Should I Take on Debt to Start A Business on The Side? (Money Q&A)

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1:17Wayfair. Every style, every home. If you've been listening to this show for a while, you know it's not just me anymore. It takes a great team behind the scenes to make everything happen. And if I had to hire someone tomorrow, I'd want someone who could jump right in and make an impact. That's why I'd use Indeed Sponsored Jobs. When workplace chaos hits, Indeed Sponsored Jobs helps you reach qualified candidates faster. Your job gets boosted in search results, so you're spending less time searching and more time interviewing the right people. Plus, you only pay for results, which I absolutely love.

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2:33Indeed.com slash podcast. Terms and conditions apply. Need to hire? This is a job for Indeed sponsored jobs. On this episode of the Personal Finance Podcast, should I take on debt to start my dream business on the side?

3:04What's up, everybody? And welcome to the Personal Finance Podcast. I'm your host, Andrew, founder of MasterMoney.co. And today on the Personal Finance Podcast, we're going to be answering your questions in this money Q &A. If you have a question, make sure you go to mastermoney.co slash newsletter, join the Master Money newsletter, and there you can respond to any of those newsletter issues that come out and ask your question via email. Also, don't forget to follow on Spotify, Apple Podcasts, YouTube, or whatever your favorite podcast player is. And if you're getting value out of this show, consider leaving a five-star rating review on Apple Podcasts, Spotify, or your favorite podcast player.

3:42And again, if you want to watch these episodes, you can watch us on YouTube. Just search my name, Andergen Cola, on YouTube, and you will be able to find us there. We are going to be pumping out some new YouTube content as well coming up here shortly, where you will see some original YouTube videos from us that are not in the podcast. We're going to be doing some breakdowns of index funds. We're going to do some breakdowns of ETFs. We're going to go through a bunch of financial systems that a lot of times maybe you can't show on the podcast, but we can go really into detail on some of those. And we're going to have some shorter episodes on YouTube as well.

4:11So I encourage you to make sure you go subscribe on YouTube. Now today, we are going to be talking through six of your different questions. The first one is, should I risk$40 ,000 from my home equity to launch my dream tutoring center or build more clients first? The second one is, should I raid my emergency fund to max out my Roth IRA up front or play it safe and invest in it slowly? Three, is going into student debt for film school in New York City worth it? And how do I avoid drowning in loans? Four, is how do I figure out what my pension is really worth when planning my retirement? Five, what are legit remote side hustles to crush credit card debt if I love reading and editing?

4:49And then six, should I pay off 20 % credit card with a 7 % HELOC or leave it alone and pay it down slowly? We've got all the answers to these questions and more. Let's get into it. All right. So the first question is one that I really, really love. And I love the way that this individual is thinking about this. So I currently am a full-time teacher and tutor on the side. I usually have between four to seven clients at a time. That doesn't seem like a lot, but I can't really take on anymore because of a full-time job and drive time. And I've turned down a lot of people. I noticed the reason why most parents hire me is because they don't want to fight kids on homework.

5:24What I would like to do is open up a 1 ,200 square foot tutoring center where kids can come for homework and help each week. I would probably charge monthly for$250 twice a week and$325 for three times a week. I would start by running it myself from 3 o 'clock to 8 o 'clock at night and then gradually add tutors as I get more students. I was thinking about advertising and marketing hard with Facebook ads, flyers, and open houses. And I'd like to make it different than some of the other major tutoring centers by making it more emphasized on tracking results and have it be more of a cozy and comfortable vibe so that students are more willing to come.

5:56This sounds awesome. I know that I'm selling to parents, though. And my way of funding it up front is to draw on our HELOC on a rental that we own. It's mostly paid off where we have a line of credit over$300 ,000. I think I would need only between$25 ,000 and$40 ,000. Now, if this idea fails and I lose everything, we'd probably just sell the house and buy a new one. It's worth about$550 ,000 and we owe$120 ,000 on the house. I'd love to hear your tips on this. Do you think this is a good idea? Do you think I'm getting in too far ahead of myself and I should focus on getting more clients first?

6:26Any advice would be great. So this is a fantastic question. And honestly, I like your line of thinking when it comes to this. Now, here is what I would think through because I actually really, really like this idea. And for me, sometimes I have to pain and pull back my excitement on businesses because I love business so much and I love business ideas so much. That's why we do the five side hustles that could turn into a full-time income episodes. And so I really do like this idea. And I think it's really solid. And you're solving the biggest pain point that most parents have. I know what this pain point feels like.

6:56The pain point is parents don't want to fight kids about homework. And if you can create a place where they're going to get peace of mind, that the kids are going to do their homework, plus they have tutors there already. This is a win-win situation for a lot of people because A, it helps them advance. And you are basing this on being able to go out there and see actual metrics and actual ways that they are actually improving over time. But B, this also allows you to ensure that parents are going to have peace of mind that it's actually going to get done. And so this is something that I think you already have somewhat of a proof of demand because you are turning people away.

7:31And so you have this unique angle. Because you have results tracking, but you also want to have that cozy vibe. And that is clear that you can differentiate from some of these other chains that are probably stale. And it just looks like a classroom that they're walking into. So yes, I think this concept is super, super strong. Now, before you spend$25 ,000 to$40 ,000 to test the demand first, and before you sign the lease, I would think through this just really quickly. First, we need proof that families will commit$250 to$325 per month. And so it keeps your risk lower if you can figure out if families be willing to pay that.

8:04Now, if you already have kids coming in that are paying that amount for tutoring services for you, and maybe you have a decent amount where you have those clients in place, then you can think through, okay, well, these people are willing to pay for it. More people are trying to get in here. Maybe you get a wait list started, okay? And so with this wait list, what's gonna happen is you're gonna say, hey, these are gonna be the prices of what is going on here. And I'm gonna charge$325 if you wanna come three times a week. And so this is the wait list to get on to this tutoring center. I'm going to be there helping your kids through this process.

8:32Now, another thing you could do to test this out with low risk is you can validate demand now. So before opening your physical location, maybe you can offer a mini version. So you can test out maybe offering, you know, small group homework help at like local community centers and or a church room or a library study room or even, you know, if your home has a, you know, a room that you can do this in, then maybe you do it there if allowed. And you can price it exactly how you plan with the tiers or maybe just slightly lower $250 or$325 a month. And you can run it from three to eight, just like you would your center's future hour.

9:05So for example, in my neighborhood, we have a brand new library that was just built. And in that library, they have like conference rooms, basically, that you can rent out. And you can go in there and utilize those as your way to kind of test this market out first. And maybe you just have a couple of clients or a couple of students to test it out. And then see if you can fill those spots before you sign a lease. If you start with, you know, groups of five to 10 kids in each group. And if you can get 20 plus families to commit to that, then that is a really good indicator. This is your beta test.

9:34That is a really good indicator that maybe you should be doing this. Now, if you can find a space where the lease isn't going to kill you. So for example, if you have a space in the area, that's a thousand bucks a month, that's in a decent area, then maybe that is something you want to consider. If it's 1500 bucks and it's not going to kill you financially, uh, then maybe you can consider that, you know, taking that leap and that jumpstart, maybe you sign a one-year lease. And so you kind of invest some of those dollars and be able to do that from there. But you got to think through this first.

9:58I would beta test at first before you utilize those funds just to make sure that you have enough families in place where this would really, really work well. And so if you do it in a community center or if you can find a library or a local church that will kind of help you rent out rooms, I think this is a really cool way to get that ball rolling. Now, secondarily is the marketing plan. So I do like your ideas for this marketing plan. You could do Facebook ads, you can do flyers, open house. All those are really, really great plan. And you can use really low cost Facebook ads. Honestly, you can, you know, use that pain point, stop homework battles with your kids, cozy after school homework, helping your neighborhood, those types of things are going to be really beneficial, I think.

10:34And if you do that open house and have that pilot program for folks before you rent that commercial space, then maybe you'll be able to kind of get signups early that will help you then get the ball rolling. You can take deposits early on that wait list, and that'll help you kind of get the ball rolling and might even get you some cash to help you with the build out with some first month deposits. And so that's another thing to think through. And you can kind of confirm if there's real interest in this. Now, what I love about this is that you're wise to tap the HELOC carefully, because if you have the proof of demand, then you can start to tap into the HELOC.

11:06If you don't have the proof of demand yet, I wouldn't tap into it immediately. And instead, I bootstrap that tiny version with a low rent that you can utilize short term. And maybe over the course of the first couple of months, if you just really cannot meet demand again, then it would be time to kind to utilize the HELOC to get that bigger space. Now, if you borrow the money and it doesn't work, your fallback is to sell the rental, which has obviously huge equity. But honestly, unless there's a reason that you need to sell that rental, your fallback is still seemingly fine because the rental is paying its own bills and it's cash flowing.

11:33You should be okay to be able to use the rentals HELOC. That's the cool thing about rentals is at least you could tap into some of that cash and some of that equity over time. But starting small makes this worst case less likely. And if you start small and you do that beta test group, it's really going to help you kind of avoid any of the worst case scenarios, which is why I like all of this. So bottom line, yes, it's a good idea. I wouldn't go full size immediately. I would test it out if you could find just some rooms or conference rooms that you could rent. And I would do a micro launch and prove the pricing and demand and make sure that you can scale up with confidence first.

12:05And then if your beta group works out, then you're on the right track and you can move on to the next thing. So I think that's really, really cool what you're doing here. A really, really powerful lesson for a lot of people who want to jump into entrepreneurship. And I absolutely love some of the things that you are thinking through here. So congratulations on the demand for your services. And I can't wait to hear what happens. So if you do this, please let me know. I want to hear the results of this because I love this stuff. All right. The next question is I make about$58 ,000 a year and I plan on working another 10 years.

12:35I'm contributing 18 % to my 401k currently at$54 ,000. and I've maxed out my HSA and Roth IRA for two years and I have an emergency fund with seven months of expenses. Should I pull 8 ,000 from my emergency fund next January to fully fund my Roth IRA immediately or slowly fund my Roth IRA over the year and leave my emergency fund alone? First, amazing job at saving aggressively and maxing out your HSA and your Roth. And the fact that you have a seven-month emergency fund is a really, really powerful thing, especially since you have it in cash. Now you're planning on retiring the next 10 years too and so you're way ahead of the game.

13:09Now, option one is to use your emergency fund to max your Roth early. The advantage of this is that the earlier you get your money moving, you can actually utilize that for compound growth and you can take advantage of market returns depending on what happens. And the Roth IRA growth is completely tax-free. And so front-loading this is going to help you become a really powerful wealth builder. The risk is you reduce your safety net. And that's the part I don't love because you reduce that safety net. If an unexpected job loss or a big expense comes up, then your safety net goes down. So option two is to leave that emergency fund loan and just dollar cost averaging the Roth over the year.

13:45And this is going to keep your financial cushion intact. And you're still going to be able to max out that Roth over the year. It's just slower. And so I think overall, we got to think of our emergency fund as our shield. Now, if you want to use one month of your emergency fund and you're comfortable enough with six months on hand, I'm okay with that. But for most people, I think you keep the emergency fund intact. And then what you would do is in overtime, just dollar cost average into the Roth. Now, a lot of people ask me this question because I always say, hey, I front load my IRA at the beginning of the year and then I do a backdoor Roth IRA as early as I possibly can.

14:15But I don't think you have to do this. You can dollar cost average over the year. You're still going to get some great returns by dollar cost averaging. It is not a requirement to front load the Roth. In fact, you're only going to be just about one year ahead if you front load it the first time. And then outside of that, it's not going to make a huge difference. And so what you really want to think through here is honestly keeping that emergency fund intact. That's why we have so much emergency fund content onto this podcast, because it's so incredibly important to keep that thing intact because you have no idea what is going to happen.

14:42And then instead, allocating and automatically investing those dollars over time back into the Roth is the way that I would look at this. Now, if you have a little bit of extra cash on hand, let's say you have enough to fund a Roth twice, then you can start an extra Roth bucket if you wanted to in your high yield savings account where you're saving into that bucket. And then over time, you know, maybe it takes you two or three years, then you can start front loading at the beginning of every single year where then you have this extra account. So maybe it takes you one year, maybe it takes you two years or three years.

15:11But if you want a front load account, I would just save it in cash slowly over time. Then you can start to front load. And then all of a sudden your Roth contributions every year, you're just funneling it back into this bucket and you're front loading. And so that cycle begins again. So that's how I would think about it and that's how I would do it is I would have an extra savings bucket in place that over the course of the next couple of years, then you could start to front load your Roth if you really want to take advantage of that. And again, it's not going to make a huge, huge difference to front load it.

15:34I would just dollar cost average over time. I think it's a better way to do it and it protects that emergency fund. Speaking of protection, if you guys don't protect your finances online, this is the number one thing that you need to make sure that you are doing because there are data brokers out there who are taking your information from the internet and they are selling it to other people. And sometimes they sell it to the wrong people and your information gets into the wrong hands. And there are scammers on the internet who can get a piece of your information. And if they go to some of these data brokers who have your information and they sell that information to the scammer, they may be able to put together the pieces of the puzzle that is your personal profile, meaning they can maybe get your address or your name or whatever else they need.

16:13And so this happened to me before where there was a phishing incident where somebody got a piece of my information. They went online to data brokers, bought the rest of my information and were able to open up student loans in my name. And so to solve this problem, I went and I searched for a way to get my personal information removed online. And what I found was a service called Delete Me. And what Delete Me does is they go and remove your personal information from these data brokers. They do all the steps that need to be done in order to get your information removed so that scammers out there can't go find your information.

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17:17All right. The next question is I'm self-employed, live at home, no rent, and save$100 a week into a high yield savings account. I invest$240 a month into a Roth IRA, and I have an opportunity to move to New York City to attend the New York Film Academy. The tuition and housing are expensive, and so I'm considering student loans, but I'm scared of long-term debt. How can I manage this debt in a healthy way if I choose to go? So first, huge respect, you're saving and investing and thinking carefully before borrowing, which is way better than what most people do. If their dream was to go to a film academy, they would probably just borrow the money and go without even thinking twice about it and thinking about the implications of what would happen and the issues that would cause towards their future finances.

17:58And so this is really, really important. I'm going to give you some steps on how to think about this. Step one is I want you to get the exact numbers. I want you to get right down to the penny if you can. So before you borrow, I want you to write down the tuition costs for the full program. Put this on a spreadsheet. Okay. The tuition costs for the full program. I want you to estimate housing. I want you to estimate how much you spend on food right now. If you don't buy food right now, I want you to think through, okay, well, what is the average person spent on food? Look at transportation and living expenses in New York City.

18:28Okay. My wife went to an in-state school her first year and then went to FIT, the Fashion Institute of Technology in New York City. She lived in the middle of Hell's Kitchen when we were in college. We did long distance for three years. Well, I finished school at Florida State, and she continued on at FIT. And so when this happened, her expenses and her housing expenses went way, way up. Her food costs went way, way up. Even her transportation costs were really high because she was riding the subway everywhere. But it was higher than even what it was at college, because on a college campus, you can walk a lot and you don't have to drive as much.

19:00Everything's pretty close together. And so when this happened, it was a big, big difference in costs for her and her family. And so they had to really think through how this was going to work. And she ended up having to take on some student loans. And that was one of the biggest things when we got married. Right when we got married, I attacked those student loans as fast as I could. And then what I want you to do is I want you to subtract any money you've already saved or any help that you're going to get from family members and scholarships or grants or whatever else. Okay. So I want you to get these exact numbers.

19:26Again, full tuition costs. I want you to estimate housing, food, transportation, living expenses, and then subtract any money that you have left over. Now, what is the actual amount that you need to borrow based on those numbers? That's the first number you're going to get. Okay. Now, secondly, is that once you go online and use any student loan calculator that's out there, there's a bunch of good ones out there. I think bank rate has one. I think a nerd wallet probably has one. There's a ton of them out there that you can go and look at and plug in that total amount. Okay. And I want you to probably round up when it is that total amount.

19:56So like if you're unsure on something, go a little higher, add 10 % to it to make sure that this is accurate. Okay. Plug in that total amount and expected interest rate. So the federal student loans are usually around 5 % to 6 % right now in a 10-year repayment program. So those are the numbers I would plug in. So if you borrow$50 ,000 at 5%, that's about$530 per month over the course of 10 years, okay? Now, seeing this monthly payment in black and white is gonna change a lot of people's minds because some people will run this calculation. They'll be like, oh, shoot, my college tuition is gonna be$160 ,000 and this is going to cost me, you know, $1 ,500 to$1 ,700 per month.

20:31that is what I could pay for buying apartments in some places. So that is something where I think you really got to think and look at this monthly payment in black and white first. Then I want you to research your industry's earning potential. So look up realistic starting salaries for graduates from the New York Film Academy or similar programs. Realistic ones, not the high end, not the low end. Kind of just try to find something that is realistic, okay? And then ask the school for average income data also because they should be able to provide that. I remember doing this early on and it was kind of eye-opening what the average income data was.

21:03Now, here's a rule of thumb. If you're going to borrow money, you need to make sure that you are borrowing less than your expected first-year salary. And that's a conservative first-year salary. So as a new film graduate, if you're going to make$50 ,000 per year in your first year, you want to try to borrow at least$45 ,000 or less if you can, if you're going to borrow money. I am not a huge proponent of borrowing money for student loans unless you know that there is income potential there because this is really a business decision when it comes down to it. Okay. Next is to limit how much you can borrow.