Q&A: Investing OR Paying Off Mortgage, Passing Wealth To Children, & Paying For College

0:28You're about to make a trade. event invites and pin messages so no one forgets mom's 60th, and never miss a meme or milestone, all protected with end-to-end encryption. It's time for WhatsApp. Message privately with everyone. Learn more at whatsapp.com. Hey, everyone, and welcome back to the Rich Habits Podcast question and answer edition brought to you by public.com. As you all know, this is our 101st Q &A episode. Last week, we announced that we had this hundredth episode. And if you follow us on Instagram, you will know that we actually gave away a pair of AirPod 4s to a lucky commenter on that episode via Spotify.

1:08Well, we did a random number generator and commenter number 23, who is Seasons, whoever they're C-S-E-A-S-O-N-S on Spotify, you have won a free pair of AirPod 4s. So if you're listening to the show seasons, email us at richhabitspodcast at gmail.com to claim your prize. Would love to give it to you. And major shout out to like the hundred and what seemed like 150 plus comments of just like super nice words. I'm going to read us some comments here real quick. Best financial advice channel. Keep it going, guys. Congrats on 100 Q &A episodes. It's been an incredible journey so far. Goat podcast. Happy hundredth episode.

1:47Thank you both for all you do. this podcast has truly changed the way I view money and I will forever be grateful for that. Like Robert, how sick to read comments like that. And just, it gets me so pumped up knowing that we've got tens of thousands of people that come back every single week, but we've like actually been able, I would argue this podcast, Robert has probably changed the financial trajectory of like so many people, like just thinking about the people that now have a Roth IRA for the first time, now know what a stock is, an index fund, an ETF, and maybe they're contributing to a 529 for their children.

2:20It's just so cool that we're able to impact so many people's financial journeys. Yeah, I love it. We have the best jobs on earth and it's so much fun every day to be able to do this with you. It would be a very cool metric if we did know because there's so many people that engage with us that are in the Rich Habits Network or DM us on Instagram, but there's also hundreds of thousands that don't. You know, I had a one-on-one call last week with somebody and said, they've been following us for three years and has changed the trajectory of their lives and their kids' lives, but they've never spoken up.

2:51They've never commented and they just booked a call. It was incredible. I'm so proud of what we've built. It's just an amazing journey. As always, thank you all so much for coming back to these Q &A episodes. We are so grateful to have your attention every single Thursday morning. And again, seasons, be sure to email us at richhabitspodcast.gmail.com to claim your free pair of AirPod 4s. And this is a lesson for everybody. If you're not following Rich Habits on Instagram at Rich Habits Podcast, be sure to do that because we post little things here and there. You could have known if you're like, oh, I didn't know you're giving away AirPods.

3:24We didn't announce it here on the podcast. It was on Instagram. So be sure that you're following us and staying up to date on all this stuff we're doing. Now, Robert, before we jump into the episode, it's super important for everyone to understand that the only way that they'll ever be able to stop trading time for money and truly begin to work toward a financial future that includes a prosperous retirement is to start building a financial nest egg ASAP. So if you want to stop trading time for money and retire one day, you need to be investing toward your financial future. And the easiest way anyone can begin investing towards their future is on public.com.

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4:37Paid for by public investing. Full disclosures in the podcast description. So our first question comes from Glycy R. Glycy says, hey, Robert and Austin, thank you for all you do. I've joined the Rich Habits Network and I just finished watching the intro videos, but I'm wrestling with a really big question. My wife and I, 44 and 46, are both self-employed and take small W-2 salaries from our businesses. We've already maxed out our Roth IRAs each year, but we want to invest more toward our retirement accounts. Because our real estate investments and business write-offs, our paper income is under$100 ,000 a year, which makes the whole tax and contribution strategy even trickier.

5:12I've been researching SEP IRAs, solo 401ks, both traditional and Roth, and even the mega backdoor Roth IRA. But honestly, it's overwhelming trying to figure out which one makes the most sense for us. So what's the best route for contributing beyond our Roth IRAs, given that we're self-employed with modest W-2 incomes and want to optimize for both taxes and long-term growth? What a good question, Glyce. If I were in your shoes, I would ask myself one question. Do I care more about long-term growth and compounding in retirement, tax-free growth, right? Or do I care about tax savings today? If the answer is I care about long-term tax-free growth in my retirement, I would go to carry.com, C-A-R-R-Y.com and open up a account with them to do the mega backdoor Roth solo 401k.

6:01That's what I do. That's what Robert does. You can literally like put 70 grand a year into your retirement accounts if you're trying to really compound a lot of money over a long period of time using the strategy. On the flip side, if you're someone who cares more about the tax write-off side of the equation, the SEP IRA is also something I've done in the past. back when I was trying to figure out taxes and everything like that. I think you contribute up to your annual salary there as well. But that's the big thing. And Robert, I'll let you answer the question as well. But before you do, I just want to like remind people, everyone I feel like is hypnotized by this idea of, oh yeah, I didn't pay any taxes this year.

6:40I saved all my money. I didn't pay any taxes. The only way that business owners don't pay taxes is by not making any money. right and so like when you don't make money on paper it's so much harder to qualify for loans to max out retirement accounts to like to do things that i would argue taxes are an okay excuse like the the toll right of paying money to be able to do those things it really just depends on your situation but i really think that people need to flip the switch out of oh i'm gonna just report all these paper losses and all this stuff to save on taxes and they realize like wait i can't do things that I was hoping to do with my money because I don't have money on paper.

7:22I think that's a really insightful breakdown. And, you know, we talk all the time. It's not what you make, it's what you keep. But in this instance, I think you're 100 % correct. So many people try to get fancy and figure out ways around paying taxes, which we should all do. We should use the tax code to our benefit. But instead, what you're alluding to is so many people are worried about that so much, they're not worried about increasing their income. Because at the end of the day, you need the income first. I see people all the time that are making 48 grand, 68 grand a year. They've got$2 ,200 in their Roth IRA, and they're worried about tax strategies.

8:01How about we get you to 100K in earnings first and get your 100K base built first, then worry about getting fancy. So yeah, I agree 100%, Austin. I think you covered it well. and I just wanted to give my kind of flip side of the story because too many people try to get fancy too early. I think you guys are spot on. See if the SEP is a good fit. Do what Austin said with Kerry.com and I think you guys will be in a great position, but I would definitely focus more on getting your income up. Having a little bit of taxable income, six figures even, is a wonderful idea in the long-term, my opinion. Yeah, I agree.

8:37It's trickeration by deception. On one hand, they want to show income and be able to get loans and get good interest rates. But on the other hand, they want to try and get all of these benefits. You have to find the happy medium. I, of course, enjoy all the benefits that the IRS creates for us in the tax code, but I also make sure that I'm still able to have good credit and be able to get loans when I need them. Our next question comes from Jacob Y. Hey, Austin and Robert, my name's Jacob, and I had a question about how my wife and I should handle our retirement accounts. My wife is 23 and has a traditional IRA from her time working at Aldi during college.

9:14It's currently worth about$3 ,400. I'm 27 and I have a pension through my employer and a Roth IRA with a balance around$12 ,800. I've been contributing$85 per week to my Roth IRA since I had the account first opened and her old job doesn't offer any retirement plan. She had recently started a new job that offers a simple IRA with a 3 % match. My first question is, do you think it makes sense to convert her traditional IRA to a Roth IRA while the balance is still small? And my second question is, now that she has an employer match, should we focus on her simple IRA first before adding anything to my Roth IRA, or do we try and contribute to both?

9:54That's a good question. Robert, you want to kick it off? Yeah, I like this situation, and I really like where their head's at. But my first take on this would be, get that Roth as close to matched out as possible. I know you mentioned$85 a week, which gets you halfway there, a little bit above half, but we want to really try and max it out at that$583 a month. I would definitely transfer the other smaller IRA over to the Roth and get that in there. You're going to have a little bit of a tax hit now, but at your ages, I think it's a tremendous opportunity to get that Roth for both of you guys built up tax-free in retirement.

10:29So you can really start to pile on that money year after year. Yeah, I agree. I think you want to get that$3 ,500 converted, which means that you'll probably end up paying$500,$600 in incremental taxes on that conversion. Just as a reminder there, make sure that tax payment is not coming out of the account itself. You're just saving that money on the side. Maybe it's a little side hustle action. Maybe you're just a little sinking fund, pull it from your emergency fund, whatever, but it's not coming out of the investment itself because that's kind of counterintuitive, right? But yeah, match beats Roth beats taxable.

11:00That's what we always say. So in your wipe situation, contribute up to that match of 3%, get the free money, and then max out the Roth IRA. And if you still have money left over, then do the taxable, right? This is your public.com account where you just put money in and trying to have it grow. Match beats Roth beats taxable. It's been our sort of mantra here for a while now. Get the free money, get the tax-free growth, and then get just the compound interest over time. Y 'all are both in your 20s. You're doing such a great job when it comes to investing at such a young age and we could not be more excited for y 'all.

11:31Now our next question comes from Jane S. Jane says, we love your podcast. It's fabulous and we listen to all episodes. My husband and I live in New Zealand, but would love your advice. We find the lessons very relevant, even internationally. We're 58 and 59 years old and still want to build our long-term wealth, but see our paid salary jobs sort of winding down. I work in marketing. I earn$180 ,000 a year. My husband works for a design company earning$90 ,000. His job is tenuous, mine very tenuous. I feel like people are kind of gravitating more toward Gen Z when it comes to marketing. So we just want to make sure if something shifts in the next five to 10 years, we get ahead of it.

12:07Now here's our situation. We have a paid off home, no mortgage, that's worth$3.2 million. We have three rental properties worth$3.2 million as well, but a combined$2.8 million mortgage across all three of them. We have investments of$3.8 million, of which$3.3 million is aggressively invested and includes index funds, and$500 ,000 in a KiwiSaver superannuation fund, which we can't access to 65. Must be a New Zealand thing. Sounds good. Jane also says, we want to keep building our wealth and have it working for us as long as possible so we have a wonderful amount of money to pass on to our three children one day and to support our own retirement.

12:48How would you recommend we do this? Should we use some investment funds to buy a business, maybe buy more rentals, pick up a lower paid retail job? I'm quite interested in hospitality, so maybe a little B &B or motel, but these may require investments to buy and not return as much for the work that's involved. We don't really want a business with staff. If we can avoid it, but something we could do ourselves might exist, might not. But long story short, what should we do as we are not ready to slow down just yet? Robert, what do you think about the situation? I think they're in a tremendous place to be financially, and I would be very careful.

13:22At 58, 59 years old, you guys have done a really great job, and I would hate to see you go out and spend hundreds of thousands, maybe a million dollars on buying a business or buying partial ownership in some existing business or whatever it may be. I would just hate to see you risk large sums of money at 58 or 59 years old and go backwards financially. So in my opinion, I would wind down the jobs when they wind down. Don't force it. I would probably look at finding a lower paid job because even if you're making 150 now and you find something for 60 or 70, that money can still all go towards your net worth and helping you continue to build more wealth.

14:03And so I think you guys are in a great position. I'd be very weary of going too hard at 58 or 59 and potentially going backwards. So I would pick safer investments, maybe with lower returns to make sure you're heading in the right direction for the years to come. Yeah, I think that's good advice. I don't think that they should take this three and a half million they have invested and like go cash it out to go buy a random business for a couple million. Like literally just think about the rule of 72, which tells us that the S &P 500, right? The American 500 largest, most profitable companies doubles every seven years in value, right?

14:42So if you have your 3.3 million that is aggressively managed and invested in index funds and ETFs, especially the ones we talk about, your 3.3 million in seven years will likely be worth around six and a half to seven million, depending on what the market does. I think six and a half to seven million by what would that be? Your mid sixties. It's pretty good retirement. I don't, I don't think there's anything wrong with that. I don't think anyone's mad about having six million,$7 million in the bank account with a paid off$3 million plus mortgage. And another call it probably by that point, half a million to a million in real estate equity in your rentals.

15:15so it's just like you guys are gonna be fine you're gonna have a net worth probably excess of 10 million dollars if you continue on the path that you've been on and i just want to reiterate yeah like do the marketing stuff due to the design company stuff and when or if it ever happens that you get phased out of your job for just like not being a gen z or something like whatever that's cool time to reevaluate and say we don't have to go earn call it a quarter million 260 270 280 maybe 300 ,000 by that time a year in income to support our lifestyle. We have a paid off mortgage. We've got nearly, you know, six, 7 million in our investments.

15:52We've got these rental properties. Our kids are through college by this point. Like everything's great. Now you say, what makes me happy? You mentioned like, you know, get a part-time retail job or maybe do some small lodging or like hospitality work. Like maybe you go work for a hotel. Maybe you guys have a passion project of taking half a million of this and like building a cabin. Like, I don't know, but like you're at a point in your life financially where you can make those decisions. Yeah. And I also think they could look at it from this perspective. You have all of this experience in marketing, go open an online agency.

16:26There is so many ways to make money consulting and doing small business marketing to where you might be able to make a couple hundred grand right there and not have your age come into play to where someone was like, you know, thinking about like for me, for instance, as you get older, you don't want to feel like ageism is in the way of you making money. So I think you could do that as well and actually look at it as a side hustle that could grow to be really big, especially if you're good at the marketing stuff. So I think you have a lot of opportunities. I wouldn't rush getting out of the job and definitely look at downsizing your role, enjoying life.

17:02I mean, you're in New Zealand, one of the most beautiful places on earth and really just absorb and do the right things with the money you already have. That's what I would do. So our next question comes from Jack H. Jack says, Hey guys, my name's Jack. What's up, Jack? How's it going? I'm a big fan of your show and all of the advice y 'all give. I'm in my mid twenties and I just bought a house. I currently live with my girlfriend. She's paying me half the bills, mortgage, interest, taxes, insurance, utilities, stuff like that. And I should have another roommate moving in in a month or two. We will then split all the bills into thirds.

17:36I owe about $310 ,000 on the mortgage. The interest rate is 6.125%. I don't want to just make the minimum payments as over the span of 30 years, I'll be paying over$300 ,000 in interest, which just doesn't sit right with me. I'd like to contribute an additional$400 to$500 a month to the principal, but I'm unsure what the best way to do that is. Should I just dump all the extra money into the mortgage? Should I be investing it in the stock market? Will it grow larger and then put that all into the mortgage. What do you guys think about my situation? Robert, I'll kick it off. Jack, love where your head's at, right?

18:10You're trying to optimize for interest and optimize for wealth building in the future. So here's the million dollar question, or in your situation, the$300 ,000 question, which is, is that extra 400 to 500 a month better serving you by saving interest in your mortgage or is it better serving you growing in the stock market? So let's start with breaking down the interest in the mortgage. I did some digging and your mortgage payment is probably close to$2 ,000-ish a month. So what you're doing here is you're saying of the$2 ,000 a month mortgage payment, I'm going to take an extra$400 to$500 a month and$2 ,000 is going to go to principal and interest.

18:51Much of that skewed toward interest in the first several years, but all of that$400 to$500 will go toward the principal of the mortgage. So according to some of these amortization schedules I was able to configure behind the scenes here, you should pay your mortgage off about 12 years faster by adding this$400 to$500 a month to the principal. So now the question is, okay, cool. For the last 18 years, you've been putting about$2 ,400 a month toward your house. And now for the next 12 years, right, because that's the 30 year allotment you would have done with the next best thing, which is just paying the minimum monthly payments on your mortgage.

19:29So for the next 12 years, the goal here is to say, cool, I've just freed up$2 ,000 a month. Should I now take that and go invest it? And the answer to that question is yes. So whatever you think about this, like tactically speaking, what you have to understand is, is your money going to grow more for you over the next 30 years by simply paying the$2 ,000 a month mortgage plus the$400 to$500 a month just goes to a Roth IRA or a taxable brokerage account? Like what does that turn into over 30 years? And then comparing it to investing nothing for the next, what would that be, 18 years? And then over the subsequent 12 years, investing all$2 ,000 toward your taxable brokerage account, Roth IRA, stuff like that.

20:14So Robert and I just ran the numbers and we're going to walk you through exactly what we found. So situation one is you make extra payments for the next 18 years with this$450 was the assumption we used toward your mortgage and do not invest it at all. Right. And now at the end of 18 years, you will have a paid for house and then you're going to take the 2000 monthly mortgage payment, add the 450 to it, Now you have$2 ,450, and all of that gets invested into the markets. And then you do that for the subsequent 12 years, which gets you to that 30-year allotment period that you were going to have regardless of just banking minimum payments on your mortgage.

20:54That number that you would have at the end of 30 years is$775 ,000. Now, to your point, yes, you would save another$300 ,000 in interest. so we could even bump that up to say 1.1 million if you want depending on how you think about that interest but you're not really going to have that money in your pocket it's like money saved so long story short 775 000 is what you would have in a brokerage account but if you want to use mental gymnastics you'd have i guess close to that 1 million 1.1 million from the saved interest as well now let's say on the flip side you just made minimum monthly payments on this mortgage at a 6 % interest rate, which is at$2 ,000 a month, and this$450 per month that you were going to put on extra on the mortgage, you just go use it and you max out your Roth IRA with it, or you contribute it to your Roth IRA.

21:42I don't think it would max it out anyway, but you're investing it, right? You're investing that$450 a month. If you invested$450 a month over a 30-year period of time, the same 30 years we just talked about here, you would have$1.5 million in your brokerage account. $1 ,531 ,000 is what it says, which is another$400 ,000 more than the, if you include interest scenario, and more than double in your brokerage account than if you went and used the extra payments to pay off your mortgage early. So yes, you would have$1.5 in a brokerage account, and yes, you technically did pay$300 ,000 or so in interest.

22:19So I guess you want to bring that down, it'd be like$1.2 or something like that, but it's still more than the other situation. And this is real cash versus like saved interest. So Robert, we just broke down the numbers. These are all real. We just did the calculations. What's your take? I love it. It just really shows you we talk about the arbitrage of money and always making sure that you have that consideration that the positive arbitrage is in your favor. It's very trendy for people to talk about paying extra payments on their mortgage, paying down their mortgage faster. But many times the numbers just don't work out because if we're making 10, 11, 12 % over here in the market and you're making, you're saving this interest over here at 6%, you just want to have that arbitrage in your favor and your breakdown really illustrates that and highlights it.

23:08So I think it's personal finance is personal. Everyone's going to have a different opinion on this one. For me personally, I would pay the minimum payments because the other way I look at it is too, down the road, let's say you're paying six, six and a half percent right now, you can always refinance when rates come back down while you're still making all this money in the markets by investing that$450 a month. Now, the only caveat here that I will add for anyone that's doing the mental gymnastics around this math is this. The only way this really works how Austin illustrated is if you actually invest $450 a month, because if you don't automate it and it's just on the honor system and you start missing some months, you went on a vacation, then you're not going to have the same outcome in which that I would rather see you do it on the mortgage because hopefully you have that automated through your mortgage company.

24:00So it works really well either way, but I would rather pay the minimum payment, make the money in the stock market because we have a lot of years where the markets are more than 10 or 11%. So it really accelerates even further growth for retirement. So listen up, folks. You can lock in a 6 % or higher yield with a bond account on public. But remember, your yield isn't locked in until the time of purchase, so you might want to act fast. Lock in a 6 % or higher yield with a diversified portfolio of high yield and investment grade corporate bonds only at public.com forward slash rich habits. And don't forget, Monday's episode was all about direct indexing on public.

24:40I've begun to start direct indexing on public myself. cannot wait to share how much money in taxes I will be saving because I'm doing that right tax loss harvesting is automatic when you direct index on public.com so go check out direct indexing if you're not doing that already our next question comes from Sergio O Sergio says hello Austin and Robert my name is Sergio I'm 27 years old happily married and a proud dad of a five-month-old baby congratulations my friend that is awesome you are living the dream that's a rich man Robert that's a rich, rich man. Happily married with a newborn baby. Come on now.

25:13Sergio says I'm from New Mexico and I've been listening to you guys for quite some time now. I've learned a ton from your show. So first off, thank you both for everything you do. Three years ago, I started my construction business and it's going really well. We're expanding and getting our name out there. This year, I'm on track with my Roth IRA and I have about$20 ,000 sitting in a savings account. Here's my situation. I make$100 ,000 a year. I've got$90 ,000 in total debt spread across three vehicles, credit cards, and some equipment financed for work. I own a rental property in North Carolina with about$60 ,000 in equity, and I'm planning to get a loan to buy land and build some duplexes.