00:00:00 Speaker 1: Welcome to Head of Money. I'm Joel and I am Matt. Today we're answering your listener questions. 00:00:25 Speaker 2: Yeah, boie, it's Monday, which means we get to hear directly from listeners. We're gonna taken listener questions today. For instance, we're gonna talk about the most important insurance product that is probably not on your radar listeners. Actually, it's not really a question as much of a comment that she's making. We're gonna get to that. We're gonna talk about budgeting on a variable income, as well as how much you're gonna be paying in taxes when you sell your house. That plus a couple other. 00:00:52 Speaker 1: Things that we're gonna get to today. My friend, First, let's get into something another listener cent our way. And I love this because I feel like they had a money community, so much crowdsourcing that goes on, and. 00:01:02 Speaker 2: Like the feels more like a community as opposed to coming from on high from Joel, right, not from me. I don't know. 00:01:08 Speaker 1: I'm not like making any laws, passing out the Ten Commandments or anything like that. But so yeah, that's what the Facebook group is so great about. If you are on Facebook and you're not in the how to Money Facebook group should totally join. I think we're at like eleven thousand members and everyone just helps. 00:01:21 Speaker 2: Each other out regularly. It's super sweet. 00:01:24 Speaker 1: But then we get listener emails pretty regularly, multiple a day, I would say, on average, and we got one from Steven that stood out and he mentioned something that I had not heard of. I'm like, I feel like I got my ear to the ground when it comes to what's going on in the financial fintech space. Well, it turns out that credit bureau experience is getting into the banking game, and I was shocked to see. 00:01:47 Speaker 2: All that email. Yeah, thanks Stephen for sending that our way, because I mean, first of all, why would you do business any more business than you have to with a credit bureau than you're required to. We're already basically forced to against our will exactly. But they're calling it like the smart money account, and it's being touted as a way to boost your credit score because we're going to count certain transactions to increasing your credit score. But then like right below that claim, there's like this giant asterisk and they're like, by the way, not all expenses, not all purchases go towards that boost. It's basically results may vary. 00:02:21 Speaker 1: It is there experience boost product that they're trying to kind of put alongside now a sort of banking product that they a proprietary banking product they're releasing, but. 00:02:29 Speaker 2: It's grummy and like I think at most it's supposed to be like what maybe ten or fifteen points if it works perfectly right. 00:02:35 Speaker 1: And the thing is, you can do the experience boost thing without signing up for their bank account, so you don't even have to you know, have a sort of a relationship with them in order to get that benefit. But the other problem is, like there's one you're doing business with a company that hasn't really proven itself to be very trustworthy. And then also you're not really getting paid much of anything on the money that you're saving inside of that on bank bank, I think was this zero percent and. 00:02:59 Speaker 2: I can't find anything. 00:03:00 Speaker 1: I literally searched and went to multiple sites, So I'm going to assume it's I'm going to assume zero somewhere between zero and zero point one percent. Yeah, I mean, because my easily offering, if it was solid, they'd be touting it. 00:03:10 Speaker 2: So yeah, yeah, and it's nowhere to be found, which means it sucks. 00:03:13 Speaker 1: Yeah, if you've been listening for any length of time, you know that Matt and I we think the credit scoring system it's important to play by the rules, but that the credit bureaus are pretty awful what they do. It's a game we all have to play. But don't do business any more business than you have to with these credit bureaus. So now that Yeah, Experience has a bank, but it's a bank, I would say branks up there with Wells fark in the bank least want. 00:03:33 Speaker 2: To do business with. Yeah, Seriously, there are plenty of other great options for you to check out, like cit who's offering north of five percent on their Platinum savings account. There are a lot of great options out there, but C I T they are certainly leading the pack. 00:03:46 Speaker 1: Yeah, and Experience just not one of the places we want you to go when it comes to banking. You don't need to consider them at all. But all right, Matt, let's move on. Let's mention the beer we're having on this episode. It's called Malpais Stout I guess by La Cumbre Brewing. This one is the last. 00:03:59 Speaker 2: Beer we have. Our friend Bob over in New Mexico, our last New Mexican beer. Yeah. 00:04:03 Speaker 1: Well, we'll give our thoughts on this one at the end of the episode, but let's go ahead and get to those listener Questions's got a lot of good ones to get to today. If you have a question for us, we'd love to hear it. We'd love to take it maybe next week. You can find simple instructions for how to submit your listener question at how toomoney dot com slash ask. It's basically recording yourself on the app on your phone sending it over our way via email. 00:04:24 Speaker 2: Pretty simple. But Matt, the. 00:04:25 Speaker 1: First question for today is about how to handle your finances when you're self employed. 00:04:31 Speaker 3: Hi, Joel and Matt. This is Teresa from American Canyon, California. My question is on budgeting. I'm self employed, but I would like to do a budget, but I'm not sure where to start. My income can vary as much as two to three thousand dollars a month. I want to be able to do a budget without having to go back over the last two years and average out what I'm making and what I'm spending. Is are a better way? Thanks a lot, and I really enjoy your show. 00:05:04 Speaker 2: I've really learned a lot, all right, Teresa, thank you for reaching out, and yes there is a better way and uh, you know, yeah, budgeting on a variable income. This is a common question, but I think it's one we haven't tackled in a while. And it's an important one too, for for all the solopreneurs out there, for all of those folks who are taking more of the entrepreneurial path. When you forsake that W two lifestyle, it comes with some of that uncertainty about how much and when it is that you're going to get paid. Yeah, having been self employed for over fifteen years, it's something I take for granted because, yeah, what is a W two Joel? What is a regular paycheck? Though? What are company benefits? These are things I know you've never really got to experience them. I guess we do have our own personal or our own company benefits, but it's a little bit different when you're wearing both the employer hat and the employee hat. Yeah, but something that you need, Yeah, that is worth addressing when you are self employee. Teresa. 00:05:58 Speaker 1: When I went from W two and come to kind of going full time with the podcast, that was something that felt like it was looming over my head, the irregularity of the income. It was like, is there going to be enough? And then it was also, well, howten's it going to come in and what's what's the payment cycle is going to be like? Because we get paid quarterly, and so it just changes from essentially like clockwork, having that paycheck being socked into your account every two weeks, and so there's a mental shift that has to take place when you get paid on a different cycle. 00:06:26 Speaker 2: That's what they call the direct deposit, right jel Yeah, which was incredible to me. 00:06:30 Speaker 1: Part of me was like, you know what, I appreciate the certainty so much that I would almost rather make less and just have that certainty. 00:06:37 Speaker 2: Granted that's not rational, but I guess there's a fear associated with that. I do think that's something that keeps some folks from stepping out on their own, is that uncertainty. Yeah? I agree. 00:06:48 Speaker 1: So let's talk about how now that you've had a taste of the freedom there's no yeah back, Let's talk about some of the things that you and I have both done to kind of make that irregularity way over our heads quite a bit less and and just how to deal with it in general. Well, the first tip is really to have extra savings on hand. This can allow you to smooth out your income artificially, and we typically recommend having something like three to six months worth of expenses stuffed into a savings account for most people, and if you're self employed, that numbers should be on the higher end of things. So let's say you're fairly frugal, duel income, no kids, household, and three months should be enough for you to feel comfortable in most cases. But if you're Teresa or Matt and Joel, that is, we think that being self employed is worth. It's worth the trade offs you have to make. But in order to not freak out about a month or a quarter where your income is not quite as substantial as you hoped it would be, this is a crucial step to take. Is to have a bigger buffer that allows you to tap those funds in leaner times and then funnel more of your income into that emergency emergency fund to beef it back up during fatter times. Right, you might even want to consider upping that amount to something like nine to twelve months worth of expenses in savings. That's sounds like a lot of cash to have on hand, and it is, but as long as it's not preventing you from reaching other financial milestones, it can be psychologically helpful as a self employed person to kind of boost your confidence that no matter what comes your way, you are good to go. And so, Matt, I mean, just based on kind of my personal finances, all the stuff that I've got going on with rental properties, with self employ self employment, I air on that side, even though maybe maybe it's too cash heavy. 00:08:25 Speaker 2: But for me it feels right, Oh absolutely, man. Yeah, And like Teresa mentioned, like, there's really no need to comb back over all of our financial transactions and expenses over the past two years in order to come up with a nice little budget. It sounds like overkill to me. I think an easy path forward in getting started with your budget is to simply look back over let's say the last three months, and then have that be the starting point for your new budget. You're able to essentially base that on actual expenses that you've incurred recently, and chances are those recent expenses are more likely going to be reflective of what you're going to spend I think moving forward, rather than what it is that you happen to have spent two years ago and having that average. 00:09:06 Speaker 1: In Yeah, let's be honest, prices have gone up over the last two That is also true three to four or five months of expenses are going to be way more reflective, and inflation plays a large role for sure when it comes to maybe trying to create a budget from. 00:09:17 Speaker 2: Scratch and just lifestyle. 00:09:18 Speaker 1: Our lifestyle changes, so you got to have different values fact to that in don't factor and pass to you factor and current you. 00:09:23 Speaker 2: And then on the income side of the ledger, I'm guessing tree so that you have a pretty good idea of what you're likely going to make next month compared to what you've made recently, what you made last month. So just start there and it's not gonna be perfect right out of the gate, but that's just a good place to start. And to be honest, it's never going to be quote unquote perfect because there are always going to things that pop up life. It happens, But don't let that keep you from making strides towards some of the different financial goals that you have. And when you are able to measure your expenses and your income, what gets measured gets improved. I think that's the maximum, isn't that like measured gets managed maybe maybe somebody. So bottom line, the ability just to start tracking this and start setting some goals, even though they might be off by a large amount, it's going to in the end result in you achieving your financial goals faster. 00:10:10 Speaker 1: Yeah, I mean, I think the number one thing is like, yeah, to look at recent expenses, recent income then and it's also crucial to have that bigger buffer. That's going to prevent a lot of the worrying about what's going to happen with your money in the future, because if you have a significant amount set aside and savings, you're just not freaking out about the possibility of a down month or even a down year. And another one of the ways to smooth out those bumps in the road, like when you're paid late by a company you're working with, which happens a lot when you're a solopreneur. You're like, oh, I'm putting the work and then I've given them ninety days to pay. Guess what we're at day eighty seven. Are they going to pay on time? And those are the kind of things that you have to contend with when you're working for yourself. The other thing is to really tweak your expenses that you don't find yourself going over budget when that happens, so at least until you get to that six month savings mark a bare bones budget, having one at least created can be incredibly helpful, and then you can move over to it in times of need. We talked about that in depth in episode three sixty two back in the day, but essentially what we're talking about here is having some flexibility when it comes to your monthly expenses, right, being able to vary them a little and live leaner should circumstances require it. And you're not hoping to have to live on your barebone barbones budget in perpetuity. That is not the goal. That's no way to live over the long period of time, but it is a helpful way to be able to rain in those expenses should circumstances require it. On basically flip, being able to flip on a dime. And so of course there are some payments and expenses that you're going to maintain. 00:11:38 Speaker 2: No matter what. 00:11:38 Speaker 1: Gotta pay your rent or your mortgage every single month, but that's of course still included in your bar bones budget that you can meander over to, but just know that there are other places that you can of course flex other places you can cut back on. Eating out is one of the easiest ones. Being flexible is important, and it's particularly important, I think when your income is a regular and especially when you don't have much of that savings buffer on hand yet totally. 00:12:04 Speaker 2: Yeah, I will say that can definitely be helpful. However, if what we're talking about here is just a variable income where you know that, like bottom line, like I always end up with enough money at the end of the year, not and who actually knows if that's going to be the case, right, but based on previous years, if you know that at some point you are going to have not only enough on hand, but more than enough, I think a bare bones budget, yes, it can be helpful in order to sock away a little bit more money to spend a little bit less. But this is where having more cash on hand, having more that cash cushion comes into play, because yes, there are some psychological wins by pairing back a little bit. But if you know, say, at the end of the year, you're going to get some massive bonus, and that's going to be more than enough to cover all your expenses. Then it's not necessarily required for you to skill back on your expenses. It's good to know that you can. And I think that's the real power. That's like the strength of the bare bones budget is to it's like training. It's like running. You know, you see people running with like the vests on Joel sinking out getting a vest didaism rucking. But by doing that, it allows you to be stronger in the instance where oh, in reality, I actually do have to pair back on my expenses. 00:13:17 Speaker 1: Yeah, most of the time, you're not going to need to do some sort of ten mile walk with forty pounds on your back. But like to know that you can means it exactly can excel kind of without the back on, right, that's why you're doing it. And so yeah, I think you're right. I think just by creating the bare bones budget, by knowing it exists and knowing you can turn to it, that alleviates some of the pressure. And it's it's pretty rare that people need to turn to it unless it's like a case of job loss, right or something more significant, not usually just because it was a down month totally, especially like you said, if you've got that that savings buffer built up significantly, exactly. 00:13:47 Speaker 2: Yeah, So from personal experience, I will say there are times when our emergency fund, or not even our emergency fund, but just the margin that we dip into when cause we get paid irregularly here with the podcas Castrol. And even though I know that by the time we get to the end of the year, I'm going we're gonna have more than enough on hand, the months we're basically we're not getting paid, and I do what we are having to dip into a stockpile, the little war chest that we've accumulated, we do spend less during those months because it's sort of like this natural reaction of like, oh, it's not fun to dipping our savings. Psychologically it's not fun. And so the ability to scale back a little bit, even though I don't necessarily have to a there's a psychological win that you're able to experience in that way. Granted, we're not scaling back in such a way that people are like, oh man, they're really cutting back, are they Okay? But there are these small tweaks that you can make to remind yourself that, yeah, in reality, you aren't making a ton of money this or in fact, maybe maybe none. You don't have to like sell all your earthly possessions. So yeah, you don't want to do anything too short sighted, but it is kind of fun to modify your behavior a little bit. That way, you're not completely insulated from the fact that your income is go up and down miss your self employed. The same thing when we talk about moving the thermostat right, it's like you kind of want to feel the pain just a little bit. You want to That's why we hate budget billing, is because we want you to do We want to imilated from those actual expenses exactly. 00:15:11 Speaker 1: Yeah, well, okay, what this really makes me think too is a story from Genesis in the Bible when Joseph he's he's worked for Pharaoh, mister technicolor jacket. Yeah, and so so he has this dream that there's there's going to be fat cows and lean cows, and ultimately what he ends up he ends up interpreting this dream and it means that there's going to be seven years of plenty and then seven years of lean times of famine essentially in the country. And so he does this great job of building barns storing up during those fattened years when things are going well, so that when the famine arises, guess what all the other countries, even around Egypt, they've got. They're like trying to try buy wheat from the Egyptians because they've done such a good job of stockpiling. And this is kind of the I think the mentality that you want to have on when you budget on a barying income, like and it makes it difficult if you have too little in savings, if you haven't prepared for the rainy days. Hopefully your income continues to grow, right, and the variable income is just becomes this snowball that grows and becomes bigger and you continue to crush it in your career. But we're not guaranteed that, and so it's so nice to have that a little war chest to savings pile so that those lean times don't actually overwhelm us and take us off course and prevent us from reaching those bigger financial goals that we've got. 00:16:23 Speaker 2: Totally. It kind of fills in those valleys a little bit. So one other tip, Teresa, I guess, like from a practical standpoint, I think what can be helpful because it sounds like you're creating your first budget, and if it sounds overwhelming, perhaps to also create a whole other budget right where you're creating the bare bones budget. I think just even simply on a separate sheet of paper, like listing out some of the expenses that you have and then ranking them in priority of things that you have to pay, but then things that would be nice to dedicate your resources towards. That way, when the time comes from a practical standpoint, you're not scrambling trying to figure out, well, shoot, I don't have enough money on hand. Well, if there is a situation that arises when you don't actually have enough money, you've got basically like a set of instructions to guide you that you were able to establish maybe during a period of time when you were feeling less stressed, maybe when you're able to thoughtfully think through it. But then simultaneously, I think it's really helpful to have a set of instructions on hand that can help to create like this order of operations when you have excess funds. And this is literally something that Kate and I created years ago of Okay, what is it that we actually want to do with our money? Beyond day to day, month to month kind of living. And for us it was typically okay, there's the roth Ira bucket, so no matter what, let's go ahead and fill that thing up. But then after that, for us, typically it was real estate. It was saving up money that's going to be a down payment for another investment property. That way, in those months where we did have excess funds, we weren't tempted to squander that money. We weren't tempted to just like, guess what, we're going to go to Europe. It was a preemptied decision that we made to funnel those dollars towards some of the different goals that we had. 00:17:58 Speaker 1: That's like the other side of the cour right, is when you're exactly like, hey, that the downside you want to you wanna save like a pessimist of right, and so you want to have enough in account in case the worst thing happens. But then hopefully you're like, oh, variable income, guess what made twenty five K more than I thought I was going to this year? 00:18:15 Speaker 2: What am I gonna do with that? 00:18:16 Speaker 1: And so you should have an idea for where that money goes beyond just once you have that savings buffer built up. Hopefully some of it's going into something like a solo four oh one, k right, and but but then some of the others. If you reach certain benchmarks, I think you should feel free to take that trip to Europe too. Just make sure you have, like Matt said, your pre planning and you're thinking about it and you're not just like throwing money at whatever sounds nice in the moment. So exactly, Yeah, Teresa, best of luck to you. Though it's budgeting on a variable income takes a little bit of getting used to, but you got this. 00:18:44 Speaker 2: You can make it happen totally. Now. 00:18:46 Speaker 1: We got more to get to on this episode, though, including we're gonna talk about like what happens when you sell a home, do you owe tax? Some people will We'll actually get to that and more right after this. 00:19:03 Speaker 2: Oh right, we are back from the break and we've got a question from a listener and they also happen to be new parents. 00:19:11 Speaker 4: Hi, Jolan, Matt, this is Brianna from Louisville, Kentucky. Thank you so much for the podcast. It's been very helpful. I have a question about five twenty nine's. My husband and I recently had our first daughter in April and we set up a five twenty nine for her. We do plan to contribute a small amount monthly, but currently we're trying to decide what I guess the goal of the account would be as far as like a number. We don't want money to get stuck in the account if she was to get a scholarship or you know, decide not to go with a four year degree. Currently, we're thinking about capping that number at what the regulations say you can roll over to a roth in the lifetime. It looks like that's maybe thirty five thousand currently a year, So we're thinking maybe that should be our goal for the account. Your input in that and kind of what you think if there's any other equation or anything else as far as determining like what the number should reach at the five twenty nine account. Again, thank you so much for the podcast. It's been helpful. 00:20:13 Speaker 2: Matt. 00:20:13 Speaker 1: Did you hear that cooing in the background was right on que Pretty sweet. I think she kind of reached down there and poked her. She's like, your chance to be on a podcast, and you've done it well. 00:20:24 Speaker 2: Brianna. 00:20:24 Speaker 1: Thanks for your question and congrats on first kiddo, But the best time, right, I just actually hung out with somebody last night who just has a six month old, and it is simultaneously the sweetest and the most sleep to private lever you'll ever. 00:20:37 Speaker 2: Be, right, I like seeing other folks who have babies. Now, it's not something I plan to revisit. 00:20:43 Speaker 1: Right, exactly what you might want to take some action on that front, my frie. That's true, all right, but how much did you actually contribute to a five twenty one account? We'll offer our best thoughts on that. You know, we've had to actually wait through similar questions in our own families. But first things first, we don't want to sound like hardline hard jerks, but the only time someone should really be contributing to a five to twenty nine plan is if they're already in money gear seven is if they're in that upper echelon. They've achieved a lot of that are the other money goals that they've had set out in front of them. And it's not because we're anti kids going to college. We want kids to go to college, or at least a lot of kids, but not every kid, because blue collar work and entrepreneurship are the great routes are also important, right, but it's because we're pro you investing and saving enough to be able to retire. It's important to have most of your debt paid off and to be funneling a decent chunk of your income into tax advantaged retirement accounts. 00:21:31 Speaker 2: First. 00:21:31 Speaker 1: If you're not doing that, then you're investing for your child, for their future college, for their future higher education needs needs to be put on the back burner for the time being. 00:21:41 Speaker 2: That's right. And actually, we are much bigger fans now of five twenty nine accounts these days than we were a year ago. That's largely because of the added flexibility that they now have. Unused funds for college can be rolled into a roth IRA for your kiddo. They don't end up needing all that muney or even much of the money that you stalked away into that account. And that's thanks to the Secure Act two point zero. 00:22:05 Speaker 1: Yeah, we kind of did a whole episode detailing all of the changes to retirement accounts that happened in the Secure Act two point zero. 00:22:11 Speaker 2: But it's in the five twenty nine. The changes to those plans were some of the most significant, and for the first time we're like, you know what, Yeah, we're kind of getting behind the five twenty nine plans for more folks than just those who were like, well, well on far down the path towards their financial goals. 00:22:28 Speaker 1: Specifically for folks who really want like the generational wealth sort of thing. If that's a big focus of yours, well, the five twenty nine early on in a child's life to roth conversion combo can help make that out. 00:22:39 Speaker 2: Yeah, it's a way to do that, but be sure to look into the finer points, into the details. But the main one with five twenty nine is that the account needs to have been opened for at least fifteen years before you can start to turn those five twenty nine dollars into roth Ira dollars. And so what that means is getting some money into the five twenty nine account, now if it's just like twenty five bucks, because that at least gets that clock ticking. That's something literally that I did with for Kate, and I I don't know why, but I thought, all right, twenty five bucks to open an account and just to get the ball rolling. Now I know I've got the options way far down the road to be able to do something with that account, were the rules to change to have different goals that we might I don't. I don't know, that's the thing. And so the ability to have that count, the ability to get that thing open, in my mind, for twenty five bucks is kind of a small price to pay for something that might end up benefiting us, yea, like in a major way. On it offers a lot of feature flexibility. 00:23:33 Speaker 1: There's no reason not to open it and put some money in, even if you're not in money. 00:23:36 Speaker 2: You're seven, you can do that step right totally. 00:23:38 Speaker 1: But then once you get further along, that's when you can prioritize making even further contributions to that account on for your kid's behalf. 00:23:44 Speaker 2: And I think the minimum amount's varied depending on the different state plans, but I say twenty five bucks because that's what the Georgia yeah five twenty nine plan requires. Sometimes it's twenty bucks. 00:23:52 Speaker 1: Sometimes you know, whatever, it's It's all you got to do is tick in five bucks. 00:23:57 Speaker 2: Yeah, exactly. 00:23:58 Speaker 1: But it's also important to mention by the that you're not going to get smacked around from a tax perspective if your brilliant child ends up getting like tons of scholarships there's there is a ten percent penalty for unqualified withdraws on the earnings, not on your original contributions. But if your kid ends up getting a like, let's say a ten thousand dollars scholarship for instance, it actually counts as a qualified withdrawal when you take out that amount from the five to twenty nine plan. So you could take ten k out of the five twenty nine plan ten k of those earnings because of that scholarship, it's still going to qualified as a qualified withdraw so the ten percent penalty does not apply to those dollars that you're taking out. Basically, you're not penalized because of the scholarship, which is really important to know. 00:24:37 Speaker 2: It almost feels if that were to be the case, it almost feels like a disincentive for families to get out there and apply for scholarships, because would you do that if you've got all this money set aside in your five pointy nine and you're gonna get penalized on that. No, in reality, you're not going to be penalized. 00:24:50 Speaker 1: It would make sticking money into your five twenty nine a lot more risky, sure, because it's hard to plan for that kind of stuff. So it's nice to know that you're not penalized for that. And so yeah, basically means there's not as much risk as you might think of oversaving in that account. Plus you can always let that money continue to grow for grad school for that child, or for another kid that might come along, or even if you decide to go back to school yourself. 00:25:11 Speaker 2: So you can change up the beneficiary. Yeah, yep, So the. 00:25:14 Speaker 1: Five twenty nine flexibility, it goes beyond just the roth. It goes being all the way to being able to change beneficiaries. If you have other kids, that money can go towards them if they don't get the same sort of financial aid, or if they go to college and your firstborn doesn't. There are at least options for that money and how it can be used in other ways. 00:25:31 Speaker 2: Yes, right, But as far as your goals, as far as how much money to have in that account, I like where your head's that. The idea of trying to get that account into that thirty five thousand dollars range, but not too far beyond it. I think that makes a ton of sense. I'm certainly not trying to save up six figures for each one of my kids, Right, So what six figures times four, that's a ton of money. My goal ideally is to have somewhere like I'm thinking in the forty to fifty sixty thousand dollars range in there, And honestly, that's thing so kind of going back to Teresa's question, that's something that we frontloaded, right, we had a couple of years where we made a good bit more than we normally did. Like earlier, I mentioned that some of the different goals like I almost see them as buckets that flow into one another. And so like the first bucket that got filled up roth Ira Sweet, next bucket investment property Sweet. In this case, we weren't pursuing any more investment property. So another bucket that opened up five twenty nine accounts, and so the ability for us to Maxo's out for a couple of years. Personally, I'm not hopefully not gonna have to put too much more money into those accounts because I'm counting on the dollars in there to continue to grow because they are invested. And so that's something to note is you might need to contribute far less in order to get to that actual number if you are fully investing that money as opposed to it sitting more conservatively. But in your case, you're likely going to have something like seventeen ish years to grow in the market. When you run the numbers, one hundred dollars a month for about eighteen years, that's gonna likely be right at that sweet spot of around thirty five thousand dollars with compounding returns of five percent factored in, which is pretty conservative. So hopefully that puts your mind at ease from a budgeting standpoint, because I'm not going to say that one hundred bucks a month if that's not nothing, but it also seems pretty reasonable when considering the insane cost of college and where it's likely to go. It's not gonna be enough to put the whole bill, no, no, no, a lot of schools if there's not major financial aid attached to it. But the truth is there are all sorts of ways to get financial aid, and oversaving is a potential risk. But if that, if that, I like that, Matt, If that's your goal thirty five k If that's kind of the sweet spot, you're aiming for, well, one hundred bucks a month into one of those age based portfolios. That's super low cost through a five twenty nine plans can be the way to get there. It's kind of a tried and true path based on when you run the numbers that you're that's that's probably close to where you're going to end up, absolutely, and I think that's going to give y'all a lot of flexibility and a lot of options when it comes to how it is that you're going to spend that money. Joel. Let's hear from another listener who happens to be from one of my favorite cities I like to visit. 00:28:06 Speaker 5: Hi Jola, Matt. This is Trish from Asheville, North Carolina. I'm really enjoying your podcast and have learned so much. Here's my question. My husband and I soldier house this calendar year for an amount higher than the five hundred thousand dollars deductible, so we are looking for ways to reduce our tax burden. We have discussed contributing the thirty thousand times two to our four oh one k slash IRA. We have also discussed energy saving ideas for our rental homes. We just don't know what the max is on that. If you have any other ideas, we would greatly appreciate it. We realize we have approximately fifty days to make these decisions. Look forward to looking forward to hearing your answers. 00:28:52 Speaker 1: Thanks so much, Matt, Ashville Beer Heaven. It's also Beer City, USA. It's a beautiful place, a beautiful part of the country. And so yeah, Trish, let's get to your question. You mentioned you sold your home for a massive profit, which is awesome, and yes, you're going to have a tax bill, but really I would consider this a success tax and we should discuss exactly how taxes work when you sell a home though, because there's a lot of confusion. Basically, when you sell a primary home, you actually don't typically ow tax on the increase in value unless the value has increased substantially. So maybe where you're at in Nashville, maybe you bought long enough ago, or the market has been so red fiery hot that you've actually managed to exceed this number, creating this tax bill. So you mentioned that you and your husband pocketed more than five hundred thousand dollars in profit, and married folks are going to owe tax on profit exceeding that number. Right, Single folks are going to owe tax on profit exceeding half of that Two hundred and fifty thousand dollars. And by the way, the number isn't just over the amount you paid when you bought the home. It's in excess of what's known as the cost basis. And so your cost basis can be increased by including fees and expenses associated with the purchase of the home and combined with the home improvements you might have made as well. 00:30:03 Speaker 4: That's right. 00:30:04 Speaker 2: Yeah, so not just so we're talking about transaction costs when it comes to the purchase and sale of that home, but also all the work that you've done along the way. Don't disclude that or you're gonna pay too much in debt exactly. Yeah, So let's just imagine, and this is, yeah, silly hypothetical, but like let's say you about a home for one hundred thousand dollars, you sold it for one million, well married and single folks are going to have a pretty large tax bill. Let's say if you bought it for one hundred thousand dollars, let's say you put four hundred thousand dollars into it. In that case, married folks would still be able to sell that property without incurring any tax bill whatsoever. And so hopefully you you do have good records of any of the work, any of the improvements that you've made, because by proving that you've increased the cost basis of your home, which is what you're doing, by keeping track of those expenses, you're able to decrease the ultimate capital gains that you're gonna have to pay. 00:30:55 Speaker 1: So, for instance, Matt, the house that we moved from when we moved up here to the Burbs, what last summer we had put a significant amount of money into the home remodeling it. Right now, it's a rental property. At some point we'll sell it, but that big chunk of money that we threw into the home, well, that's going to help reduce capital gains cost that we might have on that home. If it sells for more than we think it would. 00:31:16 Speaker 2: Are you going to sell it? That's actually that's the big question. That's a big question too, because that's so I mean, we did I don't know the answer, we did sell ours? And the ability to go back this is why it pays to be a money nerd, right, The ability to go back and look at Excel docs and see not only how much we paid on each one of these different projects in a renovation, but then to be able to add that up and realize, oh wow, we had a lot into that home. The ability to prove that we did not exceed that five hundred thousand dollars as a married couple was huge. Yeah. Yeah, it's just a massive benefit that is worth seriously worth looking at, seriously worth considering, and it's a part of why the IRS only allows folks to do that every two years. Yeah, it's less of a concern now that home values have kind of tapered off a little bit, But over the past decade, the dramatic rise and prices, I mean, folks were looking to maximize this benefit. And if they had the ability to move every year and pocket a bunch of money after doing renovations and then selling that home, I think they would have. 00:32:11 Speaker 1: Well, this is where live in flips, like what our friend Carl does, one hundred percent can be depending on how the market goes, marketing conditions where you live, and how good you are at DIY craftsmanship around the house. This can be one of those great ways to make tax free income. And it's something he's done. We talked with him. I don't remember what episode that was about that like in depth, and it's something he's lead to it really really well with over the years. But okay, let's talk about maybe lowering lessening the tax bill. Besides just thinking about the cost basis and looking at the exact amount of money you've stuck in to improve that home or the fees regarding buying and selling the home, but capital losses from other investments can be used to offset the capital gains from the sale of your home too. So let's say, just hypothetical here, he bought bitcoin at the top. Right, you've been looking for an excuse to dump it. Now might be a great time to sell right and take a loss because it'll save you moneycomme tax time, and it's allowing you to get rid of an investment you no longer have much use for. Right helps you to cancel out some of the positive capital gains from the house sale that you're going to see. So it's a way of having that tax break be the gift that keeps on giving. 00:33:14 Speaker 2: I guess something like that. That's the silver lining for having bought bitcoin at the top. But when it comes to. 00:33:20 Speaker 1: The trish showing that money move right, but at least it's saving you a little bit on taxes. 00:33:24 Speaker 2: Yeah, So the large capital gains that she's experienced, let's say you exceed that five hundred thousand dollars like Trish has, Well, you're not paying ordinary income taxes on those gains either. You're actually paying long term capital gains that tax rates typically at fifteen percent. So in that semi extreme hypothetical one hundred thousand to a million dollars example, the gain is four hundred thousand dollars, Well, the tax bill would simply be sixty thousand dollars. And that's actually that's relatively good news because lots of high earners who are selling an expensive home that has seen a lot of appreciation, or often in a higher tax bracket, it might be. 00:34:04 Speaker 1: Double that or something on some of those dollars, and so the long term capital gains rate is more favorable. 00:34:09 Speaker 2: Yeah, and Trish mentioned socking more money into tax advantage retirement accounts those that's a move that we're always going to be behind, the ability to reduce your agi your tax burden in that way. But as far as making some of those green upgrades to different rental properties, that could, again, given the different tax incentives that the government has dangled in front of us, especially folks who have who own homes, and the desire for some folks to want to shift towards greener energy upgrades. That could be a good way to pay less in tax. But I wouldn't necessarily pursue those things unless that is something that you ultimately want to like that the improvements that you know you need to make anyway, So I wouldn't necessarily, I guess, go out of my way to make some of those improvements. But if that's something you were already planning to do, I think that can definitely be some a great tax saving move to make as well. But that being said, actually got to keep in mind the particulars of the all of all the different things that were rolled into the Inflation Reduction Act, which is where some of these green energy credits come from. A lot of them only apply to your primary residents, not necessarily to rentals, and so it kind of it's a whole other can of worms. 00:35:19 Speaker 1: I guess you're not going to get at that extra sweet thirty percent bonus. 00:35:22 Speaker 2: Like, yeah, like I did a couple of those. 00:35:23 Speaker 1: Things actually this year, Matt, we put in like one of those Douglas mini splits. 00:35:26 Speaker 2: And we did. 00:35:28 Speaker 1: They paid you to stick that thing, right, we did some extra insulation. No, it's still costing money, not quite. Yeah, but the federal government is definitely lifting thirty percent of that load, which is which is nice. So, but the problem is it doesn't work the same way. If you're a landlord trying to do that to a rental property, you don't qualify for the same tax credits. It's important to note that. 00:35:47 Speaker 2: That's right. Cool, We've got more to get to, including we're going to talk about a listener who has recently found herself in possession of more money than she thought. We'll get to that plus another right after this. All right, Matt, we're back. 00:36:06 Speaker 1: We've got more money save me content to cover on this episode. And you mentioned a listener has more money than she thought. 00:36:11 Speaker 2: She didn't like mug anybody and anything, did you. Yeah, no, no, No, that's not how to money. Recommended it. And it's more than finding a twenty in the winter jacket that she recently pulled out of the closet. More than that. Yeah. 00:36:19 Speaker 1: No, it's a good one, and it's I think a trick that a lot of people can use to their advantage. But in this section of the podcast, we're going to cover a Facebook question in a week, but also like we get some really good emails sometimes, Matt and so listener Courtney sent this via email. She said, I'm a little surprised I haven't ever once heard you mentioned long term disability insurance. Of course I haven't listened to every back episode, so you probably have at some point. I've heard you mentioned life insurance many times though, but never long term disability, which is interesting because it's probably as important, if not more, if you become disabled and lose your ability to earn. It's not just your dependence that are screwed, but also you yourself. And there's often a ton of new expenses when you become disabled, medical costs, home modifications, plus things that were once luxuries like grocery delivery become essential. So, Matt, I think Courtney her statement not a question here is really helpful for all of us, for you and me and for how to Money listeners. I mean, basically, she mentions that she was suddenly disabled in this email by a chronic illness and then it decimated her finances, and she said I tell my friends all the time to make sure they get long term disability insurance. And I think she spot on. It's something that you and I have covered just rarely, just highly infrequently. 00:37:26 Speaker 2: And it's probably something we should mention more. Yeah, and Corney, I hate that you've gone through both the physical and the financial pain of this disability. And it's true life insurance. It gets all of the press, largely because literally everyone will die at some point. So because of that, it's understandably on our radar. More were Actually we. 00:37:43 Speaker 1: Talked to Old Testament earlier, Matt. There are a couple of guys in the Old Testament who didn't die, right, So that's true, I guess if you're one of the the four. 00:37:51 Speaker 2: But there are a decent chunk of folks who are going to become disabled, and so because of that, disability insurance should at least be a real consideration for a lot of folks. Stats show that a quarter of Americans are going to experience a disability, a disability you can't even say that, right, that keeps them out of work for three months or longer. And like your situation, Courtney, most of those come from an illness, not necessarily an accident, which means that we're all vulnerable it's not just the folks who happen to enjoy skydiving or something like that. And so while your workplace might offer some kind of disability insurance, it's oftentimes usually short term. And I'm glad that this is something that you've brought to our attention. It's a good time to talk about long term disability for sure. 00:38:36 Speaker 1: Yeah, if you're a W two or you might have some coverage, it's still probably not enough. If you work for yourself or you are a freelancer, the chance you don't have any coverage and you've got to go, Yeah, you got to go buy it on the open marketplace. And because of how much savings, by the way, we want our listeners to have on hand, it's likely unnecessary for most how to Money listeners, if you follow through on that, to have a short term disability policy. 00:39:00 Speaker 2: Talking about the one with a duck. 00:39:01 Speaker 1: Yeah right, Yet you don't want that one. That one costs typically a lot of money, and we'd rather have you have savings on hand to avoid some sort of short term disability claim. Long term disability, though, is different, right, It's far more necessary. And it's important to mention that these policies aren't inexpensive, right, they're not cheap, but you can shop on a site like policy genius. But you're typically talking about spending somewhere in the neighborhood of one to three percent of your annual income to pay for this policy. And again that's because there are so many claims, so something like one in four or one in five people are actually finding themselves in need of this insurance. That's why it's not quite as cheap. One other insurance policy, although it's not fool proof though, is to have more cash on hand in savings. Right, so instead of having three to four months worth of living expenses, knowing the expensive reality that a disability could create in your life, you might want to save like ten to twelve months up instead. It's not going to be as robust of a financial backstop, but I really do think, yeah, savings alone isn't going to cut it for a whole lot of people. On this front, it's nice to have more savings. It's nice in particular to be able to self insure against short term disability. When it comes to long term disability, if you can't do the job that you're currently doing because of some sort of illness, that besets you for years and years on end, that long term disability policy is going to become priceless. You're going to be thrilled actually that you paid those semi expensive premiums because of what it affords you in the aftermath of one of those accidents. 00:40:26 Speaker 2: That's right. Yeah, So that being said, this might be an instance where we ask you to do what we say and not what we do what we do, because it oftentimes comes down to risk and your willingness to accept that risk. And I say that as a podcaster like we basically Joel you and I, like we are in the knowledge knowledge work is basically what we do. Our jobs aren't specifically tied to our physical ability oftentimes to do the work that we do. Where we become disabled, injured, sick, there's a good chance that I would be able to continue to podcast, which is my main gig these days. And so something for folks out there to consider is how dependent on your physical movement is the work that you do. So, for instance, like if you are a physical therapist or like a coach or even a homebuilder of high end homes that requires you to be there in person, your ability to move around and physically lift things up and all the things that you do swring a hammer, it's going to require you to be physically well. And in that instance, I could see long term disability being something that someone in that position would want to prioritize more. But I also think about too, like why else haven't I personally gotten long term disability? And it's also because of my relational status. I've got a wife, Kate, and were I to become disabled, I would one hundred percent know that she would be more than willing to work and to basically for me to fall back on. And the ability for her to earn some income when I may not be able to is sort of another way that I am personally able to assume some of that races. If you're single, you have even more risk in this m Yeah, right, one hundred percent. And so those are just a couple instances. I guess too. If you are an individual where you make a ton of money and your partner doesn't have the ability to come anywhere near matching what it is that you're making, Like if you are like a heart surgeon or something like that, Okay, that might be something that you might want to consider because your ability to earn a large income is unparalleled. Yeah, and so the ability to offset that with some long term disability would probably be a lot money well spent. 00:42:30 Speaker 4: Yeah. 00:42:31 Speaker 1: And so even though we read the stat you're right, like one in four people is going to experience some sort of disability that could impact their ability to make make an income. That risk also varies depending on what you do and all the above, Right. 00:42:42 Speaker 2: But kind of maybe how scrappy your mindset is as well, because I feel like there might be some folks who think this is all I ever have one wanted to do, Whereas I guess my background, I think of all the different kind of jobs and industries that I've been in, and I think, Okay, if I for some reason could no longer talk, I'll find something else to do. Yeah, you'd have to find a new best Budy, But uh, I've got some of the good luck with that. Yeah, I just I I because. 00:43:05 Speaker 1: This is like one of those things, like Courtney said, like it's unexpected, right, and sure, and there are additional costs that you incur before you just kind of dismiss it out of hand. I think a lot of people should at least consider it and seriously considered it, consider it. Yeah, And when you're looking into policy, by the way, know the details of any of the policy the policies that you're considering purchasing. Right, there are lots of specifics that are crucial to understand, like whether or not you're going to be covered by an inability to do your current job or whether the insurance company will you know, want to ensure that your injury prevents you from doing any job. So there are different classifications you probably want the kind of insurance it'll probably cost a little bit more where the insurance company says, oh, you became disabled, well the way to think and we think you can do this job over here, and you're like, but now what, no, Like that's not that's that That can be a sticking point in some of these policies. Also, know how long the payments are going to last, Right, is this covered for five years or until you reach retirement age? And uh, yeah, so you can. You can also get long term disability insurance via your employer, but there are some downsides to that, including a tax downside. But another downside is not being able to take it with you when you leave. So we would say shop on the open market through an aggregator site like policy Genius. That's going to be the best way to score one of these long term disability policies. 00:44:17 Speaker 2: Yeah, yeah, and you mentioned how long that benefit lasts. One of the other ways you can get the cost down to is by there's this thing called the elimination period, which is the period of time from when you get disabled to before the benefits kick in. And oftentimes it's sort of like a premium I'm sorry, you're deductible, like on car insurance, and by default, oftentimes it's set really low because that's what looks attractive, but it's also what costs the most. Same thing is true when it comes to these elimination periods, where oftentimes the default will be thirty days, but if you can triple that and you bump that out to ninety days, all of a sudden, your monthly premiums go down significantly. So if it is something that you say that is not a risk, I'm willing to assume I do want to get long term disability. There are way like that where you are able to get the cost down to ward's not as egregiously extensive. 00:45:04 Speaker 1: That's where you want that combo of like self insuring you want skin in the game, because that's going to reduce your cost on the insurance that you might actually need. So Courney, thank you for your email. Thank you for reminding us to talk about this because we don't talk about it often enough. And good luck to all you had the money listeners out there looking into these long term disability policies, and Matt, let's do one thing, one last thing real quick. On Facebook this week, Jessica mentioned PSA to anyone new to budgeting like me. I just discovered that since my husband gets paid every other Friday, there are two months every year where he gets paid three times. Game changing revelation. 00:45:36 Speaker 2: So there's not a ton here to say, except for the fact that using an idiosyncrasy like this to your financial advantage, it just makes a lot of sense. It's purely a psychological play, because why not use that a regular pay cycle as a way to beef up your savings or even just to make a lump sum contribution to your retirement account. You can either plan for it, which is kind of the boring way, and plus that's kind of difficult to do when you're budgeting these two odd months where you get paid a little bit more, or you pretend it doesn't even exists. You plan and you budget based on the typical months, and then whenever that additional money does get infused into your account, you can take that money and use it towards achieving some of those other financial. 00:46:17 Speaker 1: Goals that you have, like a lump sum toss out of debt, or a pump student loan thrusting into the roth. 00:46:21 Speaker 2: Ira, whatever it is. 00:46:22 Speaker 1: I like that to it and to get You're right, it's psychological, right. It's not like you're actually making more progress than you otherwise would, but you're learning to live on less than you make, and you're also able to take a bigger bite out of some of those goals in one fell swoop, which can feel really rewarding. So I like that too. It reminds me of a tax refund, which is similar in that way, and a lot of people, a lot of personal finance experts, they hate the tax refund because it's this tax tax free loan to the government is what they call it, right, ye, interest free loan, interest free loan. Excuse me, it's not that it's something we recommend getting some sort of massive tax refund. I mean from an optimization standpoint, it's not the best approach. But from a cycle and I guess right now, with interest rates going up on savings, like, it's even worse you a little bit more, yeah than otherwise when savings rates for a half percent it was like, yeah, you're not really missing out on much. But from a psychological point of view, it can be a force method of savings. So for Jessica, for everyone else out there, using irregular paychecks, unexpected bonuses, and tax refunds right to reach a financial goal more quickly, it can be smart. Just don't use those lump sum payments to consume. Find it as this force method, like I said, of a way to achieve something that normally you felt might be off limits or might be difficult to hit. But those lump sums, when they hit your bank account, it can feel like, oh cool, now we've got the room to actually meet that goal. 00:47:40 Speaker 2: Or here. You know what, I actually will disagree with Joel, and I'll say, if you want to intentionally use that money to consume in a meaningful way, like hey, that's how you're able to fund, say, most of your summer vacation or something like that, I'm all for that. I'm all for. 00:47:52 Speaker 1: However, you can mentally account for this money and use it to your advantage saving and investing with the regular paychecks, right, absolutely, that comes first. If you're not and that, and you're using this as the way to meet those savings or investing goals that you otherwise wouldn't be able to hit, then you don't want to funnel it towards vacation. But if you've done the right stuff with the regular every two week paychecks, then yeah. 00:48:11 Speaker 2: You can use it for fun. Yeah. And if you haven't reached your retirement goals, then yes, use this money to make sure that your roth iray is maxed out. I think whatever strategies you can employ to make sure that this is working for you, I'm gonna get behind whatever approach you decide to take. I guess everyone's different. So all right, let's get back to our beer buddy. This was how'd you call it? Pronounce it la cumbre? Yeah, malpay stout malpace. This is a stout that has brewed there. Let's see an Albuquerque, New Mexico. And I also see on the canto that they won a silver medal back in twenty eleven night. Oh yeah, this is a this is an award winning beer. Drove out your thoughts. 00:48:47 Speaker 1: I've never been to Albuquerque, but it's on my it's on my to hit up list ever since. We talked with the couple that drove around in the van. Oh yeah, you remember what were their names? You can't believe that was early on. That was years Christy and I don't remember Chris, christ and Christie, So that was years ago. 00:49:04 Speaker 2: Well link to that one as well, but that was back when the living in your van, that nomadic life was pretty huge, and they basically got to share their experience and they were talking about how Albuquerque, how they loved it there, yeah, and how they thought they would end up end up living there once they did, that was to settle down. 00:49:21 Speaker 1: That was definitely like peak fan life. So this beer was really good and I dug it. 00:49:26 Speaker 2: I did. 00:49:27 Speaker 1: It's like classic milk stout at Nice pottit of milk stout. It tasted like a milk stout to me. It doesn't say it doesn't Does. 00:49:32 Speaker 2: It have actual lactose in it? I don't know. 00:49:34 Speaker 1: I'm not really sure, but it again, it tasted like a milk stout, and I'd say it was not too thick, but which made it like, especially for this time of year, kind of early fall, it's kind of what you want. Yeah, kind of a perfect fit for the first out of the season. At some point in December January, I'll be drinking the heavies, the big barrel aged ones. But for now, this is like the perfect. 00:49:53 Speaker 2: Colorqually concentrated beers that will be enjoying the way exactly. 00:49:58 Speaker 3: No. 00:49:58 Speaker 2: Yeah, it had all those dark and to flavors if you're into that. So for instance, if you like this like a Starbucks French roast or something like that, this is totally a beer I think that you'd enjoy. But it's funny that on the label it's a I guess their slogan is get Elevated. And I'll say that the beer it had like a nice lift to it. So the carbonation that accompanied the darker, roasty notes made it very enjoyable. Yeah, because it wasn't It's like the opposite of guinness. It feels kind of flat in your mouth. It's smooth. Yeah, it's good, but it doesn't have that lift. And with this you totally feel it on your tongue in conjunction with those darker flavors, but I enjoyed it. And Bob, thanks again for all the beers that you sent hour away. And it's always nice to enjoy beers that are being produced in a different part of the country for sure. Yeah again, New Mexico. It's on my short list. Got to make it out there. Let's do it. 00:50:49 Speaker 1: I've been once, but only to Gallop, New Mexico. My uncle lived there for a little while, but I haven't been to really any other parts, and I gotta. 00:50:56 Speaker 2: Hit those upside. You mean, let's do Albuquerque. I'm in without the wives. Just dude's trip out. We've never really done a boys trip before because got to know each other. You choset, my wife's som we like. We all got to know each other at the same time. So anytime we would go on little trips or even big trips, it was always the four of us. But maybe we should take a boys trip one of these days and we rent motorcycles. Oh sounds like somebody should be following us when making a documentary, right I'm thinking of is that you and McGregor where he did? Yeah, anyway, that's gonna be it for this episode, buddy. Until next time, Best Friends, out, best friends out yeah boy