WEBVTT - Ask HTM - Timing a Roth IRA Conversion, Attacking Debt or Saving for Retirement, and Budgeting for Housing Expenses #202 0:00:00.080 --> 0:00:02.599 Welcome to How the Money. I'm Joel and I am Matt. 0:00:02.880 --> 0:00:24.840 Today we are answering your listener questions. Yeah, man, that's right. 0:00:24.880 --> 0:00:27.240 It's Monday and we are answering the listener questions this week. 0:00:27.320 --> 0:00:30.160 We've got a bunch of great ones, including one about 0:00:30.480 --> 0:00:32.559 roth Ira a conversion, whether now is a good time 0:00:32.600 --> 0:00:34.520 to do that. We've got a question about paying down 0:00:34.560 --> 0:00:37.479 debts or you know, maybe she should invest that money instead, 0:00:37.680 --> 0:00:40.000 we'll see. And then we've got a question too about 0:00:40.040 --> 0:00:43.720 money to set aside for home repair, specifically for a 0:00:43.800 --> 0:00:45.840 rental property. And we're gonna get to all those plus 0:00:45.840 --> 0:00:49.239 two more within this episode. But first me, let's talk 0:00:49.240 --> 0:00:51.720 about some investing. Yeah, before we get to all the questions, 0:00:51.720 --> 0:00:53.360 I'm excited to get to them. I wanted to talk 0:00:53.400 --> 0:00:56.200 about micro investing apps, and we talked about those a 0:00:56.320 --> 0:01:00.320 long time ago, back in episode twenty nine. But but 0:01:00.360 --> 0:01:01.880 I feel like some of the things that we talked 0:01:01.880 --> 0:01:04.360 about in that episode actually have come to pass right 0:01:04.360 --> 0:01:06.920 now in kind of how a lot of young people 0:01:06.959 --> 0:01:11.280 specifically are handling investing inside of micro investing apps. And 0:01:11.520 --> 0:01:14.600 I've just seen a lot of news about poor judgment 0:01:15.000 --> 0:01:16.880 in regards to what they're investing in. I think we 0:01:16.920 --> 0:01:19.600 talked about this just a little bit last week when 0:01:19.600 --> 0:01:22.160 we were talking about investing in a vaultabule market. But 0:01:22.520 --> 0:01:25.640 I think micro investing apps in particular make people more 0:01:25.680 --> 0:01:28.280 prone to trade more frequently. And so if you're using 0:01:28.280 --> 0:01:30.039 an app like robin Hood or in one, you know, 0:01:30.120 --> 0:01:31.720 we like both of them. They've done a really good 0:01:31.760 --> 0:01:34.080 job at lowering the costs and making it easier for 0:01:34.120 --> 0:01:36.840 investors to get on on board to start investing. But 0:01:36.880 --> 0:01:38.679 at the same time, I think a lot of young 0:01:38.680 --> 0:01:40.840 people just feel the need to trade more frequently and 0:01:40.840 --> 0:01:42.920 to trade when they don't need to, and it actually 0:01:43.040 --> 0:01:45.400 can lessen your returns over time. You can create a 0:01:45.440 --> 0:01:48.720 lot more stress, it can create an environment for poor investing. 0:01:49.040 --> 0:01:51.040 So yeah, I mean that's something we did talk about 0:01:51.080 --> 0:01:53.640 back in episode twenty nine, that micro investing apps. They 0:01:53.680 --> 0:01:56.520 have all these great tools at your disposal, but then 0:01:56.520 --> 0:01:58.320 if you use them too much, it turns out to 0:01:58.360 --> 0:02:00.200 be a really bad idea. It's like they may get 0:02:00.280 --> 0:02:03.120 too easy to trade. The interface is so slick. I 0:02:03.120 --> 0:02:04.680 just want to hop on there and like spend some 0:02:04.720 --> 0:02:07.680 money or make some sales whatever. Well, specifically to some 0:02:07.760 --> 0:02:10.280 of the bigger online brokerages as well. The end of 0:02:10.360 --> 0:02:15.040 last year, they started charging zero dollars for commissions, which 0:02:15.080 --> 0:02:17.840 means that you could buy and sell stocks for free. 0:02:18.560 --> 0:02:20.679 Before that, it was like what five bucks or six 0:02:20.720 --> 0:02:23.200 bucks depending on who you're with. Ye, and Robin Hood 0:02:23.200 --> 0:02:26.919 really really accelerated that change, that kind of started it, yes, exactly, 0:02:26.919 --> 0:02:28.680 and so folks got used to that, and so now 0:02:28.720 --> 0:02:31.520 pretty much everyone is doing that. And the downside though, 0:02:31.600 --> 0:02:34.080 like you said, when it's so easy and when it 0:02:34.120 --> 0:02:36.480 doesn't cost you any money, and when these apps look 0:02:36.600 --> 0:02:38.080 so good on your phone, you kind of want to 0:02:38.120 --> 0:02:39.840 dive in there and see what's going on with the market, 0:02:40.080 --> 0:02:42.480 You're going to be more likely to sell. You're gonna 0:02:42.520 --> 0:02:45.440 be more likely to make speculative moves like short term moves, 0:02:46.080 --> 0:02:49.359 which goes against everything that we would recommend the date 0:02:49.400 --> 0:02:52.200 trading kind of mindset. It just becomes a lot easier 0:02:52.480 --> 0:02:56.079 to become kind of enthralled and and have that sort 0:02:56.080 --> 0:02:59.120 of mindset. When it comes to investing. We're completely not 0:02:59.200 --> 0:03:01.520 about that. We're about investing for the long haul. We're 0:03:01.520 --> 0:03:04.320 about simple investing. And so, yeah, I just wanted to 0:03:04.320 --> 0:03:07.320 caution people as I'm seeing more and more stories pop 0:03:07.400 --> 0:03:10.440 up about young people investing in a speculative way. By 0:03:10.440 --> 0:03:12.399 the way, I'm saying young people like we're really old 0:03:12.480 --> 0:03:16.040 or something like that, like our generation, our generation exactly. 0:03:16.120 --> 0:03:18.400 I hate seeing that because, like we've talked about again 0:03:18.400 --> 0:03:21.560 and again, investing for the long haul, investing simply low 0:03:21.600 --> 0:03:24.519 cost index funds in particular, and target date retirement funds, 0:03:24.680 --> 0:03:26.320 those are going to be the best way to invest. 0:03:26.400 --> 0:03:28.560 And I love some of these new apps we talked 0:03:28.560 --> 0:03:31.040 about in one it's a fantastic app. They do a 0:03:31.120 --> 0:03:33.280 really good job. But if you're using it to do 0:03:33.480 --> 0:03:37.200 speculative or frequent trades, that is not a good idea. 0:03:37.240 --> 0:03:38.800 That's not a good use of a good APPA. And 0:03:38.840 --> 0:03:41.280 something else too, is, you know, with the lockdown and 0:03:41.320 --> 0:03:44.040 with so many folks working from home, folks who are 0:03:44.120 --> 0:03:46.920 used to maybe like checking their accounts like during lunch, 0:03:47.280 --> 0:03:48.960 Well you can check it whenever you want. And so 0:03:49.040 --> 0:03:50.440 I think a lot of folks who might be sitting 0:03:50.440 --> 0:03:52.400 at home, you know, working on the laptop, sitting on 0:03:52.440 --> 0:03:54.840 the couch, They've got their you know e trade to 0:03:55.000 --> 0:03:57.080 TDA Merrior trade accounts open off to the side, and 0:03:57.080 --> 0:03:59.640 they're they're watching the market, thinking is now a good 0:03:59.640 --> 0:04:01.120 time to Is now a good time to sell? I 0:04:01.120 --> 0:04:03.880 don't know. Folks are trying to time the marketing a 0:04:03.880 --> 0:04:05.880 little too much, way too much. And you know, we 0:04:05.960 --> 0:04:08.600 touched on this a little bit last week. I personally, 0:04:08.640 --> 0:04:10.240 you know, I kind of shared my long, kind of 0:04:10.240 --> 0:04:13.200 story about about how I go about making purchases. I 0:04:13.200 --> 0:04:16.320 think it's totally fine to take advantage of dips if 0:04:16.360 --> 0:04:18.120 you're going to purchase and hang onto that for the 0:04:18.160 --> 0:04:20.400 long haul. But that is not how a lot of 0:04:20.440 --> 0:04:23.040 folks are approaching the market right now. One of those 0:04:23.040 --> 0:04:25.160 companies that I mentioned, they have seen the number of 0:04:25.240 --> 0:04:29.520 daily trades skyrocket since they started offering those trades commission free, 0:04:29.640 --> 0:04:31.520 and so they used to have one million daily trades 0:04:31.920 --> 0:04:33.640 at the end of last year and at this point 0:04:33.680 --> 0:04:36.800 now they're seeing three million trades every single day. So 0:04:36.880 --> 0:04:39.279 I guess there is a downside to free Yeah, exactly, 0:04:39.279 --> 0:04:42.040 it's increased threefold. So that's a bummer to see. Like 0:04:42.080 --> 0:04:44.159 you said that, we don't like seeing that. That is 0:04:44.200 --> 0:04:46.599 not what we recommend. We want folks to buy low 0:04:46.640 --> 0:04:49.560 cost index funds and hang onto them forever, and we've 0:04:49.600 --> 0:04:52.000 always been able to do that with Vanguard, with Fidelity, 0:04:52.440 --> 0:04:55.599 blog intor accounts there, buy those funds and you're set. Yeah, 0:04:55.600 --> 0:04:58.280 And like I said, it's not necessarily the micro investing 0:04:58.320 --> 0:05:01.239 apps faults. Some of those micro investing apps are great. 0:05:01.360 --> 0:05:03.480 They do a really good job. It's our behavior that 0:05:03.839 --> 0:05:06.520 it leads us to do. Yeah, exactly, all right, So Matt, 0:05:06.600 --> 0:05:07.960 let's get onto the beer that we're having on the 0:05:07.960 --> 0:05:11.040 show today. We're drinking dank Bot by Insight Brewing. Big 0:05:11.040 --> 0:05:13.320 thanks for listener Joe for sending this one in our way, 0:05:13.600 --> 0:05:14.960 and we'll give our thoughts on this beer at the 0:05:15.000 --> 0:05:17.040 end of the episode, but for now, onto the subject 0:05:17.080 --> 0:05:19.640 at hand. We're taking listener questions, and for folks that 0:05:19.720 --> 0:05:23.040 want to send us their voice question for consideration to 0:05:23.080 --> 0:05:24.839 be on a future episode, we'd love to hear it. 0:05:25.000 --> 0:05:27.040 Just go to how to money dot com slash ask. 0:05:27.279 --> 0:05:30.080 There are simple instructions there for you to see how 0:05:30.160 --> 0:05:32.480 to record your voice questions. Send it on over to us, 0:05:32.640 --> 0:05:34.920 and hopefully we can take it on an upcoming episode. 0:05:35.120 --> 0:05:37.800 I mean, I wanted to mention real quick that if 0:05:37.800 --> 0:05:39.560 you had a guess how many listener questions have we 0:05:39.560 --> 0:05:42.679 answered on our podcast, Because I was moving some files 0:05:42.680 --> 0:05:45.039 around on my computer and I saw how many we 0:05:45.080 --> 0:05:47.360 have in that folder. I'm gonna guess that we've answered 0:05:47.360 --> 0:05:49.760 a hundred and eighty listener questions so far. Well, you 0:05:49.839 --> 0:05:51.760 overshot it, so now it feels like that the number 0:05:51.760 --> 0:05:54.960 I'm going to share isn't nearly worthy of praise. But 0:05:55.160 --> 0:05:58.000 one fifty. We we've answered exactly a hundred and fifty 0:05:58.080 --> 0:06:00.800 questions between the ask episode it is on Mondays as 0:06:00.800 --> 0:06:03.000 well as some of those questions sprinkled in on Friday 0:06:03.000 --> 0:06:05.520 episodes on my part because I know, like when my 0:06:05.560 --> 0:06:07.479 wife's like, guess how much I spent on this, I 0:06:07.480 --> 0:06:09.839 got a guess under. I even think she might have 0:06:09.880 --> 0:06:12.680 gotten because I ruined it if I guess over. So yeah, 0:06:12.680 --> 0:06:15.600 wet blanket Joel, that's your new nickname. But I mean 0:06:15.720 --> 0:06:17.280 the reason I mentioned that, though, is because that's a 0:06:17.320 --> 0:06:19.480 lot of questions, you know, And that's also a lot 0:06:19.480 --> 0:06:21.599 of answers that we've provided. That's a lot of folks 0:06:21.600 --> 0:06:24.560 who have maybe trusted our advice. And so we appreciate 0:06:24.600 --> 0:06:27.120 all of our listeners out there who are listening to 0:06:27.160 --> 0:06:29.040 our show, and if you've never submitted a question, we 0:06:29.080 --> 0:06:30.840 would love to hear from you and and hopefully we 0:06:30.880 --> 0:06:33.160 can take it on an upcoming episode. Yeah, alright, Matt, 0:06:33.200 --> 0:06:35.919 we were just talking about micro investing apps. Well, we 0:06:36.000 --> 0:06:38.120 have a listener here with a question about investing, but 0:06:38.200 --> 0:06:41.039 specifically doing a ROTH conversion, So let's get to that 0:06:41.040 --> 0:06:44.240 one first. Hey man, Joel, this is Jonathan in Ohio. 0:06:44.600 --> 0:06:47.400 Thanks a lot for taking my question today. I'm trying 0:06:47.400 --> 0:06:49.760 to make some predictions about US tax rates in the 0:06:49.839 --> 0:06:52.559 year twenties sixties, so I thought, hey, who better task 0:06:52.640 --> 0:06:55.520 than Matt and Joel. So here goes m My wife 0:06:55.520 --> 0:06:57.640 and I are in our early thirties and we expect 0:06:57.720 --> 0:07:00.680 ROSS to be our main retirement nest egg. But I 0:07:00.720 --> 0:07:03.560 have twenty five tho dollars from an old traditional four 0:07:03.720 --> 0:07:06.920 one K that I now have in a Vanguard traditional 0:07:07.000 --> 0:07:09.600 I RA, and if I use a nine percent rate 0:07:09.600 --> 0:07:12.239 of return as an estimate, this will grow to almost 0:07:12.320 --> 0:07:14.840 eight hundred thousand dollars by that time I reached seventy 0:07:14.920 --> 0:07:17.760 and I'm required to take r m DS. So my 0:07:17.840 --> 0:07:20.480 dilema is should I convert this to a ROTH now 0:07:20.600 --> 0:07:24.840 and pay taxes in a tax bracket, or should I 0:07:24.880 --> 0:07:27.640 wait until we were retired if we don't have any 0:07:27.680 --> 0:07:31.200 other ordinary income when we get to retirement, which obviously, 0:07:31.240 --> 0:07:33.960 I don't know is the case. I wonder if we'd 0:07:34.000 --> 0:07:36.800 be avoiding taxes on in anyway, because that eight hundred 0:07:36.800 --> 0:07:40.320 thousand dollars is still under thirty thousand dollars each year, 0:07:40.320 --> 0:07:43.520 and distributions. Obviously, I know that tax slaws will change 0:07:43.520 --> 0:07:45.520 in many times between then and now, but I just 0:07:45.560 --> 0:07:48.800 want to get a second opinion. Thanks well, Jonathan, you 0:07:48.840 --> 0:07:52.480 know that that's an impossible question to I love the 0:07:52.480 --> 0:07:55.320 impossible questions. Yeah, it's still fun to attempt to predict 0:07:55.360 --> 0:07:57.640 the unpredictable. Though. In a quick note as well, you 0:07:57.680 --> 0:07:59.600 don't have to take your R M D s. Those 0:07:59.640 --> 0:08:03.240 require are minimum distributions until you are seventy two. Now. 0:08:03.560 --> 0:08:05.680 That was the result of the Secure Act, which became 0:08:05.760 --> 0:08:08.080 law at the end of last year. But honestly, Joel, 0:08:08.080 --> 0:08:10.720 if you're seventy seventy two, what difference does two years 0:08:10.720 --> 0:08:13.520 make a big difference if you're seventy if you don't 0:08:13.520 --> 0:08:15.080 have to take the R and D. But when you're 0:08:15.120 --> 0:08:16.640 that old, like two years, it's just like a blink 0:08:16.680 --> 0:08:19.240 of an eye, Like the older I get now, like 0:08:19.360 --> 0:08:22.360 time almost means nothing to me. It goes by so quickly. 0:08:22.760 --> 0:08:24.160 Makes you think of that picture of you and I 0:08:24.480 --> 0:08:26.280 from the face app when we're like, we look like 0:08:26.320 --> 0:08:27.960 two seven year old guys. It's not gonna be that 0:08:28.000 --> 0:08:30.000 long until we actually get there. Yeah, that's so true. 0:08:30.040 --> 0:08:31.840 Now I understand that, but that but that is actually 0:08:31.840 --> 0:08:33.160 a big deal for a lot of people who are 0:08:33.160 --> 0:08:35.480 trying to play in their retirement with draws, and especially 0:08:35.480 --> 0:08:37.560 as people are living longer, that extra two years to 0:08:37.640 --> 0:08:39.720 not have to take with draws is a big deal 0:08:39.760 --> 0:08:42.280 for people. That two years of compound growth, especially on 0:08:42.360 --> 0:08:44.920 that back end, like that is massive. I don't want 0:08:44.920 --> 0:08:47.200 to discount that. But at the same time, I'm also like, 0:08:47.440 --> 0:08:50.920 when you're seventy what's seventy two, we'll be there before, 0:08:50.960 --> 0:08:53.319 you know. Bunny, all right, well, let's talk about Jonathan's 0:08:53.400 --> 0:08:55.960 question Roth conversions and Jonathan, I think the first thing 0:08:55.960 --> 0:08:58.760 we need to address is predicting future tax rates, and 0:08:58.800 --> 0:09:00.880 it's pretty impossible to do that kind of like Matt said, 0:09:01.200 --> 0:09:04.600 it's hard to imagine them going lower though, because if 0:09:04.640 --> 0:09:06.840 you look at kind of a history of tax rates 0:09:06.840 --> 0:09:09.520 in this country, we're at a pretty low point ultimately, 0:09:09.880 --> 0:09:13.080 and as federal deficits increase in the national debt expands, 0:09:13.320 --> 0:09:16.599 taxes will likely have to rise to meet our increasing obligations. 0:09:16.960 --> 0:09:19.320 And Matt, there's a recent two trillion dollar stimulus bill 0:09:19.559 --> 0:09:22.080 is likely going to cost all of us some money 0:09:22.160 --> 0:09:25.280 in increased taxes over the coming years. I don't think 0:09:25.320 --> 0:09:27.280 that the federal government should operate like a household and 0:09:27.320 --> 0:09:29.360 should have to have like the balanced budget. But at 0:09:29.360 --> 0:09:31.400 the same time, I do think the increased federal spending 0:09:31.400 --> 0:09:34.520 the increased deficit will lead to higher tax rates for 0:09:34.559 --> 0:09:37.280 us in the coming years. But again, it's impossible to predict. 0:09:37.360 --> 0:09:40.240 How can I actually know that it does influence at 0:09:40.280 --> 0:09:42.720 least a little bit of how we answer this question, though, Yeah, 0:09:42.720 --> 0:09:45.480 for sure, man, And so another consideration is where the 0:09:45.480 --> 0:09:48.480 market is currently right, making a roth conversion in a 0:09:48.520 --> 0:09:50.559 down market makes a whole lot of sense if you're 0:09:50.600 --> 0:09:53.120 in a lower tax bracket, and in particular, if you 0:09:53.160 --> 0:09:55.640 do it right now while the market is down, as 0:09:55.640 --> 0:09:58.600 stock prices have fallen, your tax bill on that conversion 0:09:58.760 --> 0:10:00.280 is going to be lower than it would have been 0:10:00.440 --> 0:10:03.400 just a few months ago. It's especially ideal if you 0:10:03.440 --> 0:10:05.839 can make that conversion in a year in which your 0:10:05.880 --> 0:10:09.760 income doesn't exceed the marginal twelve percent tax bracket. Yeah, Basically, 0:10:09.760 --> 0:10:12.080 the lowerer a GI, the lower your taxable income, the 0:10:12.120 --> 0:10:14.880 more it actually makes sense to do a Roth conversion. Now, Jonathan, 0:10:14.880 --> 0:10:16.880 don't wait ten years when your tax rate's gonna be 0:10:16.920 --> 0:10:19.440 twice is what it is now. That's me predicting the future, 0:10:20.280 --> 0:10:22.480 which is impossible. Yeah, that's a bad move, Matt, don't 0:10:22.480 --> 0:10:24.400 do that, and I think too. It's important to note 0:10:24.440 --> 0:10:26.680 for Jonathan that in order for this to even be 0:10:26.720 --> 0:10:29.120 on the table, you really have to make sure that 0:10:29.160 --> 0:10:31.000 you have the cash on hand to pay the tax 0:10:31.360 --> 0:10:33.560 on the conversion and at the same time make sure 0:10:33.559 --> 0:10:36.040 you aren't depleting your emergency fund in order to make 0:10:36.080 --> 0:10:39.839 this move. Especially with rampant job insecurity of contracting economy, 0:10:40.080 --> 0:10:42.720 it makes sense to hold on to that emergency fund. 0:10:42.920 --> 0:10:45.520 And if you don't have enough money on hand to 0:10:45.640 --> 0:10:48.360 keep that intact as well as paying the tax bill 0:10:48.400 --> 0:10:51.240 that you're going to incur next year, then don't do 0:10:51.280 --> 0:10:53.520 it because that puts you it undue risk. So, while 0:10:53.559 --> 0:10:56.200 we love the idea of making a Roth conversion, you 0:10:56.240 --> 0:10:57.600 have to be able to pay the taxes that you're 0:10:57.640 --> 0:10:59.920 gonna incur in order to make it. Is still us 0:11:00.040 --> 0:11:03.559 mark move and Jonathan, another advantage of making that conversion 0:11:03.920 --> 0:11:07.240 is you have the potential to spread out your tax liability. 0:11:07.240 --> 0:11:09.360 You didn't really mention this, but if you do have 0:11:09.640 --> 0:11:11.839 happen to have a four O win K through maybe 0:11:11.880 --> 0:11:15.559 a current employer, converting to a rath with that old money, 0:11:15.679 --> 0:11:16.920 like that makes sense to go ahead and do that now, 0:11:17.000 --> 0:11:19.800 because it's helpful to have both pre tax and post 0:11:19.840 --> 0:11:23.959 tax buckets in retirement. Essentially you're diversifying your tax liability 0:11:24.120 --> 0:11:26.600 when the time does come for you to retire. Yeah, 0:11:26.679 --> 0:11:29.360 at those different tax buckets so helpful. Having both pre 0:11:29.440 --> 0:11:31.760 tax and post tax just gives you even more flexibility 0:11:31.760 --> 0:11:34.680 in retirement to basically dictate what your income is gonna 0:11:34.720 --> 0:11:37.200 look like and dictate what your tax rate is going 0:11:37.240 --> 0:11:39.160 to be because you don't know what the actual tax 0:11:39.240 --> 0:11:40.560 rate is going to be in the future. Yeah, so 0:11:40.559 --> 0:11:41.960 that's kind of a good way. I think a lot 0:11:42.000 --> 0:11:43.640 of answers that we give on the show sometimes are 0:11:43.640 --> 0:11:45.480 split it down the middle. That's a way to split 0:11:45.480 --> 0:11:47.360 it down the middle to have some pre tax some 0:11:47.440 --> 0:11:50.160 post tax money. You're you're splitting the difference and you're 0:11:50.160 --> 0:11:53.840 giving yourself more flexibility in the future while ensuring some 0:11:53.880 --> 0:11:56.480 tax breaks now. Right, And it really comes down to 0:11:56.600 --> 0:11:59.360 ultimately us not knowing the future. Like I said at 0:11:59.360 --> 0:12:01.240 the beginning of your question, Jonathan, we are in a 0:12:01.240 --> 0:12:04.680 pretty historically low tax environment. I'm kind of keen to 0:12:04.679 --> 0:12:07.160 take the burden the hand on this one and make 0:12:07.200 --> 0:12:10.760 the conversion, especially if most of your retirement account exposure 0:12:11.320 --> 0:12:13.559 is in those accounts that have already offered you at 0:12:13.559 --> 0:12:16.040 tax benefit. I would jump at the chance to have 0:12:16.240 --> 0:12:18.360 some of my money in a post tax rath account 0:12:18.600 --> 0:12:20.480 because it does add to some of the flexibility you're 0:12:20.480 --> 0:12:22.240 gonna be able to have. Of course, it's hard to 0:12:22.280 --> 0:12:24.600 know whether you'll actually be in a lower tax bracket 0:12:24.600 --> 0:12:27.080 in retirement, so just do your best and either way, 0:12:27.160 --> 0:12:29.240 keep investing for the long haul. That's really what it 0:12:29.240 --> 0:12:31.400 comes down to you. I mean, these sorts of decisions 0:12:31.400 --> 0:12:33.800 about whether to convert to a roth ira from a 0:12:33.840 --> 0:12:37.160 traditional ira, they're good questions to have. But more than anything, 0:12:37.440 --> 0:12:40.080 growing that nest egg, putting more into it and making 0:12:40.120 --> 0:12:43.080 sure you're going to have enough in retirement, that is 0:12:43.200 --> 0:12:45.120 the bigger part of the equation. All Right, man, We've 0:12:45.160 --> 0:12:47.000 got a couple more questions that we're gonna get to, 0:12:47.200 --> 0:12:58.920 but first let's take a quick break. All right, That 0:12:58.960 --> 0:13:00.360 we're back to the break. We're you get to a 0:13:00.440 --> 0:13:03.040 question about employees stacked purchase plans in just a second, 0:13:03.200 --> 0:13:04.720 but before that, let's get to a question that's on 0:13:04.720 --> 0:13:06.720 a lot of listeners minds. Do I pay off debt 0:13:07.160 --> 0:13:10.360 or do I invest with the extra money that I've got? Hi, 0:13:10.440 --> 0:13:13.080 Joel and Matt. My name is Kate and I currently 0:13:13.120 --> 0:13:16.920 live in Pittsburgh, Pennsylvania. UM. I love the show and 0:13:16.960 --> 0:13:20.160 I found it to be a very valuable motivational tool 0:13:20.200 --> 0:13:23.040 for me. UM, I'm coming a bit late to the game. 0:13:23.360 --> 0:13:27.920 I'm thirty five with married with two kids twelve ages 0:13:27.960 --> 0:13:31.000 twelve and four. We're a single income family, and I 0:13:31.080 --> 0:13:34.560 unfortunately haven't given much thought to my finances until recently. 0:13:35.840 --> 0:13:38.920 I pretty much let life get carried away, assuming I 0:13:38.920 --> 0:13:42.560 would take care of things later. So now is later, 0:13:42.960 --> 0:13:45.760 and I'm working on making sure that I'm in more 0:13:45.800 --> 0:13:48.960 control of my finances and making better decisions for the future. 0:13:49.880 --> 0:13:52.960 We have a large amount of debt, including consumer debt, 0:13:53.480 --> 0:13:57.400 student loans, a personal loan, and a mortgage. I am 0:13:57.440 --> 0:14:00.079 a teacher and contribute twelve percent of my income to 0:14:00.120 --> 0:14:03.160 my four oh one k annually. Currently my four oh 0:14:03.160 --> 0:14:06.120 one k, though is it in terms of my savings 0:14:06.160 --> 0:14:09.160 for the future. I know I need to emphast up, 0:14:09.559 --> 0:14:14.600 but my debt is absolutely crushing currently and we're working 0:14:14.600 --> 0:14:16.600 on a plan to pay it off as soon as possible. 0:14:17.800 --> 0:14:19.400 But if you have no if you have debt, you 0:14:19.400 --> 0:14:23.200 have no money, and that includes money for savings. But 0:14:23.400 --> 0:14:26.080 if I only focus on the debt, it will be 0:14:26.200 --> 0:14:29.560 years before I can begin saving for the future beyond 0:14:29.600 --> 0:14:32.480 my four o one k. My concern is that that 0:14:32.520 --> 0:14:35.080 would be years of not being able to benefit from 0:14:35.120 --> 0:14:39.000 compounding interests with investments. So I'm not sure what to do. 0:14:39.560 --> 0:14:42.000 Focus only on the debt and put off savings until 0:14:42.080 --> 0:14:45.160 at least most of my desk taken care of, or 0:14:45.760 --> 0:14:48.320 take some amount of money, even if it's small, and 0:14:48.360 --> 0:14:51.480 begin investing into another retirement account such as a rath 0:14:51.560 --> 0:14:55.280 I array while working at the same time to pay 0:14:55.280 --> 0:14:58.880 off the debt. I would appreciate any advice you may 0:14:58.920 --> 0:15:01.520 have to help me figure out of solid path going forward. 0:15:02.040 --> 0:15:04.760 Thank you so much for the help and for all 0:15:04.800 --> 0:15:09.000 of your work on the podcast. Cheers. Kate thinks so 0:15:09.080 --> 0:15:11.200 much for listening to the podcast, and we are glad 0:15:11.280 --> 0:15:13.760 that it's been motivational for you. Honestly though, like you're 0:15:13.760 --> 0:15:17.680 not getting started all that late at age thirty five. Yeah, 0:15:17.680 --> 0:15:19.560 thirty five is not that late in the game. I 0:15:19.560 --> 0:15:21.320 think Kate's giving herself a little bit of a hard 0:15:21.320 --> 0:15:23.680 time here, and I think we all understand the realities 0:15:23.760 --> 0:15:26.160 of like pushing something off a little bit further down 0:15:26.160 --> 0:15:27.760 the road. You know, she was kind of mentioning how 0:15:27.960 --> 0:15:29.960 she's like, I'm gonna say that for later. We've all 0:15:30.000 --> 0:15:32.160 been there, like we don't want to do the harder, 0:15:32.320 --> 0:15:34.520 difficult things in life, but you know you're there now. 0:15:34.680 --> 0:15:36.560 We understand that you're ready to make some decisions. So 0:15:36.560 --> 0:15:37.880 that makes me happy though that we can kind of 0:15:37.880 --> 0:15:39.720 guide you along in the stage of life. And didn't 0:15:39.760 --> 0:15:42.360 Kate say too that her investment rate, her savings rate 0:15:42.400 --> 0:15:45.880 was twelve. I think that's pretty good. That's that's solid. Again, 0:15:46.200 --> 0:15:48.880 Kate raking herself over the coals and when it's unnecessary. Kate, 0:15:48.920 --> 0:15:50.840 you're doing a great job. Keep it up. I want 0:15:50.840 --> 0:15:52.400 to say that you didn't mention whether or not you're 0:15:52.440 --> 0:15:55.080 getting an employer match. If you do, then you should 0:15:55.120 --> 0:15:57.600 at a minimum keep investing up until that match amount, 0:15:57.640 --> 0:16:00.120 no matter what. When it comes to investing more or 0:16:00.120 --> 0:16:02.440 paying down debt. For instance, if your employers putting in 0:16:02.440 --> 0:16:04.640 three percent, if you put in six, if they're essentially 0:16:04.680 --> 0:16:06.920 matching fifty cents on the dollar, well, then stop at 0:16:06.920 --> 0:16:09.200 six percent of your money and start funneling that extra 0:16:09.240 --> 0:16:12.080 money towards your high interest rate debts. Then you're able to, 0:16:12.400 --> 0:16:14.680 like we're talking about earlier, Matt, kind of splitting the difference. 0:16:14.840 --> 0:16:17.520 You're doing both simultaneously, and I think that's always a 0:16:17.520 --> 0:16:19.800 good place to be, especially if you do have high 0:16:19.800 --> 0:16:22.480 interest rate debts that you want to get rid of. Yeah, 0:16:22.560 --> 0:16:24.520 and on that note, we've we've talked before about the 0:16:24.560 --> 0:16:28.120 debt snowball and the avalanche. Student loans and mortgages aren't 0:16:28.160 --> 0:16:31.200 typically the highest priority for us to don't want to 0:16:31.200 --> 0:16:34.680 pay off, especially your mortgage, But you should funnel all 0:16:34.800 --> 0:16:37.640 your extra money towards getting rid of that personal loan, 0:16:37.840 --> 0:16:41.080 a SAP any of that consumer spending. And then once 0:16:41.120 --> 0:16:43.640 that is taken care of, you can increase your four 0:16:43.640 --> 0:16:46.640 O n K contribution amounts. Yeah, once you've been able 0:16:46.640 --> 0:16:48.800 to make good progress on the debt, you can start 0:16:48.840 --> 0:16:51.880 investing again. But super high interest rate debt does take 0:16:51.880 --> 0:16:56.240 priority over investing typically at least after that match amount. Yeah, 0:16:56.280 --> 0:16:58.360 So tackling the high interest rate debt like that's more 0:16:58.400 --> 0:17:01.160 along the lines of taking the that avalanche approach, right 0:17:01.160 --> 0:17:03.400 because you're gonna start with the higher interest rates, but 0:17:03.760 --> 0:17:06.199 because you're already saving within your four own k and 0:17:06.240 --> 0:17:08.200 you already have a plan to knock out your debt. 0:17:08.520 --> 0:17:10.520 I think the decision really comes down to taking the 0:17:10.640 --> 0:17:13.199 route that will be the most effective for motivating you. 0:17:14.040 --> 0:17:16.720 If the snowball appeals to you, then maybe, like that 0:17:16.800 --> 0:17:19.480 laser like focus on purely paying off debt is the 0:17:19.480 --> 0:17:21.040 way to go. Like, maybe you just want to focus 0:17:21.040 --> 0:17:23.120 on one item at a time and then once you've 0:17:23.160 --> 0:17:26.359 eliminated that completely, then focus on investing. But you know, 0:17:26.400 --> 0:17:28.639 if you are going to look at the numbers and 0:17:28.680 --> 0:17:31.199 take more of a mathematical approach, then that's when the 0:17:31.200 --> 0:17:33.400 debt avalanche might be for you. Yeah, Matt. So much 0:17:33.520 --> 0:17:37.880 of our personal finance lives are emotionally based and trying 0:17:37.880 --> 0:17:40.439 to split the difference, which sometimes really does work and 0:17:40.480 --> 0:17:42.560 it can be the best way to go, it doesn't 0:17:42.560 --> 0:17:45.040 always work for our mindset. Our brains have such an 0:17:45.040 --> 0:17:48.600 easier time handling a singular goal, and if that singular 0:17:48.640 --> 0:17:51.080 goal is going all in and investing as much as 0:17:51.080 --> 0:17:54.080 we can or funneling as much money as we can 0:17:54.080 --> 0:17:57.120 towards HIE interest rate debts. Well, having just one goal 0:17:57.480 --> 0:17:59.879 makes it so much easier to accomplish, and so if 0:18:00.040 --> 0:18:02.360 at is what works best for Kate, then I think 0:18:02.359 --> 0:18:04.320 she should do that, because, Yeah, we like talking about 0:18:04.320 --> 0:18:06.080 the numbers, we like talking about what makes the most 0:18:06.080 --> 0:18:08.720 sense and how take advantage of the match and then 0:18:08.760 --> 0:18:11.760