Q&A: Tax-Free Income for Kids, Our Frugal Life Hacks, & Franchise Dos and Don'ts

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0:47We've been keeping you warm for over 50 years. We'll see you at our coat event. Burlington. Deals. Brands. Wow. Visit burlington.com slash coats for details. Hey, everyone, and welcome back to the Rich Habits Podcast, a top 10 business podcast on Spotify. This week's episode is our question and answer edition, which means Robert and I are sitting down and once again, answering your questions. We're going to dive deep. We've got, I think, eight or nine questions in this week's episode. We might be on the little bit longer side, but you guys say you like it. So we're going to keep coming with the longer Q &A episodes if you guys enjoy them.

1:22Yes, these episodes have become quite the hit over the past, let's call it eight months. And so they just keep getting longer and longer. So make sure you tell us if these start getting too long and we can always cut them back. But we really enjoy these episodes because we just get to really engage with so many of you that bring us these hard hitting questions every single week. Well, speaking of engaging with people with their questions, Robert, don't forget, we've got the Rich Habits Network as a wonderful solution for that. A lot of people now, Robert, I think we're at 429 members are inside of the Rich Habits Network.

1:57Unbelievable amount of people. So many questions, so many introductions, so many DMs being asked and thrown around. It's just been so much fun in the Rich Habits Network, Robert. We have consistently now 10, 15, 20 people, every single post chiming in, helping each other out. It is what it is, right? It's a network. It is a network of Rich Habits podcast listeners that want to help each other grow, that also want to learn alongside us. So it's been a lot of fun. I think that's the coolest part of what we've built here. And we're building right in front of you before your eyes, all of you that listen each and every week is building this network of very smart, educated people, whether you're in the beginning stages of your investment journey, middle or even later stages, and everyone is just helping each other.

2:38And I love it. It's great to see when I can pop in there. And I appreciate all of you that are just reaching out with all of your questions. So it's so much fun. So if you want to join the Rich Habits Network, there's going to be a link in the show notes below. You can just go to Google, type in Rich Habits Network. But again, there's over 420 community members already inside of there, excited to learn network. And the coolest part is there's people that are 22. There's people that are 65. There's entrepreneurs. There's W2. I mean, everyone from all walks of life are in here, and it's just so inspiring to see their stories and get to interact with them on a daily and weekly basis.

3:10So be sure to check out the Rich Habits Network using the link in the show notes below. So before we get into this week's episode, a quick heads up. Time might be running out to lock in that 6.9 % yield at public.com. And right now, bond yields are at highest level since 2009. And you can take advantage of that with a bond account at public.com. But here's the thing. The Fed has signaled potential rate cuts in September. And there will probably be more to come this year and into 2025. But the good news is that with a bond account on public.com, You can potentially lock in a 6.9 % yield until 2028.

3:48And when the Fed lowers interest rates, your yield remains the same. That is the key point here is you are locking in that rate no matter what happens with the Fed. But you must act fast to take advantage of some of the highest bond yields in years. Discover how you can lock in a 6.9 % rate until 2028. The new bond account only at public.com forward slash rich habits. All right, everyone. Our first question comes from Nicole T. Nicole says, I have a question whether it's worth to pay down my mortgage. I'm already maxing out my retirement accounts, and I have now money invested into a high-yield savings account for an emergency fund.

4:26And I'm also investing in my bridge account. However, I have a$600 ,000 mortgage at a 7.25 % interest rate. I have$300 ,000 in cash. I'm trying to decide whether I should put all this money in the market or if I should pay off a chunk of my mortgage. But if the rates drop here as the Fed cuts them, then I could potentially refinance my mortgage and then even begin arbitraging more of that into the markets like you and Robert say. But what do you guys think? Robert, I'll let you kick this one off. Nicole, great situation and even better question. Let me take a stab at this. I personally would not pay any of the payments down.

5:01I would get that$300 ,000 in the markets because remember the S &P 500 alone is already at 19 % gains for the year and we're only three quarters of the way through. So keep that in mind. We always talk about that positive arbitrage and this is one of those situations where you're gonna take advantage of it. Even though 7.25 % on your mortgage is quite high, I don't think it's time to look at refinancing just yet because with the Fed rate cuts, I would wait a little bit longer for those rates to come down enough to make it worth your while to refinance and cover the fees of refinancing. And for now, get that$300 ,000 working in the markets and utilize that positive arbitrage to your benefit.

5:42I'm right there with you, Robert. And I mean, think about it like this, Nicole. You've got$300 ,000 sitting on the sidelines that if you had started investing earlier this year, you'd be up nearly$60 ,000 in profits against that. Now, here's what I would do if I was in your situation. I would likely set aside$20 ,000, maybe$50 ,000 of this$300 ,000. So when the rates do begin to come down, let's call it over the next 9 to 18 months to maybe 4.5%, 5.5 % interest on these 30-year fixed mortgages, you can go and refinance it, have some cash set aside to pay some of that refinancing fee, and then maybe even chuck a little bit extra onto that mortgage if you want to lower the payment, assuming that it might be overwhelming right now.

6:23As you know, we don't want that to be more than 30 % to 35 % every single month, and a$600 ,000 mortgage at 7.25 % might be more than that. So when you go to refinance over the next nine to 18 months, make sure you put enough down alongside the refinance where you have now some more flexibility in your monthly budget to invest and not be house broke. I love that. I love that so much. And that is such a great way to wrap up that question, Austin, just because people need to think through the total ownership cost, but also the opportunity cost when they're thinking about what to do with their extra money and where to invest it.

6:58So, so important. Our next question comes from Viral S. Viral says, in episode 12, you guys had mentioned that parents with a small business can claim up to$12 ,500 from their business profits and begin using that to pay their children even without putting them on payroll. If the child is not run through payroll, what is the path to claim the payment as a business expense and how do we prove it as earned income for the child since a Roth IRA contribution requires earned income? So my immediate thoughts here, Robert, let's assume that you're not doing the Roth IRA. Let's just assume you want to just pay your child every single year from your business.

7:35You want to keep the money in the family. You want to have a little bit of that business deduction. I believe, and again, I'm not a CPA, but you can just issue that 1099 to your child, assuming they do not want to participate in a Roth IRA contribution. However, if you do want to participate in a Roth IRA contribution, you can try to add them to your payroll. you can make them a W-2 employee, and you could pay an extra couple hundred dollars a year in taxes around them as their employer. So assuming you pay them less than$13 ,600, they will not owe any federal income taxes on that because that's the standard deduction for the year.

8:09It's below that sort of line where you'd have to pay taxes on your income. But they would, however, still have to pay some of those Social Security and Medicare taxes, right? But in our opinion, it's like, come on, just figure out the extra couple hundred bucks every year and make it so that if they are on a payroll and if you really want to get after that Roth IRA, all the deducts are in order and you're able to now allow them to realize that income is earned income. It's taxable income, right? You just paid your Medicare and your social security taxes on that income. And now they can invest that into a Roth IRA.

8:40And Austin, just a quick note. I didn't want to interrupt you because you are crushing this answer, but the standard deduction amount for 2024 is actually 14.6. I didn't want to interrupt you, but it did go up. So I just wanted to get that out there to make sure for anyone that's doing the deduction for this year. And then one thing I would like to add is that if the business is an S corp or a C corp, you're not exempt from paying the employment taxes. Both of you, the business owner and the employee will both have to pay social security and Medicare taxes. However, the child does not pay federal income tax, as long as it's up to the amount of the standard deduction.

9:19I think we could talk about this topic for hours. I love it so, so much because in my travels in education, I don't know that 10 % of the people out there actually utilize these tax benefits for their small business when they have children. And I'm not saying you should get yourself in trouble. And if a kid is doing normal chores that they would do, that's not considered real work. But if you have a business and you can put them to work, whether they're in social media, they're cleaning, they're organizing, any of those things that are real tasks that you would have to pay someone to do for your company, this is a great way to help your kids build wealth, get them on the right track, especially if you set up that custodial Roth for them and get that maxed out every year.

10:03Our next question comes from Priyanka K. Priyanka says, how should we split the money between our bridge account and our retirement account? We want to retire in the next 10 years. My husband and I are in our mid-30s and every single year we invest about$60 ,000. 40 % of this goes to our retirement accounts and 60 % of this goes to our bridge account. Help us figure out if this is a good allocation when it comes to investing so that we can retire early, but also have enough money in our retirement nest egg so that we don't ever really run out of money. Now, Robert, this question would be so much easier to answer if I had any more information about their financial situation, but we'll just take a stab at it.

10:42Well, let's do this. Let's base it on the$100 ,000 mark because I think that makes for easy math. Okay. So let's say that the average listener right now is taking home$100 ,000 a year and you are investing 15 % of your take-home pay every single month. That means you're investing $15 ,000 a year. In my opinion, as we come back to this sort of rule when it comes to investing priorities, we say match beats Roth beats taxable. And we say that order because the match gives you 100 % absolute return on your investment into your 401k in the form of a match from your employer. So we want to make sure we get the free money.

11:20So go up to the match. Next, we have the Roth IRA. That's$7 ,000 a year. And then after that, assuming we have autonomy on the 401k, we go back and we max that out if we can afford to. If we do not, and it's all in these underperforming target date funds, then we park the money in what we call a bridge account on public.com, which is a normal taxable brokerage account that's used as a way to bridge us from an early retirement into our 59 and a half age bracket where we can finally start tapping into our Roth IRA and our 401k. So that's just the quick and dirty on what we think. Now, if we were making$100 ,000 a year, investing$15 ,000 of that toward our retirement accounts, we of course would go up to the match with our employer.

11:57So let's say they match that 3 % of our$100 ,000 salary. You're now investing$3 ,000 to that 401k, then it gets 100 % match from your employer. So you have$6 ,000 invested. And then you go and jump to the Roth IRA at 7 ,000. So you have the 3 ,000 here plus the 7 ,000 here. Now you're at $10 ,000 total invested out of your 15 ,000 pot. Now let's assume that you do not have autonomy and the 401k is in a bunch of target date funds and you don't want to over allocate to that. So in that instance, in my opinion, I would take that other$5 ,000 you have and park it into a public.com brokerage account and invest it into the index funds we talk about.

12:34But if you did have autonomy and you could make sure that the 401k was invested correctly into the cool ETFs we talk about in the index funds, then it would be a good idea to take that other$5 ,000 remainder and park it back into that 401k. So you've got all this money now in retirement. Now, here's the real question, Robert. If we just take$15 ,000 a year and we're investing it, we don't exactly have that much left so we can park money into a bridge account. So what's your perspective on this? Do you think people should then maybe under allocate toward a 401k, more allocate toward a bridge account?

13:08I mean, how does the math work in your eyes? Yeah, this is, I think, one of the most important questions a huge portion of American citizens, let's say 35 years and older face and they don't understand. You and I broke it down really well in the net worth millionaire episode of the podcast. I don't remember which one that was. It was our biggest disagreements with Dave Ramsey. Yeah, our biggest disagreements with Dave Ramsey. And this gives me goosebumps and chills because it's so damn important. And here's why. So many people blindly go through their careers, maxing out their 401ks and being proud of it, paying down their house and being proud of it.

13:47But then they have all of this equity and all of this money, but they have no accessible capital from those investments, from those retirement accounts until they actually retire. So you're actually cash poor all along the way. That is why we preach to the mountaintops to understand and have the bridge account, something you control, something you have autonomy on, and something that you can take money from whenever you need it, want it, or wanna do whatever you want with it because of the fact that you control it. It is so important. So when we talk about the numbers, I think the way I would look at it is this.

14:23As you're building the 401k and the Roth IRA, I think probably the best strategy is once you get to 250 or$300 ,000 in the 401k, then I think you could take your foot off the gas a little bit and start then really putting money in to build the bridge account. Because what you don't wanna do is ignore having that autonomy in that account and being able to build it to a very nice level in case you wanna retire early or you want to do anything that you'd want to do as you get up in the years. So it's very, very important. But until you have that base built in, obviously the 401k, you want to get the free money all along the way, but just don't take your eyes off of the future and knowing the importance of the bridge account.

15:07So to put some real numbers around this, Robert, I just did some math here. If you're investing, let's call it back to this example of that$100 ,000 and you want to allocate 15 % to your investments and you are doing a 3 % match with your employer, so you're investing$6 ,000 a year on that 100 ,000 salary, again, because they match your investment, you'll be looking at about a half a million dollars in this 401k after doing that for about 20 years. Now, if you wanna increase that maybe up to a 4 % or 5%, right, assuming you do have autonomy over your investments, because again, we don't wanna over-allocate money into an underperforming account that invests into bad funds, then maybe you're starting to look at having$700 ,000,$800 ,000 in this 401k retirement account over a 20-year period.

15:52Okay, great. We've got the money just like what you were talking about, Robert. Now it's time to take the foot off the gas, right? This money is going to work for us if we want to invest toward it or not, right? It is large enough. It's going to double every seven years and we've got time on our side still. We're probably at this point in our late 40s, maybe early 50s. And so now it's time to really begin thinking about putting that same foot on the gas with the bridge account. How now do we grow that to$250 ,000,$350 ,000, allowing us to focus that money on income producing ETFs that can pay us$3 ,000,$4 ,000 a month and supplement a potential early retirement.

16:24So again, I know this was kind of long, Priyanka, but we wanted to really break it down for you here because I think at the end of the day, a lot of people could be confused about the purpose of a bridge account and when it's an optimal time to begin kind of reallocating funds away from a retirement nest egg and into a, wait a second, I can afford an early retirement bridge account. Well, and I think one of the most important takeaways from this and why I get so excited about it is this really illustrates why so many business owners and people that don't have 401ks end up more wealthy than people with 401ks.

16:59And that is because so many people are led to believe that a 401k is a great retirement strategy. And it really isn't because they underperform the market so poorly. But because you're getting that free money, if you know how to do the balance between how much to put in the 401k, how much to put in the bridge account, how much to max out the Roth IRA every single year, you can find a really great balance to build wealth and be able to take advantage of the 401k as well. I love that, Robert. Now, before we jump to our next question, I need to give everyone a heads up. Time may be running out to lock in that 6.9 % yield on public.com.

17:34When you invest in a bond account, you can lock in this rate until 2028. But with potential rate cuts on the horizon, you might want to act quick. Discover how you can lock in a 6.9 % yield until 2028. The new bond account only at public.com forward slash rich habits. There's going to be a link in the show notes below. Our next question comes from Naresh P. Naresh says, as the high yield savings interest rates are about to go down because the Fed rate cuts, I started to think about alternative ways to earn a high yield on my money. I've been chatting with Austin regarding this private debt fund from F Street, where they pay you a 10 % interest rate on your money every year.

18:12However, they make it by lending out your money at a 15 % interest rate. They do hard money lending. Do you guys think this is a good idea? Robert, we've never talked about F Street. I don't use F Street. I've never looked into F Street. So let's keep F Street out of the equation for a second. I think what would be more important, though, is for us to explain, one, what hard money lending is, two, what private credit is and sort of how that took the world by storm over the last couple, call it 18 to 24 months, and then three, other alternative ways to earn a high yield that might be less risky.

18:42Well, I'm going to start with the risk. Naresh, I don't think you should be doing private money lending until you're at a$2,$3 million net worth where you're fully diversified into all the things we talk about on a daily basis. Private money lending can be very lucrative, but it's also very risky because you are lending this money, whether you're lending it directly to a company that is borrowing funds or you're lending it through Yieldstreet or one of the other websites that does it. But it is very risky because you are betting on these real estate markets or other diversified categories that may not be as mature as I'd like to see for someone starting out.

19:19I look at hard money lending, private lending, private credit, and even investing in startups as something that you do later after you have all of your bases covered and you're really, really secure in your base if that's$2 million,$3 million to get to this sector of investing. And yes, you can get higher yields. Sometimes hard money lenders will get 15, 16 % on their money. But the problem is when they do this in a real estate deal or for a local syndication, if that company fails, your money is gone. And unless you really, really want to spend your time in court, you know, being the second or the third mortgage on a property to be able to get your money back because you're never going to be first.

20:01The bank is probably always going to be first or the syndication. You have to be very, very careful. Not saying don't do it. I'm saying move with caution because I don't know where you're at in your investing journey at this point. And I certainly wouldn't be looking at this strategy early on. Let's say Naresh is really focused on this 10 % annual yield. So sure, if you want to do some hard money lending and get real risky with it and cross your fingers that whoever is taking your money to flip a house or whatever they're doing with the money pays you back, be my guest. but it is not uncommon to see some of these fix and flips fall through where they can't sell like they wanted to in those first three or four months.

20:42And now you don't get your money back because the house still hasn't sold yet, or they do sell the house, but they break even on it. Now they can't give you your money back with interest. And so there's all these bad situations that can happen when it comes to hard money lending from an investor perspective. Here's some other ways to make some yield with your portfolio, assuming you don't want to do the public.com bond account. First one, covered call ETFs. We've talked about SPYI, we've talked about QQQI, and IWMI. These ETFs will pay you an annual yield higher than your 10%. And if the S &P 500 or the NASDAQ, the actual indices trend higher throughout the year like they did this year and last year, the actual prices of these covered call ETFs will rise as well.

21:19I think the price of SPYI, the actual price of the ETF is up about 4-4.5 % this year. And that's on top of the 12 % it's going to pay you. So you're looking at what a 16 % total return here in 2024 so far with SPYI. That's a great alternative. Another one for you to consider REITs. Robert and I talked about REITs a lot over the last couple episodes. These are real estate investment trusts. You won't get that same 10%, but you will be getting 5, 6, 7%. And it'll still be in real estate, something you might be interested in because you want to do some of this hard money lending. And now your customers aren't Uncle Bob and Miss Rebecca over here.

21:55But instead, your customers are Walgreens, Costco, and Kroger, and you now own a share of this larger real estate investment trust that owns commercial real estate in a meaningful way. So those are just two ideas, Naresh, that you can kind of run with here as it relates to generating some more yield in your portfolio. Yeah, this is a great question for everyone to pay attention to. And I have seen so many of my wealthy lawyer friends and doctor friends and people in those fields that make a lot of money and want to diversify. So then they find a local contractor that may or may not have the experience of doing these flips or doing these deals.

22:30And they invest$50 ,000,$100 ,000 with these guaranteed returns only to lose all their money. And the way I look at it is once you get sophisticated and you have millions of dollars, then I think you can take the higher risks to get the higher returns. But until then, I'd rather see you do what Austin said or even just put it into VOO and QQQ because we know over time they're going to make 10, 11, 12 percent. you're going to win and everyone's going to be happy. Our next question comes from Connor L. Connor says, what financial decision would you change? For me, it was back in 2020 and 2021 when I made the decision to invest a few thousand dollars into some meme cryptocurrencies while they were at all-time highs.

23:09In hindsight, I realized this wasn't the wisest choice, especially given my financial situation. I had less than 5 ,000 invested in my retirement accounts and only$30 ,000 saved in an emergency fund. Instead of chasing the hype, I should have just focused on building my 100K base, buying the ETFs like VOO, VGT, Moat, and others that you guys talk about and are much more credible. Looking back, I understand that in the grand scheme of things, a few thousand dollars might not seem like a lot to some people. However, when you're just starting out and you don't have much save like I did, every dollar counts.

23:37I got caught up in the hype of a potential quick gain without fully considering the risks of the importance of having a strong financial foundation first. Does anyone else have a similar experience? Robert, I'll let you kick off this one. What is your biggest financial sort of decision that you would change throughout your life? Yeah, I think this question is great. And I'm going to tell you right now, most people do it backwards. They start out with all the crazy investments and all of the hype and trying to like 5x their money right out of the gate with some investment that they shouldn't even be considering rather than doing the basics.

24:12I promise all of you that follow along from someone that's been in this business of building wealth for 35, 40 years, consistency wins. That's why Warren Buffett said, I think his famous quote was, he was asked why not more people follow his investment advice. And he said, because no one wants to get rich slowly. And I love that because everyone wants to take their shots early. And you know, the message from Austin and I, and that is build your base first, start to diversify, then take your shots. So for me, where it starts out is understanding consistency and automation at a younger age were the most important factors for me in building wealth.