. And something that Alex from OZ said that I really resonate with is he doesn't invest into the S &P 500. He invests in the SME 500, which means he invests into things that he knows very well because he thinks he can outperform the market by doing so. Sarah, if you do not feel like you can invest into stocks and ETFs and do well, but you instead feel like you are really good at this rental property stuff, you already have three rentals, you're cash flowing, it's producing a lot of money for you, and you feel like you can take this equity out of your primary residence after selling it and buying something else, have$500 ,000 or$600 ,000 running around here to allocate to something cool that you're very familiar with, do that.

21:40Do what you are familiar with. That is what's really important here. Do not go on and buy some crazy assets that you've never heard of because some guys on the internet told you like, no, invest in yourself. Invest in things that you're very familiar with, things that have a long track record of success and things that you can directly control. So Robert, I couldn't agree more. The 5 % Fannie Mae mortgage there that is a duplex, triplex, quadplex. Sarah, you are very familiar with real estate. Maybe this is your next move and it's going to produce more passive income. So you could probably retire even before 2034.

22:12Really, really good question. Okay, so before we jump into the next question, I want to remind everyone about how excited I am about the new public.com high-yield cash account. This account pays 5.1 % APY on your savings. And to put that into perspective, if you're an average American with three months of savings in a checking account, you could expect to earn an additional$1 ,000 every year on your$19 ,000 in savings. Don't forget, every dollar you save on the public platform is insured by the FDIC up to 5 million. There's full liquidity. There's no subscription required. So be sure to check out public.com forward slash rich habits or click the link in the show notes below.

22:53We highly recommend moving your low paying savings off of allies 4%, wealth fronts 4%, M1 finances 5%. Move that over. Earn some more money. Earn some extra yield on your savings. It is a great idea to do so. Major shout out to public.com for introducing this new product. T-Bills were revolutionary. Now they're revolutionizing the high yield cash accounts. And we are super, super excited to be introducing this to you all. All right. Our next question comes from Yoruba G. Yoruba says, my house is under contract and we close on it on February 6th. I bought it for$226 ,000 and I just sold it for$395 ,000.

23:33I own a general contracting company here in New Jersey, and the reason I sold the house was because I was struggling to pay on it every month, and I was sick of having a beautiful house that I couldn't afford. I have just found a new property that's rent to own, and I think I negotiated a pretty good deal. The seller wanted$335 ,000, so I offered to rent it for two years and then buy it for$265, so I can add some additional rehab while I live in the house. The house needs about$30 ,000 of rehab, but once it's fixed, I think it could sell for$400 ,000. Do you guys think this is a good idea? What's your perspective?

24:07Robert, I want you to go first here because you're the real estate guy. And I feel like there's a lot of moving parts in this question. Yoruba, I hate this. I gotta tell you, it just doesn't make sense to me. You say you bought a house and it's a beautiful home for$226 ,000 and you're selling it for$395 ,000 because you hated the payment and hated being house broke. But then you tell us that you're gonna rent a house that is of a greater value, base value, than the house you're selling. So I don't understand how are you gaining anything financially in this instance, assuming that the rental payment on the$265 ,000 is gonna be equal or greater to the house you already own.