Rich Habits Podcast - Q&A: Retirement Investing as an Entrepreneur, Cashing out the 401(k), & Co-Signing Student Loan Debt

Starting point is 00:00:00 In communities across Canada, hourly Amazon employees can grow their skills and their paycheck by enrolling in free skills training programs for in-demand fields. Learn more at aboutamazon.ca. Hey, everyone, and welcome back to the Rich Habits Podcast Question and Answer Edition. These are our Thursday episodes, and in these Thursday episodes, we answer your questions. No filter, no, you know, pre-recorded anything. It's Robert and I off the day. exactly what we think you should be doing as it relates to what you ask us. And you can ask us questions on Instagram at Rich Habits Podcast. You can ask us a question via email, Rich Habitspodcast at

Starting point is 00:00:41 gmail.com. And Robert, speaking of emails, we have created what I would argue is the coolest, best, most informative and also illustratively focused newsletter on the internet. The Rich Habits newsletter. We've got over 42,500 subscribers. We're adding 50 to 100 subscribers. We're adding 50 to 100 subscribers per day now. It is just blown away our expectations. You guys are eating up this newsletter. So Robert, why do you talk about, one, what you like about the newsletter? And then two, we had one go out this morning about a really cool graph that Bank of America shared. And so maybe break down a little bit of what you thought about that graph, why it was interesting and what people can expect when they read the newsletter. Oh, I think for me, the coolest part about

Starting point is 00:01:24 the newsletter is that it is a direct reflection of our brain dumps, week, what we're looking at, what we're investing in, and I think it just really vibes with us as people and how we deliver the information that we deliver every week. And everyone's approach to this is different. And I think ours is the best. Like I said earlier, I think we've built the best mouse trap. And so for me, it's just so incredible as we grow this community and the newsletter and rich habits to really just see how people react to how we break down the various aspects of building wealth and financial freedom because it is different for everyone. And that's why this graph is so incredible to look at. Because when you look, we talk about it all the time that building wealth

Starting point is 00:02:15 and financial freedom is not a one size fits all. And there has never been a better graph to illustrate that than this one. And that's why it's so incredible to see the various eight. groups and wealth levels of what they believe in each group is the best strategy for growth and opportunities in investing. And so I think this graph is just incredible to illustrate that. And listen, people, if you're like what graph, I'm not subscribed to the newsletter. I don't know what y'all talking about. One, you should subscribe. Two, when you subscribe, you'll see the graph we're talking about. And you'll also see Robert Nye's perspective on it in a very succinct summarized newsletter and three you can do all that by clicking the link in the show notes below you

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Starting point is 00:03:36 about the markets. Check out the Rich Habits newsletter. We're really proud of it. And if we've provided you any value over the last 18 months, you're going to subscribe to the newsletter to do us a favor. And I think one of the most important things when deciding, when you see it pop up in your inbox if you're really going to read it or not or just click on it and click away is look at it from this perspective when you hear the word newsletter it sounds nerdy it sounds boring it sounds laborious to get through but guess what if you take that five or ten minutes a week and i look at it more of it's less of a weekly newsletter and more of a weekly digest of what we're thinking and what we believe is important to your financial kind of history and future if you can look at it from that mindset

Starting point is 00:04:20 perspective and just carve that 10 minutes out a week, I think it'll be game changing for all of you in the coming months and years because this is a long game. So just keep that in mind when you're joining. We appreciate it if you join, but if you don't read it and you don't get actionable items from it, then we're not doing our jobs properly. So please look at it from that lens from a mindset perspective. And I think it'll be a game changer for all of you. With that being said, Robert, let's talk about this episode sponsor Public. If you trade options, you got to ask yourself, why wouldn't you choose an options trading platform that's putting investors first? And at public.com, there are no commissions or per contract fees. And more importantly, it's the only platform

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Starting point is 00:05:38 Full disclosure in podcast description. All right, Robert, we've talked about our newsletter enough here. We've given public their flowers. We love trading options on public. Let's dive in to the meat and potatoes of the episode, the very first question from Trayla. Traila says I have $150,000 in my 401k, and it's invested into target date funds and has been for the last five years, and it's grown by about 8% per year over that time frame. I'm 32 years old, and I'm starting to realize that I need to make more money.

Starting point is 00:06:06 Cost of living in the Bay Area is just so expensive. So here's my question. Do I invest 100% of this $150,000 of my 401k into blue chip funds? Or do I split the money 50-50 across Blue Chip funds and other target date funds? Who, good question. As you probably know, Robert and I aren't the biggest fans of target date funds. You know, I think the importance of a target date fund, if it had one, kind of goes back to what Jeremy Schneider was talking about.

Starting point is 00:06:35 It automatically rebalances your portfolio once a year. It, you know, puts you into some bonds, it takes you out of the stocks. It's just really set it and forget it mentality. and it's very boring, boring, boring, way more boring than we wanted to be, which of course comes with underperformance against the index funds we talk about all the time, right? The S&P 500, the NASDAQ, things of that nature. And so if you were maybe in your 50s or 60s, I could see a target date fund maybe being applicable given how you probably want to preserve capital more now than kind of grow it, but you said you're 32. And I'm 28 and I am so focused on growing my capital as

Starting point is 00:07:14 you should be at 32 and probably 42. So Trayla, if I were you, I would put all 150,000 of that 401k into a blue chip funds. Now you can do that through however, you know, I don't know what these mutual fund sellers are in your specific 401k. It's going to be different for everybody. But two things you want to look out for though before you do this. The first thing's going to be the long term performance of these blue chip funds, right? So, you know, that might be five, ten, maybe 15 years if they have it. And the second thing is the expense ratio. You want to make sure you're not paying more than 1% per year. That's just going to be suicide. But I think if you're doing both those things and you've got the right funds in front of you, I think you're setting yourself up for a great

Starting point is 00:07:53 retirement come 65 years old. That's a great breakdown. And my take on this is going to be little different, but we agree on the overall strategy. And that is, for me, target date funds just leave too much money on the table. You hear me talk all the time about optimizing your gains within your investment strategies. And very few Target Date funds ever do that because they are built to maintain your money and not lose it versus grow it. And that is a big key here.

Starting point is 00:08:24 Target date funds are great for that, set it and forget it, but they don't take into consideration market conditions. They don't take into consideration wars and COVID and all the different things that can happen because they're not built to grow your money and make those adjustments as we, to find that extra growth.

Starting point is 00:08:43 You take 2023, for instance. If you were to own a target date fund making you 6, 7%, which most of them don't even achieve that, versus being in the VOOs or the QQQs of the world, I think QQQ had gains of like 47% for 2023. So you're just leaving too much money on the table. That is my problem. So I agree with Austin 100% here that I personally, especially at your age, would not leave it in the target date funds because you're just leaving too much money on the table over too long

Starting point is 00:09:16 of a period of time. So I personally would move it and just keep on moving on and, you know, get it out of that target date fund. I'm right there with you, man. And you had a fallup question, Trey Laos said, should I keep doing some pre-tax contributions? My employer matches 100% up to 4% of my $170,000 year salary. So you said that you get 100% match up to that 4% of your $170,000 per year salary, which means that you are contributing that 4% or $6,800 and they match it 100%, which is awesome. So now you have $13,600. Incredible. And if that's invested into blue chip stocks and blue chip funds, you are just off to the races, right? That is awesome. So should I keep doing pre-tax contributions? I'd say yes, right? Robert and I, we always talk about up to the match,

Starting point is 00:10:03 then you do your Roth, and then anything over that. If you have autonomy of your 401k to go back and max that out, which of course now you do, and it's not in target date funds, which is even better. And then you can take any extra money if you have more than that and you can put that into a normal taxable brokerage account. So I hope that answer your question, Trayla. We're really proud of you. You are investing so much money at 32 years old and you are absolutely at this rate going to retire a net worth millionaire come 65 years old, even if you live in the Bay area. Isn't it crazy, Robert, how some of these people, they're like, oh, I live in this area. It's so expensive. I'm never going to be able to do it. And then you do the math for them. You're like, no, you can, you can do it.

Starting point is 00:10:41 It's possible. And they're like, oh, well, I guess you're right. Wow. Maybe it's not cost of living. Maybe it's not, you know, these outside forces inflation, right? We just want to make sure people have hope. I think that's the biggest and most important thing at the end of the day is a lot of the weeds of things. They see the markets go up and down or in circles and they just say, what the heck is a loser's game. I don't know what I'm doing. I can't achieve this. I don't know what it's going on. But in actuality, you're doing a lot better than you think, right? And by just investing and listening to the podcast is a great first step, right? But by doing these little things, you're setting yourself up and you're sort of beginning to build the brick by brick by brick of your

Starting point is 00:11:17 financial future. And we couldn't be more proud of you guys. Yeah. And I think that's one of the things I enjoy the most about what we get to do every day as financial educators is being independent thinkers. And what that means is Austin and I are not bound to one specific product or company or something where we have to tell you to buy these investments. We're independent people. We are educators so we can tell you what we think is best for your situation because as I said earlier, everyone's financial situation is different. And that is one of the beauties of us being independent and educators is we can tell you and educate you on what we think is best for your situation, not the masses or not some company that we have to push their products. So that is one

Starting point is 00:12:04 of the best things that I get to do every single day. And beyond that, too, Robert, a cool way we're always doing that is by transparently showing you guys, you know, what we're investing into, how we're deploying capital, what we're focused on. And we do that not just in the newsletter, but of course on this podcast, right? We're always telling you guys, you know, we've got tens of thousands of dollars in NEO's funds. And we do that with pride. We've got thousands of dollars in Masterworks. We've got, you know, all these cool different sponsors. Like, we use them, right? Yahoo Finance was a sponsor a couple weeks ago. I've used Yahoo Finance since college. I love their platform, right? So at the end of the day, we just want you guys to know that we're proud of you and we're trying to be as authentic and as

Starting point is 00:12:40 transparent as possible in this awesome, awesome process. Our next question comes from Nicole. Nicole said, I love listening to your podcast on my commute to work every day. I'm Nicole. I'm 22 and I'm a college student with two more years left until I graduate. I have $5,500 in my savings account, $500 in the stock market with $130 a month being automatically invested. Round of applause. Love it. And $17,000 in student loans that I won't have to pay back until I graduate. I make $2,300 a month working two jobs and I'm saving about $900 a month at the moment. I'd love your advice as to how I should allocate that extra savings. Should I try and build my savings up to $15,000? Should I put more of this into the stock market? How should I use this $900 a month? Robert,

Starting point is 00:13:27 I'll let you go first. Nicole, great job. Love that you're automating some of your investments already. And so based on the information provided, I would say with having $5,500 a month in your savings already, you're good there. I hope it's in a high yield savings account, not just sitting there making no money. So if it is making no money, let's get into high yield savings. But after that, the answer to me is you should first and foremost get the Roth IRA setup. Get some of this funneled into those basket of funds we talk about all the time. Like, V-O-O-V-G-T-Q-Q-Q-Q. That's where I would start. Secondarily, based on your age, I would look at getting a small portion of this, maybe $200 a month, into a nice cryptocurrency portfolio.

Starting point is 00:14:10 Just get the basics when you get started, Bitcoin, Ethereum, ChainLink, XRP, some of the basics, kind of like the blue chips of crypto. I would do that. And then third, I would look at getting a public.com account set up. And that could be for the crypto and maybe look at some treasury. getting some base there as well, just so you're getting a little bit of your base spread out so everything's not all in one place. Or you could also look at maybe getting an additional couple hundred dollars a month put away into fund rise. We love fund rise. You could do that into their innovation fund. That would get you some exposure to some startups that have some really large promise in the coming year. So I would just get that balanced out among a few of those things I mentioned.

Starting point is 00:14:54 And then that way you're growing the Roth IRA, you're growing the crypto base, and you're getting yourself out there along with having the high yield savings account. That's where I'd start. I think you did a great job breaking that down, Robert. And especially kind of thinking about the Roth IRA. I think that's a really important one. Of course, we want everyone to max out the Roth IRA every single year. And, you know, Nicole, I just did some math for you, right? Let's say that you were super strict with your budget.

Starting point is 00:15:20 And every single month, you set aside $900. and you used it to both max out your Roth IRA and invest in the stock market. So between those two things, of course, when you max out the Roth IRA, you are investing that money into the index funds that Robert just eloquently laid out for you, as well as putting some money in the stock market. Over the next two years, right, you said you graduate in two years. So over the next two years, if you invest $900 a month, you'll have about $22,000 spread across your Roth IRA, which is $7,000 a year, so $14,000 over there.

Starting point is 00:15:52 and the rest will be in your brokerage account on public.com. That $22,000 invested into the ETFs Robert just laid out for you at an average return of between 10 and 12% per year from 24 years old to 65 years old. When you are 65, you will have $2.7 million if you just don't even touch this money again. You don't add a dime to it, right? And so, you know, we see a lot of people online, especially Dave Ramsey. He'd tell you pay off your student loans, right? Save money to pay for school along the way. Doing that, you're leaving over $2 million on the table by not investing this money.

Starting point is 00:16:27 So if you want to get some crypto, be my guest. If you want to have some T-bills, be my guest. But I think what's most important here is that you do not keep this money on the sidelines over the next two years, but instead you make sure that you deploy that $22-ish,000 over the next two years and you forget about it until retirement. Nicole, you have so much wealth building ahead of you in your future. I mean, this is just $22,000. Imagine what you're going to start making an investing app.

Starting point is 00:16:52 you graduate, right? You might be a deca millionaire by the time you're 65. You are going to be so rich and we are so proud of you. Thank you for listening to the Rich Habits podcast. Our next question comes from Trevor. Trevor says, hey guys, great job on the podcast. You have changed my outlook on life. I'm a real estate agent living in Tampa, Florida. I have $10,000 in my Schwab account, and I want to grow that to 100,000 as quickly as possible. How do I best deploy this capital as tax sufficiently as possible. I'm going to be eating turkey sandwiches and ramen for the next couple of months to squeeze out every last dime of my budget. I love, I love me some Trevor. This is what I'm talking about. The right mindset. When you're younger and you have flexibility

Starting point is 00:17:34 in your lifestyle, you should be looking at it from that perspective. And I'm not saying you need to go this far with turkey sandwiches and ramen, but why not? Instead of going out and blowing $300 a week at the bars and stuff you don't even need, you start socking away that money now and let it grow, grow, grow for the future. Then you have set yourself up for future freedom instead of spending every dime you have until you're in your 40s and then trying to play catch up. So Austin, take it away on what Trevor should do based on your thoughts to become tax efficient in this growth. Yeah, really good question, Trevor. So of course, the first thing you can do is the Roth IRA, right? but that's only 7,000 a year.

Starting point is 00:18:16 You're a real estate agent, so I think you're self-employed, which means you probably don't have a 401k at work. So if you are self-employed, you have your own LLC. Assuming you have yourself on payroll through gusto.com, you can open up something called a Roth Solo 401K. Now a Roth Solo 401k is going to be a way for you to also contribute after-tax dollars toward a retirement account, which is a great thing. And they have a sort of tax loophole, Trevor, depending on, I guess, how much money you make for the year, depending on, you know, what you can invest.

Starting point is 00:18:51 You can deploy, I think, Robert, in 2024, is it $69,000 in the mega backdoor Roth? Yeah. So you can deploy $69,000 of aftertax dollars into this mega backdoor Roth solo 401K. We use carry.com. You can use whoever you want, but they make it very simple. And you can do that. And again, that's after tax dollars. So it's going to grow tax free.

Starting point is 00:19:13 So if you're all about tax efficiency, right, the Roth IRAs, the Roth, everything else, like this is money that's going to grow for you that you can lean on in retirement, take out in retirement, and not have to pay a diamond taxes on it. So that is probably what I would consider doing. You have to set up some sort of payroll. You got to pay yourself. There's a little bit of intricacy, right? But if you use the right platform, again, Gusto is who I use.

Starting point is 00:19:37 I'm sure Robert maybe has a recommendation for how he pays himself as well. He'll be able to share it a second. But once you've kind of got the ground. work laid there. It's pretty simple. And once you've done that, you are off to the races, man. Tax-efficient growth is the name of the game. It's something I'm really passionate about, something Robert is as well. And by doing this, you'll be able to have millions of dollars of tax-free money waiting on you when you're 65. It really comes down to what I say pretty much a thousand times a week. It's not what you make. It's what you keep. So Trevor, Austin's breakdown is perfect.

Starting point is 00:20:06 And you definitely need to look into every avenue of this tax efficiency, but also, understanding what is afforded to you being a self-employed real estate agent. And I think this is very, very important that you're optimizing what write-offs you can use, whether it's your car, your cell phone, a portion of your apartment or condo or home. All of those things really come into play with helping you grow your wealth early on and extracting every last dime out of your budget. So just make sure, you know, DM me. If you need to, hit us up in the show notes and really just make sure to flush all of those options out so you can maximize your tax efficiencies, but also your savings so you have more to invest at the end of every year. You know, and for me, yes, Austin, you're right. I use ADP. We do that for all the

Starting point is 00:20:57 companies, not all of them, but some of them. But Gusto is great as well, like Austin mentioned. And it's really just all about what works best for you in optimizing your gains with the revenue that you're making. I love it. Good question, Trevor. We're rooting for you, buddy. Eat those ramen and turkey sandwiches. I'm right there with you. I love myself a daily turkey sandwich. Our next question comes from Andrea. Andrea said I got laid off from my job a couple weeks ago. And it made me realize that I need to increase the number of ways I need to make money,

Starting point is 00:21:25 specifically through my investments. So what do you all recommend as a consistent way to make money through investing? I'll kick this one off, Robert. My favorite way of making consistent income, there's two ways, but it's the same strategy and that's covered calls. We talked about this on a webinar. We broke everything down for you guys. I'll leave a link to that webinar, Andrea, in the show notes below. But it's a pretty simple

Starting point is 00:21:46 strategy that allows you to earn income every four to six weeks. For me, I'm earning right now anywhere between $1,500 to $3,000 per month doing this completely passive. But I did have to invest $40,000-ish thousand dollars to earn that income. If you don't have that much money, you can also buy the Nios Funds, ETFs we talk about. They are covered call ETFs. They do it all automatically for you. And these ETFs are like $50 a share. So for 50 bucks, you can start getting some skin in the game. They pay every single month, just like my covered calls do. It's about a 12 to 14 percent annual distribution yield there. So just think about it as like the 1% rule, right? If you invested $10,000, 1% of that's going to get paid back to you every single month, which is pretty

Starting point is 00:22:26 cool. Those are my two ways. Robert Jeveny recommendations on how Andrea can generate some extra income with her investments. Yeah, but I also think, you know, with limited information that Andrea provided, I would look at it too more so of having multiple streams of income, not just through investments unless she has this big, you know, basket of money already and then she can diversify that money like you stated. But I would look at it that I would want to really find ways to have multiple streams of income through my investments, but also through work. And that could be a couple side hustles and not having all your eggs in one basket for your income. But as far as that goes. You can look at investments that are smaller venture investments. Again, we don't know how much money

Starting point is 00:23:12 you have. Investing into, you know, maybe things that you can flip. If you had a few thousand dollars and you could find a niche in your area where you could use that few thousand dollars and start flipping maybe luxury handbags. It could be shoes. It could be vintage luxury watches. There's a lot of different ways to make meaningful income. You can do it through Etsy and offer a and Facebook marketplace and all these, but there's just so many different ways, but I think for me it would start out with having multiple streams of income through investments and through earnings

Starting point is 00:23:46 to make sure you're never in a position where you can go completely broke because you are not prepared through these multiple streams. So that would be my take on it. Yeah, I like that a lot. Of course, the easiest way that anyone can just start making money, right, is like driving for Uber, delivering for DoorDash, things like that.

Starting point is 00:24:03 Other side hustles that even my friends now, My friend's a firefighter, and he's getting in on this side hustle. I'm not sure how long it's going to last, but affiliates on TikTok shop. So he is really into working out. And there's a ton of like different supplements and things that are on TikTok. And so he started making videos reviewing some of the supplements and what he thought about them. And again, he's a firefighter full time.

Starting point is 00:24:23 He makes like 60K a year. This is going to be his side hustle that he hopes is going to make him a couple extra hundred, maybe a couple thousand dollars a month, depending on how successful it might become. So maybe that's something else you can check out. You know, there's a ton of different ways to make money online. And if you guys want a whole episode dedicated to Robert and I breaking down the various ways that we've made money, both on the internet or in real life or whatever else, we can do a whole episode talking about that for sure. Definitely.

Starting point is 00:24:46 And one of the key takeaways for this question and side hustles is to understand you don't, I call it buckets, buckets of income. Every side hustle or every extra job you get to help you on your financial journey does not need to be a ton of money. You can literally do a side hustle. Let's say you have a decent job right now, but you're not getting ahead and you're not able to save $1,000 or $2,000 a month or even $500 a month to invest. Go get the side hustle. Maybe it's just every Saturday afternoon or you drive all day every Sunday and you make an extra $300 a week. If you took that exclusively and pretended it didn't exist and you put all of that into an investment account, you would retire a multimillionaire, even if you only did that for a few years. That is the key.

Starting point is 00:25:33 When we talk about side hustles, we're not saying go get two side hustles that are going to necessarily make you an extra 10 grand a month. We're saying that for every $500 to $1,000 that you can create to put away for your financial future is mind-bendingly prosperous for you over the long term. And it can be done in those down hours where you might be lazy and you're watching six hours of football or you're on the couch all day eating junk food. get rid of that, turn that time frame into that side hustle and set yourself up for financial freedom. So that's where I would go with it. Isn't that stat, Robert, $400 is the, you know, emergency that the average American can't afford, right? Just like if someone has a $400 emergency, they have to go into credit card debt, like that should be your goal, right? Make an extra $400 a month. If you're that American who can't afford a $400 emergency, go figure out how to make $400 a month

Starting point is 00:26:29 via some sort of side hustle that Robert and I have talked about. Maybe you find something on the internet. Maybe it's on YouTube. Do some research. Have some fun. Like, this should be a fun thing to do. But if you can make an extra $400 a month and that's going to keep you out of high interest debt or keep you from having to cash out your 401k early or borrow money from a predatory lender,

Starting point is 00:26:47 right? That's going to be huge in your wealth building journey. So, Andrea, we're proud of you. There's a lot to look forward to. We're sorry you lost your job, but we're rooting for you here. And we think you're going to make it through just fine. Our next question comes from Sang Marie. Sang Marie says, I love your show.

Starting point is 00:27:01 I've learned a lot over the last few months. I'm 40 and I make 92,000 a year. I have $75,000 invested toward my 401k and my Roth IRA and the two of them returned about 10% year-to-date and 22% over the last 12 months. However, I was thinking of withdrawing $30,000 from this 401k and investing it into the stock market or by maybe buying a rental property. What do you guys think? Sangmarie, don't do this. Please don't do this, saying, Marie. Okay, so let's break this down, Robert.

Starting point is 00:27:32 10% year-to-date, that's great. Solid returns. The market's up, what's called 14%. So you're up 10%. You might have a little bit of international inside of there. Maybe you have some bonds, right? Maybe you're 401ks. But 10%, you should be proud of that.

Starting point is 00:27:44 That's fine. 22% over the last 12 months. If I pull up the S&P 500 and I click 12 months here, it's up 26%. 22 versus 26. I think you're doing great. Again, might you have some international, some bonds, whatever there, you're doing just fine, saying Marie, you're 40 years old, you're on track. But the thing is, whenever you take money out of your 401K, not only is this money going to be

Starting point is 00:28:06 taxed as income, so let's call it a 20% 25% tax rate on that money, right? But you're also going to pay a 10% withdrawal penalty, an early withdrawal penalty because you're younger than 59.5. So you're essentially paying 35% interest rate on this $30,000. to invest it into the stock market, something you're already invested into, or to buy a rental property? Like, why would you pay essentially $10,000 to invest $20, like, you know what I'm saying? Like, like, it's just, it's not a good idea. It's not a good idea. Maybe Robert, you can break that down a little bit more simply, but saying, Marie, I just, I would not do this. I mean, without knowing,

Starting point is 00:28:45 could they cut back the contributions on the 401K, take that money, put it somewhere else in a traditional brokerage account, let that build up to 30K, then use that to buy the rental property or put it into the stock market. That's something you could look at because I believe if those contributions, again, we don't have all the information, but if that contribution was cut back and you could build up into a basket of index funds and a traditional brokerage or individual stocks that you like, I think that's a good idea. But I agree with Austin, I don't think borrowing and paying penalties and all that makes sense right now. So I would leave it put and find another way.

Starting point is 00:29:25 So for me, the other way would be cut back the amount that you're contributing right now to the 401K, put that into a fresh account that you control, and then build that up to be able to do the stock market and potentially a rental property down the road. Yeah, Sing Maria. I also want to take a moment, Robert, to talk about how, you know, maybe she's seeing some gurus on the internet, cash out your 401k. go buy rental property, flip it for a billion dollars, and you're now a trillionaire, right? Some crazy stuff. So, Singmarie, I don't know what's catalyzing you to want to take 30 grand and invest it

Starting point is 00:30:00 into a rental property. But let me be the first to tell you that the returns you're seeing in your 401k, they're great. You're doing just fine, right? You're within spitting distance of the S&P 500, both year to date and over the last 12 months. You're not drastically underperforming like some of these target date funds do. You're doing just fine. So please, whatever you're seeing on the internet, whoever is whispering in your ear, cash out the 401k, go buy that Ronald property. There's no reason to do that, okay? Just want to make sure that you know that you're doing just fine. And, you know, if you do want to invest in real estate, fine. Maybe go get a REIT or fund rise is a great way to do that. If you want to own hard assets, real real estate, then, you know, I think Robert's example is a great way to do that.

Starting point is 00:30:40 Cut back on those contributions. Maybe instead of, you know, 10%, maybe you only contribute 2%. And the other 8% of your salary goes to a public.com account that's going to grow for. for the next 12 to 24 months. Maybe you've got that 30K that way. Then you go buy your first duplex. Maybe you want a house hack, right? I don't know what's got this going on for you here, but there's a lot of different ways that you can skin a cat.

Starting point is 00:30:59 And this is the most expensive and most detrimental way to do it. And it's not a good idea. So do not do that. I agree. And speaking of public, are you paying too much to trade options? If you're not trading on public.com, the answer is yes. Public is the only platform where you earn a rebate on every option contract traded. And that's in addition to no commissions or per contract fees.

Starting point is 00:31:22 There's no one else out there paying trading rebates so you won't find a better deal. Bottom line, if you're paying more than zero to place an options trade, then you're paying too much. Switch to public. And start getting rebates on every single contract traded only at public.com. Paid for by public investing, options not suitable for all investors, and carry significant risk, full disclosures in the podcast description. Lovepublic.com. Robert lovespublic.com. And our next question comes from Jared also lovespublic.com because he's 23 and he opened his first public account to begin building his base and we couldn't be more excited for him. However, he said that he's super focused on the passive income side of the

Starting point is 00:32:05 equation, specifically with SPYI. He said he has his drip settings on. You guys remember those drip settings we talked about a couple episodes ago. Dividend reinvestment plan, which means all the money you're getting gets reinvested immediately. So he has his drip settings turned on and he's eager to make monthly income. However, he says that he needs to know more about the taxes, pretty much saying, how am I going to get taxed on this income? Am I going to have a big tax bill at the end of the year? So, Jared, great question regarding SPYI, and it's very, very simple. You can go to, if you want, to the Nios Funds.com website, click on SPYI under their ETSs, go down to distributions, click on supplemental tax information 19a-1 notices inside of there, follow me here Jared, inside of there

Starting point is 00:32:55 is going to be a number called estimated return of capital. What this means, very simply put, is as a percent of that dividend payment they paid you that month, what percent of that was categorized by the IRS as a return of capital, which by the way is tax-free. So if you are getting a return of capital from a NEOS fund, or I guess any other fund for that matter, it is considered tax-free income and you do not have to pay taxes on it. Now, by looking at year-to-date, these tax notices, I can see here in May, 91% was considered a return of capital. In April, 97% of the dividend distribution was a return of capital. So if I were you, I would set aside anywhere between 5 to up to maybe 10% of the income you're making from Nios funds and set that aside for taxes. Okay. So keep 90% let that do

Starting point is 00:33:54 its thing to take 10% put it to the side. Maybe park it in some T bills you're on public.com already. Allow it to earn some more interest there for you. That's what I would do. Again, return of capital is tax-free income. Neos funds, they made their funds this way very strategically. They don't like taxes either. And I'm a big fan of it for sure. Yeah, Jared, it's a great question, especially at 23 years old. I love that people are thinking this way, and Nios is a great place to be for these tax efficiencies. So great question, and we appreciate you following along and submitting this question. Shout out to Jared for building his base at 23 years old. He's working hard, just like we know all the other people listening right now are, including our next question from Samir B.

Starting point is 00:34:34 Samir says, hi, Austin and Robert. I love the podcast, and I've been listening to you guys for over six months now. Wow. I love the way you guys articulate several financial topics and an easy to understand. understand way. I'm in my early 30s. I have a 401k, a Roth IRA, and a public account. My wife and I are planning to buy a house over the next 12 months. However, my cousin wants me to co-sign his student loans for him. He's taking out over 200,000 of debt to go to dental school. How will this debt, if I co-sign, impact my ability to buy a home and save for my future? Oh, wow. Oh, Samir, Samir, Samir, Samir,

Starting point is 00:35:10 to Samir, do not do this. And I'll let Robert explain why, but co-signing for a loan puts you on the hook. If Samir's cousin decides that maybe dental school's too hard and he drops out and now he's $200,000 a debt and he can't pay it back that month, right? He can't pay that $2,000 monthly payment. You now have to pay the $2,000 monthly payment. You co-sign this loan. You guaranteed it. So I can think of a hundred things I'd rather do with my money than co-sign and pay back a loan. I didn't take out myself. But I'll let Robert dig it. into the details. Here's a good way to look at it from a mindset perspective. I know you want to help your cousin, but at the end of the day, is the cousin going to be able to help you? I used to use this

Starting point is 00:35:51 all the time with my friends when they would say, hey, I want to borrow your truck, or I want to borrow your boat, or I want to borrow your jet skis. And I would say, well, let me ask you this. Can you go ahead and deposit the value of my truck, boat, or jet skis into my account? And then as long as you return it to me without damage or excessive wear and tear, I'll give you the money back. So that's one mindset thing to look at in these instances. But secondarily is $200,000. You have to look at it as a major investment, unless you're worth $100 million and you didn't tell us that. And so if you look at this $200,000 investment that you're going to be making into this dental school, what's in it for you? other than being good to your cousin.

Starting point is 00:36:36 What's in it for you? Because you do have risk here. You have liability that they default. They do not go on to become a dentist. They change career plans and say, sorry, I'm going to try and make the payments on this. My bad.

Starting point is 00:36:50 What's the upside for you if you do this? And if you're not looking at it from there's an upside or it's an investment in their future and they're going to give you, you know, five percent of their earnings to, you know, accommodate you for normal, you know, investment, you know, returns, then it's all downside and liability for you. And for me, that's just a big no. I don't loan people money anymore unless I

Starting point is 00:37:16 know for a fact. They have assets that can far exceed the value of what I'm loaning them money for. So I have a way to get my money back if they're wrong or if they don't pay. So the answer for me, long-winded is no, don't do it. You're just setting yourself up for massive issues down the road, let them figure it out on their own. And to Samir, I think what's important is to bluntly answer your question of how will this impact your ability to buy a home, it's going to show up as debt that you owe. Being a cosigner means you also are on the hook for this debt. And if someone pulls your credit report, they're going to see, oh, you also have $200,000 of student loans you didn't tell us about. Oh, no, I mean, just a cosigner. Well, I mean, that's debt, right? And so

Starting point is 00:38:00 that's going to also impact your debt to income ratio. And we know. your debt to income ratio cannot be over. What is it, Robert, like 36% or something? Yeah, 36 is pretty average when you're buying a house. Yeah, so it's like, you know, if your debt to income ratio is above that, which it's very simple to compute that and the mortgage lender is going to do that on your behalf, and they're going to know what's going on here. It's just going to make it so much harder for you to buy a house. So Samir, if you want to help your cousin, send them a bunch of scholarships to fill out, send them a bunch of student aid forms that they can use to go find free money from the government or whatever else that might be applicable to

Starting point is 00:38:35 them. But do not do it by putting yourself on the hook for $200,000. It's something that, you know, for example, and I don't want to get too personal here, but I have a friend whose parents co-signed a student loan for their son. And now the parent is $80,000 of debt because the son couldn't pay the monthly payment on the student loans. And now she, this parent has to do it. And it's just like, I understand you want to help your family. I get that. I'm a big family guy, but when it comes to something that big, that life altering, right, that is a really, really, really hard decision to make and a heavy one that's going to impact not just today, but also the next 12 months of your life to buy a house and years down the road as you continue

Starting point is 00:39:17 to build wealth for you and your family. So if it were mean, I wouldn't do it. I'd have a tough conversation. I'd be as resourceful as possible, helpful as possible, but I would not put myself on the hook for $200,000, assuming that my cousin might drop out of dental school and now they can't pay back the loans and, you know, the rest is history. Right. Well, that was a great episode. So exciting. Make sure if you haven't signed up for the newsletter to do so right away, we appreciate you each and every week, all of you that follow along, share the podcast, give us those five-star reviews and just keep helping us grow this amazing podcast and community. We have so many great things that we are going to be announcing and launching in the coming weeks and months.

Starting point is 00:40:01 And we're so happy to enjoy this ride with each and every one of you. Coming weeks, not even months yet, Robert, we are, you know, August is going to be a very fun month for all of our listeners. We've got a lot of stuff we're working on behind the scenes. We think you guys are going to love it. A lot of free resources as well. I mean, it's going to be some of the most, like, the opportunity that we're about to present to you guys will be an opportunity to build generational wealth for your family that you just

Starting point is 00:40:27 won't have because Robert and I have connections and other types of ways of investment opportunities that the average person doesn't have. And we are figuring it out a way to unlock those opportunities for our listeners. We really are. And we want you all to win with money. We want you all to be as wealthy as possible throughout your lives. And this is going to be the coolest thing ever. So just stay tuned. It's hard for us to, you know, kind of keep it so behind the scenes. We're working on it, but it will come out here in the next couple weeks, and it will be an opportunity for a lot of people to hopefully begin to really move the needle from a wealth-building journey perspective for them and their families. Don't forget, check out the Rich Habits newsletter. A new email came out to you this

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Rich Habits Podcast - Q&A: Retirement Investing as an Entrepreneur, Cashing out the 401(k), & Co-Signing Student Loan Debt

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