Q&A: Preparing for a Recession, Invest $37K or Pay Off the Car, & Active Portfolio Management

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0:46Visit a Marshalls store near you or shop online at marshalls.com. Hey, everyone, and welcome back to the Rich Habits Podcast question and answer edition. these are our weekly episodes where we sit down and we answer your questions right off the dome. We get your questions asked to us via Instagram DMs at richhabitspodcast, also emailed to us at richhabitspodcast at gmail.com, and sometimes we answer questions that are asked inside of the Rich Habits Network, which is Robert and I's way to really connect with our biggest and truest fans. The Rich Habits Network includes eight hours of video coursework and a weekly live stream.

1:24We're now like, gosh, Robert, I think it was over 250 people joined us on our Zoom call last week. It was so much fun. But we're running a seven-day free trial for the Rich Habits Network right now. So if you wanna join, you've been on the fence about it, you're like, I don't know what these guys are doing. $77 a month sounds kind of wild to me. You can literally do a seven-day free trial. If you don't like it, you cancel it, see you later. No hard feelings, all is well. And right now, Robert, we've had over 35 people sign up for the seven-day free trial as of recording this on St. Patrick's Day, which by the way, crap, dude, where's my green?

1:56We're not wearing green today. What are we thinking? We are not. We should probably change clothes. Although I don't know if I have any green here in the Florida place. So interestingly enough, this is what they get. But yeah, go sign up. Go check out the Rich Habits Network, guys. We've had so many people do the free trial and like literally 70, 75 % of them stick around because they realize, wait a second, these guys are legit. They're hosting the live streams. The video course works amazing. They're getting back to my questions. The community is so responsive. And like our episode last week, right?

2:26You want to surround yourself with people. Your network is your net worth, right? That's why we call it the Rich Habits Network, because we want people to be networking, communicating, and knowing that everyone's going in the right direction. Before we dig into the webinar, I think the coolest part about what we do at the Rich Habits Network, the live streams are great. And people always ask me, do you guys really do these live streams every single week? or do you pass it off onto somebody in the team? And I want to make it very clear. Austin and I host the entire live stream. It's not like some of the fake gurus where they come on for five minutes and do an intro and then pass it off to a team member or an intern.

3:02This is Austin and I start to finish every single week. So keep that in mind. But in my opinion, the coolest part about the Rich Habits Network is the school community. We have so many amazing like-minded people in the community all sharing their thoughts, their aspirations, their dreams, but also we have accountants, we have lawyers, we have real estate agents, we have mortgage lenders, we have all of these people of varied skill sets. And I think that is where the magic is for the everyday person that's on the fence of joining the Rich Habits Network. Because by joining, not only do you get access to Austin and I on a weekly basis, all of our thoughts, all of our updates, market insights, all of that, but you get access to the hundreds and hundreds of other really smart people in the community that are there to help each other and grow alongside each other.

3:52So keep that in mind. That is my favorite part of the Rich Habits Network. And then finally, Robert, let's remind everyone about what's going on later today, March 20th at 4 p.m. Eastern time, which is our Financial Independence Retire Early webinar. This webinar is a breakdown of the FIRE movement. FIRE, F-I-R-E, is an acronym that stands for Financial Independence Retire Early. And it's essentially a playbook that allows people to retire early, right? Have the autonomy, the decision to say, I want to work because I like it versus I work because I have to. And so we'll talk about different savings rates, different ETFs to buy, you know, what the 4 % rule is.

4:33It's just a really interesting way for us to dig deep into how people can retire early and share with you how I plan to retire early myself. Now, getting back to the webinar, yes, it is tonight, 4 p.m., Eastern Standard. I'm super excited about it. And just these webinars, to me, are so fun because we can break down, like we always do, otherwise difficult topics to help people understand because personal finance is personal, and we are always here to help guide you on the various topics like fire. And finally, before we jump into this week's episode of the podcast, we have to give a major shout out to our sponsor, public.com.

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5:47Think ChatGPT meets your Apple Stocks app. That is what Alpha does. Really, really cool stuff. It allows you to actually understand why your portfolio goes up and down on a daily basis. Public is a FINRA-registered, SIPC-insured, US-based company with a customer service team that actually cares. Bottom line, your investments deserve a platform that takes them as seriously as you do. Fund your account in five minutes or less at public.com front slash rich habits and get up to$10 ,000 when you transfer your old portfolio. That's public.com front slash rich habits paid for by public investing full disclosures in the podcast description.

6:26So our first question of our Q and a episode today comes from Julia P via email. Again, that's rich habits podcast at gmail.com. Julia says, Hi guys, I've been listening to your podcast for a little over a year now, and I just want to say that it has been so eye-opening and informative. Thank you for pouring your time into educating others. So here's the deal. I'm 28 years old and I'm a single mom. I've gotten divorced last year, which means I recently sold my house and received$90 ,000 for the portion of equity that I owned. And I also received a$4 ,000 bonus from work last week before taxes.

6:58I make$125 ,000 a year. I have$115 ,000 in my traditional 401k, 20 ,000 in my emergency fund in a high-yield savings account. I owe$35 ,000 on my car at 4.5 % interest, which is about$702 a month for me. And then other than my car, I don't have any debt. Now of the$90 ,000, I've already used some of it to max out my Roth IRA for the year. I set aside another 50 ,000 in my high-yield savings account on top of the 20 as a down payment on a future home when the time is right for me. My question is, should I take the remaining$37 ,000 and use it to pay off my car? Or should I take that money and park it in a bridge account, invest it, and see it grow over time as well?

7:40I feel very fortunate to have so many options, but I want to make the most informed decision. Robert, you want to kick this one off? I love this question. And yes, Julia, you have set yourself up very well. And we did a little bit of math for this, and I'll let Austin break that down. But I think the move, if you're looking at it from a long-term time horizon, is to pay off the car, get rid of the$700 a month payment, but pretend the payment is still there and invest the$700 every single month. Because we did some math and it is quite shocking where you'll be at retirement by just making this one really smart and calculated financial move.

8:14So Austin, break down the math adjusted for inflation, because this is really important for everyone to understand, because we're always talking about being consistent with your investments and what compound interest can do for you over time. So Austin, break down the numbers of the$700 a month invested in the S &P 500 until she retires. So the way that Robert and I approach this question, Julia, and why we're going to tell you to pay off the car is twofold. So again, you laid out a great reason. hey, should I keep the debt? Park the$37 ,000 into a bridge account, invest it in the S &P and let it ride.

8:52So let's assume again, you're 28, you put$37 ,000 onto public.com and you invest it in the S &P 500 and you completely forgot about it until you're 65. That's going to be about$850 ,000 adjusted for inflation when you're 65. That sounds pretty great, right? So like bare minimum, Let's do that. But we think there's a better option here. And the better option comes with a little bit of discipline, a little bit of planning, but it's going to yield bigger results. The other option is you use the$37 ,000 to pay off your car. And then that$702 a month car payment that you are probably going to have for the rest of your life anyway, we want you to start investing that every single month until 65, right?

9:37So again, a lot more planning and a lot more discipline comes with that. But if you start at$0 and you take that 702 every month and you just invest it in the S &P 500 at the same inflation adjusted return at 8.5 % here, you're looking at$2.2 million at 65 compared to 850 ,000. So again, if you want to just throw it in that bridge account, let it ride, go get your 850, we love that idea. But we think you are listening to the Rich Habits podcast because you're trying to find the edge. You mentioned making an informed decision. We're going to make sure you have all the information in front of you to make the best decision with your money.

10:16And we think the best decision is to pay off the car and take that 702 every month and invest it religiously until you're 65 years old. And you now have$2.2 million in this brokerage account on top of whatever your 401k is going to turn into your Roth IRA. This is on top of those things. And this illustration really points out something we talk about every day. And that is being consistent with your investments, not trying to time the markets and automating as much as possible, and then letting compound interest do its job. And I love illustrations like this because is the 800K from 37K great?

10:54Absolutely. But if you can stay consistent and automate that same$700 a month as if it's the car payment into the investing, getting that two point something million dollars is so much better long-term. And I want everyone to understand these numbers are all adjustable. If you're trying to become a multimillionaire and retire comfortably, even at$500 a month, if you're at a younger age is enough. It's so important to understand that you just have to be investing early and often and be consistent and you'll get there. So our next question comes from Carson. Oh, Carson says, Hey guys, I love the podcast and you are the reason I have my Roth IRA.

11:30Ray, thank you so much. My wife and I are going to buy a car in the next year. We currently have $10 ,000 sitting in a bond account on public earning over 6 % and about$1 ,500 in the brokerage account invested into VOO and VTI. Should I change this weighting at all based on expected volatility in the markets or should I move the money somewhere else? What do you guys think? I'll take a first step with this one, Robert. Love that you've got$10 ,000 sitting in that bond account. That's going to be spitting out that 6 % or higher yield for you. I love that idea. The reason why Robert and I encourage people to invest along the way when it comes to saving for a big purchase is because normally when you're saving for a down payment or a large purchase for a car or something like that, that comes with two and a half, three and a half, four and a half, five and a half years of saving in a long-term sort of stock market trending higher, essentially.

12:21You're looking at 12 months. I do not know for certain where the stock market's going to be 12 months from now. If you said, Austin, do you know where it's going to be in five years? I'd say, yeah, it's going to be higher than it is today. No problem. All good. But in 12 months, with whatever volatility we've seen so far this year and the tariffs and the war, all the crazy things that are happening, I don't have that same conviction. so i feel good though about this weighting the ten thousand dollars to the fifteen hundred because at the end of the day carson even if your fifteen hundred dollars went down by twenty percent which means you lost three hundred dollars in the stock market you now have eleven thousand two hundred versus eleven thousand five hundred to buy a car and that three hundred dollar difference isn't going to be the reason you don't buy a car you're just going to find three hundred dollars elsewhere in your budget, in my opinion.

13:08So if you want to keep it invested, rock and roll, go for it. But if you had all$11 ,500 invested, that's when I'd say, hey, maybe we pump the brakes. Maybe we move this a little bit more safer into something a little more predictable considering we're going to buy it in 12 months or less. I love this question. And that is a great takeaway, Austin. And I just want to add one more piece. And that is, I always say it, Austin says it a lot as well, is parked money is dead money. And I like the fact that your money while you're waiting and you're thinking ahead, you're forecasting, like we talk about, you don't have this money parked doing nothing because 12 months is too long to just have money sitting in a checking account.

13:46And I see this every single day where people are like, oh, I'm buying a house in two years, so I have$86 ,000 in my checking account. That is not what you wanna do. You need to make sure even in volatile markets that your money is leased is in a treasury bill or a bond account or a high yield savings account. So you're getting that four, five, 6 % because at least then your money is still working hard for you while you plan for the future. So I love that you're forecasting. I love that you're making money with your money for the future. So I think it's a great strategy. Now, here's a question for you, Robert.

14:20Do you have any car recommendations in the$10 ,000 to$11 ,000 range for our friend Carson here? Yeah, I mean, any time you're going to buy a car and you want to pay cash, I think the best way to go about it is to go to an affluent area or search in an affluent area. Because what you want to find is retirees that are giving up a car because they no longer drive it. And if you live in an area where there is an affluent retiree community and you can buy that five, six, seven-year-old BMW or Audi or Lexus, and it has low miles and was well taken care of, that is the move for those of you, whether you're financing or paying cash to do when you're looking for a nice, reliable car that doesn't have 150 ,000 miles on it.

15:11That's what I would do. You could make a whole business around that because a lot of these affluent communities that have older drivers that are no longer using these cars, they have multiple car families, they will sell these cars for reasonable prices and you're not going to have the normal wear and tear of somebody that owned it and had four kids in it, or they beat it up for five years and it has a ton of miles. That's what I would do. I am so glad you said that because that's exactly what I did in 2018, 2019, when I realized I couldn't afford my brand new cool Lexus car payment with a big insurance payment.

15:48And I was being stupid with my money. And I said, I need to start investing more aggressively. I need to get rid of this car and go drive a normal car. And so I saved up and I had about$7 ,000 to go use to buy a car with. And that's exactly what I did. I bought a 2005, so a 15-year-old car at the time, Lexus ES330 with about 45 ,000 miles on it. And it was immaculate. It was a 77-year-old woman who couldn't drive anymore. And the back seats were only used to put her groceries in. I mean, it was a cool, cool car. It worked for me. All I had to do was get to point A, point B and come home. I mean, it was great.

16:23So that is the exact advice I would have given Carson as well, right? Find yourself a car that's, you know, 8 to 12, maybe 13, 14, 15 years old, but it's one of these reliable Toyotas or Lexus or one of these brands like Honda, right? That's been around for a long time. Totally, totally agree, Robert. I love that question. And I'm so glad you did that. That is awesome because I didn't know you back then. So that is really cool. So our next question comes from Braulio C. Braulio says,

17:19at once? How do I figure this out? Thank you guys in advance. I appreciate all the education you provide. Have a nice day. You have a nice day too, Braulio. Thanks so much for listening to the show, my friend. I'll take a first stab at this one. So Braulio, you're thinking about this completely correct. Just to break it down for everyone, there are two flavors of retirement accounts that are like commonly known. One flavor is employer-sponsored. The other flavor is individual, right? Now the employer sponsored one could be a 403B, a 401k. There's a lot of different combinations of numbers and letters over there.

17:53But in this instance, it's a 401k. And then the IRA, right? Both traditional or Roth is the individual retirement account that anyone can open up. They don't have to be employed by anyone, just have a social security number and you're off into the races. So in Braulio's instance, he's saying, hey guys, I've got this 401k from my employer. It's got$75 ,000 into it, but it's a traditional 401k, which means that all the money that Braulio put into this account was tax deferred. He had to write that off of his a taxable income for the year. Now, what happens is you write off the taxes now to pay the taxes later in retirement.

18:28So how it is today, that$75 ,000 will grow to, let's say, I don't know, $500 ,000 by the time he's 65. And then any time that he takes the$500 ,000 or any amount of that and puts it in his checking account and enjoys it, he's paying income tax on that money. And the reason why Robert and I are such big proponents of the Roth 401k and the Roth IRA is because, yeah, you're paying taxes on the money before you put it into the account, but it grows tax-free and all the money you take out of it is also tax-free. So we agree, Braulio, that you should be aiming to have all 75 ,000 of this in a Roth IRA, But we believe you should work closely with like a tax accountant or someone who could, you know, get a better understanding of your total financial picture that will allow you to pay as little amount of taxes as you roll that money over as possible.

19:22What we're saying here specifically is maybe instead of lump sum, all$75 ,000 rollover at once in one calendar year, maybe you roll over$15 ,000 a year for five years and that keeps your taxable income pretty low, right? So that's the way we do it. And then I'll let Robert answer the second half of this as to how to deploy the$75 ,000 into what ETFs and at what time frame. Yeah, I love this question. And Austin, good takeaway. Two things for me. Number one, we should always assume that the taxes are going to be higher in the future. That is why we're always telling people to take that tax hit as soon as possible, because you don't want to kick the can down the road forever and then have a much higher tax bill later on because we have to assume they're always going to go up.

20:05So that's number one. But number two, the deployment you're talking about in a basket of these low cost index funds and ETFs is definitely the playbook because you want something that's going to perform well over time. That's going to give you diversity, but also is going to just be something that, you know, is tried and true. You know, we've talked about this over and over again. People are always like, why do you guys love VOO so much? And that is because it has performed 11.8 % over time for the past 60, 70 years. And we love that because is it exciting? No. Is it crazy high-flying like it would be if you just bought NVIDIA stock or Palantir or something?

20:45No. But we want to make sure that people have enough diversity so they can make sure that their portfolio breakdown provides them security during the tough times and the good times. so they're not just always in these high flyer sectors or stocks. So that's my takeaway for it. I think it's the right move. I always want to make sure to take care of my taxes sooner than later because we don't know what's going to happen down the road. And Robert, you did a great job explaining this. Why it's so important to have these index funds and ETFs in your retirement account is because this is your nest egg.

21:20This is the money that if you blow up this account and it goes to zero, you trade, you do options, you do crypto, whatever. like congrats you're broke now in retirement right this is the account that you don't touch this is your fortress of solitude when it comes to retirement having the ability to retire with dignity means that you have now a wall a financial wall around you through this retirement account that no one's going to be able to break through and penetrate and that happens by investing into the long-standing blue chip tried and true index funds and etfs over a very long period of time The 75 ,000, if you invest it, right?

21:57So there's actually a rule called the rule of 72, Robert. And I love this rule because it's a really easy way for people to think, how quickly can my money double in the stock market? Because we're like, oh, I wanna double my money. I wanna triple my money, whatever, right? So this rule allows people to do that. So Braulio for you here, what you should be doing is the rule of 72 says, you take 72 and you divide it by your expected annual return. And whenever the number that gets spit out is how long it's going to take for your money to double. So we know the stock market on average goes up about 10 % per year, which means 72 divided by 10 is 7.2 or about seven years.

22:35So on average, your$75 ,000 is going to double every seven years. So that's going to go from 75 to 150 to 300 to 600 to 1.2 million, right? We're talking about doubling compound interest. That's how that works. And that's going to allow you to retire with dignity and retire with grace. It really comes down to portfolio construction because so many people think that all of their money that they're investing towards retirement and building wealth is up for grabs. And I think the simplest way to put it is, and Austin, you really alluded to it well, is you have to look at the retirement account as your fortress.

23:14You don't touch it. You're not going into it to buy a boat. You're not going into it to renovate the den or the man cave. Dave, that is your money, your forever money that hopefully you don't dip in and out of year over year because it'll never grow. That is it. Then you have the bridge account. You have the other investment accounts. Those are the ones that if need be, you can go in, take some money in and out of over time because you have your fortress of solitude as Austin stated, because that is what keeps you dignified in retirement. Because at the end of the day, no one's going to be there for you in retirement and you need to make sure you cover your bases for yourself to make sure that you can retire with dignity.

23:57So our next question comes from Mark N. Mark says, hey, Austin and Robert, I know you've talked about the foundations for building your base and your Roth IRA and what ETFs you guys love and recommend, but I have some pushback and I hope you could answer it for me. We all know your favorite ETFs of VOO, QQQ, VGT, VTI, Moat, and others, just to name a few. But when comparing them side by side, most, if not all of them generally follow the path of the S &P 500 due to their heavy weighting in stocks. This doesn't seem very diversified. Wouldn't it be smarter to invest in the S &P 500 as well as then just like other sectors or markets to track different things?

24:36I love the show. I've binged nearly every episode since I found it. I'm just hoping you guys could give me some clarity on this. This is a great question, Mark. Robert, you want to kick this one off? I would love to. Mark, great question. The answer is performance. We could come to you, everyone that follows along and watches the podcast as part of the Rich Habits Network, and we could say, okay, you're going to have XYZ percentage in the S &P 500. Then we're going to do 20 % in bonds. We're going to do 20 % in international stocks, and we're going to do the rest in treasury bills. We could do that.

25:09But when we talk about diversity, we also talk about fine wine and whiskey. We talk about real estate. We talk about cryptocurrency. We talk about fine artwork. We talk about all these things because we don't believe in diversity just for the sake of diversity, if that makes sense. We don't think you need to be overly diversified in your portfolio of ETFs and index funds or even stocks just to say you're fully diversified because in our defense of this, we believe that a smaller basket of index funds is way better than so much diversity that you're not going to perform as well as we would like because you have a little bit of money in way too many different sectors and too many investments instead of a lot of money in the four, five, six sectors that we like the best.

25:57So I hope that helps. I'm right there with you, Robert. And like how I think about it again is this idea of portfolio construction. I want to have the vast majority of my investment portfolio invested into US stocks, equities, ETFs, all that fun stuff, right? Because I believe that betting on America will continue to be the right bet for the foreseeable future. And the easiest way to just reflect upon this and check my work is to look at the Vanguard Total International Stock Index Fund, VXUS. That's the ticker VXUS. I pulled it up here, Robert, the 10-year total return of VXUS is 73%. The S &P 500's 10-year total return, even after this correction we've experienced, 229%.