Motley Fool Money - How To Handle A Raise

Episode Date: May 3, 2022

A trio of earnings reports from Hilton Hotels, Expedia, and Avis Budget Group give us the chance to zoom in on the travel industry. (0:20) Asit Sharma discusses: - Key metrics for hotels, bookings, and car rentals - Travel industry's growth having a positive ripple effect on advertising revenue - Why he prefers travel brands with staying power (13:10) Alison Southwick and Robert Brokamp discuss how to adjust your monthly budget after you get a raise. Here's the retirement calculator Bro mentioned! - http://calcxml.com/calculators/retirement-planning?skn=606 Stocks discussed: HLT, EXPE, CAR, ABNB, MAR Host: Chris Hill Guests: Asit Sharma, Alison Southwick, Robert Brokamp, Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone, I'm Charlie Cox. Join us on Disney Plus as we talk with the cast and crew of Marvel Television's Daredevil Born Again. What haven't you gotten to do as Daredevil? Being the Avengers. Charlie and Vincent came to play. I get emotional when I think about it. One of the great finale of any episode we've ever done. We are going to play Truth or Daredevil.

What? Oh, boy. Fantastic. You guys go hard. Daredevil Born Again, official podcast Tuesdays, and stream Season 2 of Marvel Television's Daredevil Born Again on Disney Plus. You're not the only one planning a trip this summer, and the results are starting to show up in travel stocks. Motley Fool Money starts now. I'm Chris Hill, joined by Motley Fool Senior

Analyst Asset Sharma. Thanks for being here. Chris, thank you for having me. A question that I find myself asking with greater frequency, and I'm not alone, which gives me some comfort, the question is, where should I be looking as a stock investor? You can look at categories of stocks. You can also look at industries. Today, the trend is, the trade is. Travel industry is front and center in the news. So I thought this is as good an opportunity as any to look at the travel industry. Hilton Hotels, Expedia, Avis Budget. They're all out with their first quarter earnings reports.

And I will just add, go ahead and ignore what's happening with those stocks today. Over the last six months, all three of these stocks have outperformed both the NASDAQ and the S&P 500. So I wanted to spend a couple minutes on each. your thoughts and then sort of talk about the travel industry writ large. Let's start with Hilton Hotels. The profits look good. The full year guidance was lower than Wall Street wanted, although this is not really the time or the environment for any company to go big with guidance. But in general, this seemed like a good quarter for Hilton.

Yeah. I mean, hasn't Wall Street seen what's going on in the larger world? They've got expectations for later this year. Best to check those expectations at the door and look what's happening on the ground here, which I think it's pretty positive for Hilton. Chris, I mean, they had a profitable quarter. They had net income of $211 million. What I really liked about this report is their system-wide comparable rev par. That's fancy speak for revenue per available room, sort of an average revenue they have broken down by room. That increased by about 81% from the prior period last year, which, as you remember, was one where Omicron, that variant was all over the news.

Traffic in all these travel companies was coming, again, to a halt, not quite as bad as we had in 2020, but Hilton took a hit. And what I loved about their increase in Rev PAR is that the two big components, average daily rate and occupancy, both were strong. So, not only are people coming back and traveling both for business and leisure, they're willing to pay the slightly higher prices that they paid last year when it was a little easier to get a room, whether you were traveling for business or leisure purpose. This is something, and I'm glad you hit on this, this is something that we saw with Expedia

as well, because Expedia's first quarter loss was smaller than expected. The stock is, when I checked earlier, was down about 12% today. But you look inside Expedia's report, and you can see in the numbers the demand for travel. People are spending more money. In the case of Expedia, the cost of airfare was up, but the number of tickets sold was also up. Hotel rates on the rise, but hotel stays up more than 50%. So, this is just one of those things that you, like, again, that's why I say, forget about

what the stocks are doing today. You can look at these three and just see the demand for travel going higher. Yeah. Chris, you know, I know we're going to talk also a little bit in general about investing in this industry. So I don't want to say too much just now, but Expedia has a pretty nice brand. So they're getting a lift as travel resumes. People are going to their various properties.

Hotels.com comes to mind because I'm a cheapskate, and that's one of the places that I look, when I'm going to travel. I've been on their site as of late, looking at some potential room nights. But this is the thing also we have to keep in mind. Not every company in the travel industry is going to be back to 2019 levels. When we look at the tech industry, often you and I talk, and we see companies that are already exceeding 2019 performance. But here, Expedia, while they're up like 52% in their stayed room night growth versus their first quarter of 2021, they're still lagging 2019 and haven't quite gotten back to that critical mass of volume that they need among all their various travel properties to be profitable. So this quarter they

had in that loss of 122 million bucks, but they're on the right path. Their gross bookings really, you know, jumping up here, 24 billion bucks in gross bookings versus just 15 billion roughly this time last year. So a positive trend here for Expedia, not quite there, but again, they're on the right path, despite so many geopolitical events that past COVID, keep throwing them for a loop. I'm referring, of course, to the word Ukraine. Obviously, both of them tied to the hotel industry. You talk about the revenue per room. I always think of it as heads on beds.

You know, that's if you're in the hotel business, that's what you're looking for. You want heads on beds. Avis budget group, first quarter profits came in higher than expected. They already had a stock buyback plan in place, and they said, we're going to increase that plan by $3 billion. I can't say with any authority how good they are at that. I will just look at their stock chart and say, if they're going to buy back shares, they're buying back at a higher price because that's a stock that's done well over the last couple years. Yeah. Stock has done well. Management obviously thinks that investors will appreciate them

putting these excess profits to work. And looking at that stock chart, yeah, I think investors do like this and they want more utilization of free cash towards reducing share count here. But they are firing all cylinders because, you know, we have to trot out a lame cliche if we're talking about the car industry here. I like that this jump in quarterly revenues of 77% was accompanied by some nice profitability on the bottom line. But again, we see a trend here. Chris, they mentioned that their revenue increase was driven by rental days as demand improved and increased revenue per day. So we have this pricing power element going on. Now, in the car industry, there is demand for cars. There are fewer cars, fewer new cars. And this has ripple effects everywhere.

We're still dealing with supply chain issues that are causing chip shortages. So the car companies, rental car companies are able to utilize this to their advantage. People need to rent more vehicles. And again, we have the tailwind of improved travel, which is pushing this company. I think of the three that we're talking about today, they're probably enjoying the best performance. Airbnb is going to report after the closing bell today. One of the things I like about Airbnb as a business is they don't really need to spend a ton of money. on marketing. They've talked before about how word of mouth is such an important lever for them and they're not paying for word of mouth. You look at businesses like the three that we're talking

about today, Expedia, Hilton, Avis Budget. You can go ahead and throw a Marriott in there as well. Those are businesses that do depend on marketing and advertising. And it occurs to me as we're having this conversation that one of the nice ripple effects of the. the travel industry bouncing back the way we're seeing, the demand for travel increasing the way that we're seeing, is for advertising businesses. This has to be a win for businesses like Alphabet and Facebook who depend on advertising. I think so. And I think this also proves the resiliency of both the advertising model and the travel model. Long term, the U.S. economy keeps growing.

even at our worst, I mean, these are tough times with interest rates, so high, inflation is going through the roof. We probably will still manage to eke out some economic growth this year. And we're a consumption-based economy. So, over time, as you said at the outset of this conversation, Chris, when an investor is trying to choose where to invest, this is one of those logical places, but I think it takes some nuance. And for me, how I invest in this sector is I try to think about big brands, powerful brands, that have some staying power. If I'm looking for the highest growth vehicles, I'll probably look outside the travel industry. When I'm investing in this, I'm thinking about these companies.

We've mentioned several today. I'm an owner of Airbnb. I'm an owner of Marriott, for example. We're talking about durability, advantages of scale. I mean, Hilton has that. They've got a pipeline of several hundred thousand rooms that are in development. They make a lot of money just franchising their brand name. about each of these companies as having that staying power, that's what you want as an investor. And maybe you won't get the most powerful growth that way, but when you're building out a portfolio, you can't all be tech, nor can't be the sleepiest industry, say, utilities industry. And this is a good place to look in that regard.

I love what you said about brands with staying power, because if you think about experiences that people have with travel, it's, whether you're traveling for place, pleasure or for business, there isn't an emotional component to it. Anytime you're traveling, people will always ask you, how was the travel? Not how were things at your destination, whether it was a vacation or a business meeting or a conference or something like that, but how was the travel? And how the travel went has an impact on the brand. And I think you're absolutely right that the more people, you know, a business like Marriott,

which I, to my own detriment, do not own shares of. The more Marriott can continue to fulfill the brand promise that they are making, whether it's to business travelers or to people on vacation, the more they're just going to strengthen that brand, and the more it becomes a brand with staying power. I agree. And let's just keep on Marriott for just a second. They really understand their consumer. They have a wonderful loyalty program, which is helping them actually move business up.

off of sites like Expedia and make it more direct with their customers. They have that relationship. And we as consumers, I mean, even if we in this particular industry switch to being more Airbnb consumers than Marriott, we will still, in certain situations, be it business travel, or you just happen to check one of Marriott's sites. They've got from budget to, of course, very upscale properties under their big banner. You know, we might stay at a very, you know, we might stay at a property here and again. They've got that core business that resonates with customers. So I think that this is how you want to play this industry. It's volatile. And at the end of the day, it's not immune to shocks. It's prone to exogenous shocks. But over time, Chris,

you and I, we got to get out. We have to see the world, right? You and I can't always be hanging out together on Zoom. No, we can't. As much as I enjoy hanging out on Zoom with you, No, we need to get out. Asa Charma, love talking to you. Thanks for being here. Always fun. Thanks again, Chris. Remember, you can email podcasts at Fool.com with your questions about stocks and money, like Erica did. She wrote, I recently received a 5% raise.

I just turned 30. I'm saving for a house, paying off student loans, paying rent, and of course, saving for retirement using the Motley Fool's guidance. What recommendations do you have for adjusting your? budget with an adjustment in income. Great question, Erica. With some tips on how to handle a raise, here's Robert Brokamp and Allison Southwick. Last week, we talked about getting a raise. And this week, we'll discuss what you should do if you're successful, like Erica. Much of what we'll discuss doesn't just apply to a bigger paycheck, but to any financial windfall you might receive. Getting a raise is great news, but it might actually be even better than you think. Why is that, bro? Well, because it's

actually much more than getting a paycheck. And there are a few examples why this is the case. We'll start with one here. You may be boosting your eventual Social Security benefit because it's based on your 35 highest earning years adjusted for wage inflation. So if you've got a raise and it's among your better earning years, it might knock out one of those lower earning years. And this is similar to other benefits you receive, like a pension or employer-provided life and disability insurance. Many of these are based on your annual income. So the more you earn, the more valuable that benefit. It could also result in a higher employer 401k match if you get one, since most match formulas are based on a percentage of your income. And depending

on your plan, this may be true even if you personally don't contribute more to your 401K, though you should, and we'll get to that later. So all kinds of good things come with getting a raise. And you know who's also happy to hear you received a raise? Your dear Uncle Sam, oh, he misses you. Yes, here is the less good news of getting a raise. You have to share, your raise with Uncle Sam in the form of higher taxes. Same with Sister State, if you live in a state that charges income taxes. Tax season just ended. So really, we should all think about whether we're having too much or too little withheld from our paychecks. You want to make changes now so you don't owe too much next April or get a huge refund, which I know feels good,

but we probably could have done better things with our money than give the government an interest-free loan. And by the way, April just ended. So we're already one-third through 2022, believe it or not. So you have two-thirds of the rest of the year to get your withholdings. rate. And since higher income means higher taxes, getting a raise is a good time to re-evaluate those withholdings. The IRS does have a tax withholding calculator. Lots of fun. You can find it just by Googling it for it, and it'll help you with the calculations. And if you figure out that you should have more or less withheld, you submit a new W-4 to your employer, and they probably can help you with that process. We're also talking a little bit about windfalls in general,

and the tax consequences of those varies on the type of windfall. So, for example, A bonus does not just get added to your income and tax like the rest of your pay. It's considered supplemental income and is usually taxed at a flat rate of 22%. That might be more or less than you need to have withheld, so then you compensate with the rest of your pay. And since this has been in the news recently, I'll add that debt forgiveness, which is kind of a windfall, generally is taxable. However, that may not be the case for forgiven student loans. So it depends on various factors. A law passed last year makes most forgiven federal educational.

debt tax-free, but only through 2025. So, as always, dig in the details of your particular situation. And I'll just throw in a final note on taxes here. A higher income could result in you being ineligible for some tax breaks or being ineligible to make some contributions to investment accounts like a Cover Dell Education Savings account or a Roth IRA. Not the Roth 401K. Anyone can contribute to the Roth 401K, but if you make too much money, you can't contribute

to the Roth IRA. So, if your income was already close to those eligibility thresholds, evaluate whether you can still contribute. Okay. So you've thought about the IRS, and now you're looking at that money pile that's left over. Yes, you can treat yourself. We'll get to that. But first, hopefully, you're thinking about the long term. Yes. And ideally, you'll be able to use some of this newfound money to buy a better future if you can. So, you know, as you might expect, we don't recommend that you blow your extra

dough on more stuff. Ideally, you'll be able to do. use it to fortify your financial future by saving and investing a portion of that new money. That said, we know that many people are getting raises that are below the rate of inflation. Some folks are going to need really every penny of their after-tax raise just to cover the cost of living. But if that's not you, then ideally, you'll be able to use a portion of your raise or windfall to build an emergency fund, pay off high-interest debt, like credit cards charging 15%, or just save more for retirement or college if you have kids. So let's return to Erica, whom we heard from at the beginning of this segment.

So she has school loans, once in my house, and is saving for retirement. What should she do with her new raise? Well, at this point, I wouldn't be in a hurry to pay off school loans. Repayments of federal loans have been paused until August 31st. And there's all that recent talk of loan forgiveness, again, mostly of federal loans. Plus, the interest rates on school debt are generally low. Interest is tax deductible for lower and middle income Americans, and you don't even have to itemize to take that deduction.

So that leaves the house in retirement. So she could set up a higher-yielding online savings account and have money automatically transferred after each paycheck to begin building up a down payment for the house. And then use some of a raise to save more for retirement. It's just really about everyone should. In fact, if you don't save more for retirement, getting a raise might actually put you farther behind.

That's the conclusion of a report from Morningstar entitled, More Money, More Problems, How to Keep a Bigger Paycheck from Spoiling Retirement. So according to their research, most people don't increase their savings rates as their income rises. Instead, you know, they use it to increase their lifestyle. They go out to eat. They buy nicer cars. They get a bigger house, that type of stuff. As the report put it, yesterday's indulgences become today's new normal and tomorrow's expectation,

otherwise known as lifestyle creep. The problem is, the more you increase the cost of your lifestyle, the more you increase the cost of your retirement. Because most people want to maintain that lifestyle when they quit work. No one wants to have to cut back. Now, you might think, well, I'm saving a percentage of my income. So when my income goes up, my savings will also go up and I'll be just fine. But the Morningstar report found that this may not be the case. And workers should also increase their savings rates.

That is the percentage of income that they're saving for retirement. The report actually suggested the following guideline, spend twice your years to retirement. So if you're 20 years from retirement, you can spend 40% of your raise, but then save the rest. or just follow the advice of podcast listener Dave G, who emailed us a few years back and said that when he was at college, he was taught to save half of each raise. He did so, and that allowed him to gradually build up to a savings rate of over 40% by the time he was in his 50s, and allowed him to retire early. But of course, dear listener, your situation is going to be unique because, you know, you're so darn special. So the Morning Star Report also suggests that this would be a good time to meet with a financial planner who can help determine how much of your raise you should be saving. because, you know, after all, if you're really behind, you should bank it all.

And, of course, this also applies if you receive some sort of a windfall. If you're behind in your retirement savings, receiving an inheritance or, you know, some other large, some money just falls into your lap. This is a great opportunity to boost your net worth. Unfortunately, according to an Ohio State study, Americans save only about half of their inheritances and as many as 40% of heirs spend the whole thing. So if you receive a large chunk of change, you might also want to spend some time with a financial planner. That said, she or he won't work for cheat.

If you're looking for a good, free online retirement calculator, we provide a link to my favorite one in the show notes. I do want to add a special tidbit for those in the military. You actually have access to free financial counseling, and you'll get a reminder about this benefit at certain touch points in your career, including when you maybe get a promotion and a raise. Be sure to take advantage of that. I want to give a shout out to Daniel Kopp of Wise Stewardship Financial Planning,

a fellow in my master's degree program who alerted me to this perk. So thank you, Daniel. And then one final financial planning point. Raise is a good time to evaluate your insurance. I know not a very exciting topic, but you get life insurance and disability insurance to replace income you can no longer earn. The more your income grows, the more you should consider whether you should have more insurance. The death benefit of a life insurance policy when your kids were born may no longer be enough,

five, ten, or fifteen years later. Now, it might be because you've built up a net worth and your kids are older, you don't need as much life insurance as you bought. getting more insurance is not very expensive. According to PolicyGenius.com, a $250,000 10-year term policy for a healthy 35-year-old male is only about $14 a month. And for a $500,000 policy, you'll pay just another $7 a month on top of that. Well, as much fun as it is to pay more taxes and ponder life and disability insurance, bro, have we come to the part of your advice where you tell people to treat themselves? Because I did promise we would get to that part,

you know, the immediately fun part and not the thanking your past self in the distant future part. Yes, and I do think this is important, even though we saved it to the end. You should enjoy it. So we covered a bunch of responsible, boring stuff, but hopefully there's enough left over to enjoy some of your raise or your windfall. Got to eat, bump up your vacation budget, replace that five-year-old phone. Whatever is a worthwhile reward for you, you earned it. As always, people on the program may have interest in the stocks they talk about and the model. full may have formal recommendations for or against, so don't buy ourselves stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.