Latest / The Personal Finance Club Show / Rates Dropping, Good Debt, and When to Pay Off Your Mortgage | Ep 2

Transcript

Rates Dropping, Good Debt, and When to Pay Off Your Mortgage | Ep 2 · The Personal Finance Club Show

0:16
Welcome back to the second episode of the Personal
0:19
Appliance Club show. Hey, Jen.
0:21
Hi, we did it. I know we're actually recording
0:24
this on the day that the first episode ever is launching.
0:27
So it's a very exciting day. I was just saying before we were
0:30
recording that, you know, the true measure of a podcast isn't
0:34
like having an amazing first episode.
0:35
It's like having like hundreds or thousands and improving and
0:38
getting better over time. And so I think the first episode
0:42
went great. Like it all launched like was
0:43
well edited. We had like music, like I'm like
0:46
thrilled out of the park, but we want to make it better and
0:49
better and better. So hopefully this episode is
0:52
even better. Exactly, people are being very
0:54
nice. The comments section is very
0:56
see, I'm having trouble finding things for Jeremy.
0:59
Had time today because people are really nice to you in your
1:02
comments section. Oh well, let me just mention
1:05
that maybe renting is a good idea for some people and they
1:08
will tear me to shreds. Eat you up.
1:10
So you will get the the home owners the realtor.
1:13
I don't know why people just get very angry at me at the mere
1:16
suggestion that there might be alternatives to home ownership.
1:19
OK, plant that seed. I'll check the comments section
1:21
in about a week. Exactly.
1:23
Awesome. Well, welcome back for episode
1:25
2. Last time that we talked, you
1:27
were fulfilling your civic duty of being on jury duty.
1:31
You couldn't say anything. You were being very good about
1:33
not saying anything. I had no idea.
1:35
So now we need to know what was it like?
1:38
Tell us what how the case was. Give us the details that you
1:41
can. Oh my God, John, I've been like
1:44
bottling this up. This is it went into four weeks
1:48
of jury duty. It wasn't every day.
1:49
It was actually 12 individual days that spread out over the
1:53
course of four weeks. And from like is craziness from
1:57
the day of jury selection until the day of the verdict full of
2:01
crazy stories. I was like basically bottling up
2:03
because they every single time you entered or left the room,
2:07
they said, don't talk about this with anyone because it's going
2:10
to, if you do, it could impact the validity of the verdict.
2:14
And but now, but now I can. And they literally say once
2:17
there's a verdict and you can kind of say whatever you want.
2:20
That said, this case was a civil case, meaning someone was suing
2:24
someone else. It wasn't a criminal case.
2:26
Like the police were trying to convict someone of a crime and
2:30
it was, it was involving a family.
2:31
And so I don't really necessarily want to like blow
2:33
them up too much, but it was like a crazy story.
2:37
And so I want to tell like, basically what happened, some
2:42
lessons we should all draw from avoiding getting into a
2:45
situation like this, and then the verdict, we can't do it.
2:47
So here's the basic story is a grandma and grandpa, and there's
2:51
really 4 plaintiffs, all in their 80s.
2:54
And basically grandma owned some properties and her daughter and
2:59
her granddaughter and their two husbands.
3:01
Those four people all lived in these properties over the course
3:06
of 20 years. And at one point the kids were
3:10
like, hey, we want to upgrade to another property.
3:12
And so grandma sold one of the properties, put this like
3:17
$300,000 or so down payment on to the next property and said,
3:21
hey, here's the deal. I'll, I'll put in the down
3:23
payment to get you guys in. You guys pay for everything.
3:26
You pay for the mortgage, you pay for the taxes, you pay for
3:28
the upkeep. And then when you can pay me
3:31
back or when you can refinance the loan, we'll roll my down
3:36
payment out of that into the next rental property that we
3:39
have. And so that's, you know, this is
3:42
I'm just trying to give you this like very brief overview.
3:44
And this was, like I said, a twelve day case.
3:45
So it's very complex beyond this, but that was the basic
3:49
idea. So that all happened.
3:51
They got in the home, then they did this refinance and did not
3:56
give grandma her money back. And as part of the refinance,
3:59
the kids had to take grandma off the title.
4:02
And grandma signed a letter basically saying this is a gift.
4:05
I'm giving them the entire house, bona fide gift for free
4:08
for nothing. And she did it for the purposes
4:11
of the kids being able to like refinance their loan.
4:15
And her expectation was a week later, once the loan is is
4:20
secured, they're going to put the title back in her name
4:24
because she still owns the property until she gets paid
4:26
back her down payment. But that never happened.
4:31
And so then as we were sitting there in the jury, like watching
4:35
this case, like the the increasingly frantic emails from
4:38
this 80 year old woman, I was like, hey, like I put this in
4:42
your name very temporarily so you guys could get this refi and
4:47
you didn't. If you're not signing it back to
4:49
me, like what's going on here? And Fast forward four years now
4:54
we're in court to decide this and that.
4:57
That was like 1. There's actually 15.
4:59
I'm doing the 555 action. If you're listening causes of
5:03
action that was like, you know, that was a few of them because
5:05
they split up for a few different ways.
5:07
But then the kids and grandkids were counter suing for like 7
5:10
other reasons, including things like for the 10 years within
5:14
your property, 55 months of those were uninhabitable because
5:18
you as a slumlord, the conditions were so terrible.
5:23
Yeah, I know you ruined, you ruined our property because you
5:25
had during a remodel, your workers moved our couch outside
5:28
and it got rained on. Oh, there's a loan.
5:33
There's another loan for rent that went back and forth.
5:35
There's an eviction notice at one point, like the whole thing
5:37
was this gigantic mess. And so, and it was like, it was
5:40
just so messy because it was like, you know, this covered
5:43
like multiple properties of the course of literally 20 years.
5:46
And, and both sides, once they like, decided they hated each
5:49
other, like threw all the spaghetti against the wall to
5:51
see what would stick. And then like me and the other
5:54
11 jurors were like put in a room to decide, OK, who's who
5:59
and like that $300,000 deposit that never got paid back and
6:03
grandma got taken off. The title was kind of like the
6:06
core piece of it, I think. But then there's like all these
6:09
little other little side issues that they're like airing.
6:12
And so that's what happened. Like some lessons I've learned
6:15
is the a big first one. And and this really made me
6:20
appreciate all the problems I don't have in my life because to
6:25
my own credit, and I didn't even realize it before I was sat here
6:29
watching this, I have not gotten into these types of situations.
6:32
I don't, I'm not putting in down payments and having other people
6:35
pay the loan and taking names on and off titles and getting into
6:37
like these really murky, complex situations.
6:39
Like I own my properties when I was single.
6:42
I own them now that I'm married, my wife and I own them, which
6:45
is, you know, murkier than being single a little bit.
6:47
But you know, marriage introduces that kind of
6:49
complexity, but I'm not getting into these very complex deals
6:53
with multiple people and yadda, yadda, yadda.
6:54
And so I think that is like a good lesson about just having
6:57
very clear boundaries in your own personal life and your own
7:00
financial life. And then another really big
7:03
lesson is I think you should never loan money to family.
7:10
And that sounds cold hearted, but my take is if you want to
7:14
help family, you need to find peace with it being a gift.
7:19
And so when grandma was getting into this really sticky
7:22
situation where it's like, OK, I'm going to give you the 300 K,
7:25
but I need it back. She was opening up this
7:28
potential problem where the kids became, in my opinion,
7:32
comfortable with it. Like, well, we're paying for the
7:34
house. She's off title now.
7:37
It's really ours. She said along the, you know,
7:41
over the years, this was going to be our inheritance, so why
7:43
not now kind of thing. And then and then the two sides
7:47
end up hating each other. And so grandma should have
7:49
gifted it to him. And I actually, when I was
7:52
talking about this on Instagram, someone messaged me.
7:54
They said, hey, here's, here's my deal.
7:57
I'll give you money. I'll give it to you as a gift.
8:00
If you pay it back to me, great. Maybe I'll give you another
8:03
gift. If you don't, that's the end of
8:04
it. Either way, I'm at peace.
8:06
I've chosen that's to be a gift and you have the decision as the
8:09
recipient if it's a loan or if it's a gift and if you want to
8:12
continue down this Bank of you know, Bank of friend or Bank of
8:16
family. So that's the situation.
8:20
Do you want to hear how we ruled?
8:22
Yes. OK.
8:24
And so, you know, it was it was a little bit sticky because
8:27
grandma signed this legal notarized file to the county
8:30
document that said this is a bona fide gift.
8:32
You get this house for free for nothing in return.
8:36
And, you know, as a jury, I don't want to get into the the
8:39
deliberations too much because I was like a private thing.
8:41
And maybe it could open up the case to appeal, whatever.
8:44
But as a jury, we are having to decide, is that ironclad or do
8:49
we have to weigh all the evidence, the emails, the
8:52
context, the deal, the behavior? And, you know, one thing that we
8:56
never saw in the in the trial was the outraged emails from the
9:01
kids saying, what do you mean you want this house back?
9:04
This was always a gift. Nothing like that ever happened.
9:06
Like, you know, so to us, it became exceedingly clear that
9:10
this was always meant to be this complex, temporary loan
9:14
situation. And so we gave grandma back her
9:16
money. We gave grandma back her 300.
9:19
Yeah. So grandma got got.
9:20
I mean, you know, I'm happy for her, too.
9:22
And, you know, but like, I don't think she came out of winter.
9:25
I don't think anyone came out of winter.
9:26
Like, the family seems to be torn apart.
9:28
I hope they can overcome this. But yeah, Grandma came, got her
9:32
money. We didn't give kids money for
9:33
the uninhabitable thing. I was like that that didn't come
9:36
up until I got sued. And then they decide for 55
9:39
months of living here, raising my kids, throwing parties, you
9:42
know, doing remodels, this was uninhabitable.
9:45
Like, OK, that doesn't that doesn't seem to be legitimate.
9:49
And, and, you know, and we were forced to, you know, judge or be
9:54
the jury of truth and what people were saying wasn't always
10:01
consistent and things like that. And so that's what we did.
10:04
Have you ever been on a jury? Well, you know the first, I
10:08
think the second week that I was here at personal finance Club, I
10:11
got a jury duty notice. I went for jury selection.
10:15
I've never actually ended up on a jury.
10:18
But the annoying thing about this time around was I went for
10:21
the full day the first day, which I think everybody kind of
10:23
expects, and we were so close to selecting a jury.
10:27
And then I had to go back the next day at like, 10:00 AM.
10:29
And I was dismissed by 11. Very aggravating.
10:32
But, you know, I made a couple of friends where we gave each
10:34
other side eyes. Like, we could have stayed at
10:35
home girl. But.
10:37
So I've never actually been on a jury, but I do love the lesson
10:39
of, you know, never, never loaning family money
10:44
specifically. Could probably extend that to
10:46
friends as well. I think so, yeah.
10:48
You know, always, always just giving freely.
10:51
I think that's a good life lesson in general.
10:53
I'm Kenyan. My I'm first generation
10:55
American. So my parents are what are
10:57
considered like a sandwich generation where they, you know,
10:59
grew up supporting me and my siblings and then also we're
11:01
supporting my grandparents and aunts and uncles and things like
11:05
that. And I think that my mom learned
11:08
that lesson a while ago now. But it's just like, you know,
11:12
you think like, oh, I'm going to, I'm going to invest in this
11:14
business in Kenya and it's going to be great.
11:17
And then, you know, never sees that money again.
11:19
I think there's like a cycle that you have to go through
11:21
because you're so attached and you love people so much that you
11:24
want to just give and say, like, they're going to do the best
11:26
with it and give back. And now I think she just gives
11:29
freely and it's more careful with her money than she was, you
11:32
know, 20 years ago. Yeah, and it's, it's a lesson
11:35
you don't want to learn the hard way because the hard way
11:38
involves destroying family relationships, right?
11:41
And, and families tend, families and friends tend to be more
11:44
casual about things like signing leases and late fees.
11:48
You know, if you're, if you're dealing with a landlord that you
11:49
don't know, they're like, OK, they're going to hit me with a
11:51
late fee. And I, and they're a business.
11:53
And I, you know, there's this like kind of arm's length
11:55
relationship where you, you're have like a business
12:00
professional respect and expectations with family that
12:04
gets squishier. And because that's squishier,
12:07
these, these deals can just get really messy because both sides
12:10
make assumptions about the other side.
12:11
And, and there's not this clear distinction of roles and things
12:14
like that. And so yeah, keep it, keep it
12:17
gifts help your family if you need it.
12:19
And if you can't, if you need that money back, you can't
12:21
afford to learn it. That's why I say.
12:23
Yeah, well, congratulations on fulfilling your civic duty.
12:26
We always want sane, smart, willing people on juries.
12:31
You know, I think a lot of people want to, like, escape
12:32
jury duty. So I'm glad that you, I know it
12:35
was inconvenient, but I'm glad that you did it, you know?
12:37
Thank you. I know actually, I mean this is
12:39
my second trial ever and I actually love the process.
12:42
This case specifically was very long or supposed to be 8 days,
12:45
which is already long for a civil trial.
12:47
It stretched out to 12 days and very frustrating because I felt
12:50
like the attorneys were not being very respectful of our
12:54
time. Like you're, you're frustrating
12:56
our on the second day, which was unnecessary.
12:59
Multiply that by 12 days of every day.
13:01
Be like, aren't we like didn't we already go over this
13:04
testimony? My God.
13:06
But you mean about I'm proud of you.
13:09
Let's let's pivot, let's get into our segments.
13:11
First segment, what is it? Explain it like I'm five.
13:17
I love to. Explain it like I'm 5 because
13:20
there's so many complicated financial things in this world
13:23
and everyone feels like they don't know, and everyone feels
13:26
like they're the exception and everyone feels like they're
13:27
behind. And so I like to make things
13:29
super simple. So what?
13:30
What? What are we explaining today,
13:31
Jen? OK.
13:32
So at the time of this recording, the Federal Reserve
13:35
just cut rates. The news cycle is ablaze,
13:37
although when is it not ablaze? So what does it even mean for
13:41
the Fed to cut rates? How can they dictate what
13:45
interest banks charge for loans? Explain it like I'm 5 or like we
13:49
said, maybe like I'm 15. 55 is tough.
13:53
We're learning our numbers of five, but I'll do my best.
13:57
I I have to be a little bit vulnerable and admit something
14:01
when you hear all the time in the news the feds cutting rates.
14:04
Jerome Powell I mean, maybe you don't, but I do because I kind
14:06
of follow stuff. And even me who has been doing
14:10
this for seven years, like, you know, reads the stuff everyday,
14:14
I didn't really know what that meant.
14:16
Like I kind of understood that these rates they're cutting were
14:18
interest rates. They kind of relate loosely to
14:22
mortgage rates and savings accounts rates.
14:24
But like, what is the Fed? How can the Fed tell the Bank of
14:30
America what your savings account rate should be?
14:32
What like actually is going on? And and so I like really try to
14:36
learn deeply just for this episode so I could understand
14:39
and explain it to you like we're all five, I guess.
14:42
And here's here's, here's my understanding of what's going
14:44
on. Banks are in the business of
14:46
accepting deposits and paying interest.
14:49
So if you are a saver, you can go up to a bank, you can give
14:52
them $100 and then every year they'll pay you 2% interest or
14:55
whatever it is. And they're also in the business
14:57
of loaning out money. So if you want to buy a home or
15:01
grow your business or buy a car, you can go to the bank and then
15:04
they'll give you money. And then the rate that they pay
15:07
you for savings accounts like these days is around 3 to 4%.
15:12
And the rate that they charge you for loans is around 7%.
15:16
And so banks, that's their business model.
15:19
They, they, they take all this money, they loan it all out and
15:21
then they pay less than they're charging.
15:23
And then the delta is how they, they make money.
15:27
And so then where does the Fed come in?
15:28
Isn't that like, and I, and I think if, if there's only one
15:31
bank in the world, like if we had this like little village
15:35
with 100 people and there's one bank, it, it would be that
15:37
simple. It would just be, you know,
15:39
everyone's money is in the bank and the banker's job is to keep
15:42
track of it all and they make money in the delta.
15:45
But we don't live in that simple of a society.
15:46
We live in a society where, or at least in the US and the
15:48
country where there are thousands and thousands of banks
15:52
and money constantly is flying between these banks as people
15:56
make transfers and and paychecks come from corporations to your
16:02
account. And there are wires and there
16:04
are deals and there are, you know, all the reasons that money
16:08
is moving around in order to track those transactions between
16:13
individual banks would be logistically very, very
16:16
difficult and, and problematic. Because if one of those banks
16:20
ended up not being able to make good on that transfer, the whole
16:24
thing could like crumble and people went and banks wouldn't
16:27
trust each other and, and etcetera.
16:28
And it, and it would be a very unfluid situation.
16:32
So the Fed came in, comes in and the Fed is very, you know,
16:35
exploited like 5. It's kind of like the, the
16:39
bank's bank, the banks like, so if I go to, I'm in San Diego.
16:43
If I go to San Diego County Credit Union, not a not a pitch,
16:46
but it's like the closest bank to my current location.
16:49
They keep their money at the Fed, as do all the other banks.
16:53
And so when you know, my credit union has to send Bank of
16:56
America money, it's really a transfer from the balance at the
17:00
Fed between San Diego, San Diego County Credit Union to Bank of
17:04
America. And so the Fed is all the banks
17:06
bank. And that means since the Fed is
17:09
tracking all these transfers between banks and holding all
17:13
that money and also potentially lending out money themselves,
17:16
the Fed can kind of set their own rules and they can set their
17:20
own rate. And so when when the Fed says
17:24
we're raising or lowering the rate, what they're saying is,
17:26
hey, when banks move money between each other, we're
17:30
setting the rate at which those lend.
17:32
Like since we control the rules, we control this bank that we're
17:35
setting the rate. So let's say, you know, San
17:38
Diego bank wants to give out a mortgage and they need more
17:41
money. They need to go borrow it from
17:43
another bank. The rate that they get on that
17:46
loan is set by the Fed more or less.
17:50
And so that's basically how the Fed can set rates that then
17:54
affect things. And then there's this trickle
17:56
down since that's the rate in this FED bank between the banks.
18:00
Then there's this trickle down that happens to your savings
18:04
account. So right now if you go to get a
18:05
high yield savings account, you're going to be getting about
18:08
4% interest. And if you go to get a get a
18:10
loan, you're going to be paying about 7% interest.
18:13
All based on this trickle down from what the what the banks
18:16
need to pay to get that money or lent or what they're getting
18:19
paid to lend that money that's set by the Fed.
18:22
Does that make any sense? It actually did.
18:25
And I'm glad. It makes me feel better that you
18:27
had to do some research because I was truly curious.
18:30
And I just, we hear about new fed picks and interest rate cuts
18:34
and, and we're just, I'm, I'm confused as the layman, I'm
18:37
confused. So I'm glad that you had to do
18:38
research as well, because you're supposed to know this stuff, OK?
18:42
It's complicated and everyone feels behind.
18:44
That's why we're doing this show.
18:46
Yeah, I guess that my only thing is, is me, Jen, Mandia is this.
18:50
Does this affect me directly? You know, if I'm listening, does
18:53
this affect me? You kind of know a little bit
18:55
about my life at this point. Would this affect me?
18:58
So that's a really good question because there's this, there's
19:00
the technical question of like, why does this work or how does
19:03
this work? And then there's, you know, the
19:05
tea leaves that everyone's reading when the Fed comes out
19:08
with news, we're lowering the rates, we're raising the rates.
19:10
What does that mean? And, and the answer is it kind
19:13
of depends on you. So if you're a person who
19:15
doesn't borrow money and has tons of money and cash sitting
19:19
in a high old savings account, then you know for the moment you
19:22
actually would prefer higher rates.
19:23
You know you would much prefer 4 or 5 or 6% interest than 0.
19:27
A few years back rates were very, very low.
19:29
And if you went to put money in a savings account, you'd get
19:32
about 0% interest or maybe 0.1. Now there it's more like 4%.
19:37
If you're on the flip side, if you're not a saver but you're a
19:39
borrower, then you would prefer lower rates.
19:42
So if you're going to buy a home right now, home buyers or
19:46
potential home buyers are really looking forward to these rate
19:48
cuts because right now 7% rates compared to recent history when
19:52
they're more like 3 or 4% for a mortgage, make your monthly
19:56
mortgage payment a lot more expensive, like almost double in
19:59
a lot of cases. And so when they hear the feds
20:02
lowering rates, they say, hey, that means that maybe banks are
20:06
going to start offering cheaper mortgages so I can go buy that
20:10
home that I couldn't have afforded before.
20:12
And so as an individual, it kind of just depends, what are you
20:16
doing right now with more of your money?
20:17
Are you borrowing more money or are you saving more money?
20:20
Most people tend to prefer lower rates because things like
20:22
mortgages are more impactful to people's lives than savings
20:25
accounts. That said, economies are
20:29
impacted differently. Economies like lower rates, like
20:33
the whole U.S. economy, real estate, buying, real estate,
20:36
building real estate, borrowing money for, you know, hiring
20:39
employees, like all these huge companies doing things, they
20:41
want to be able to borrow money more inexpensively.
20:44
So for example, if I'm trying to buy a new gigantic $100 million
20:47
apartment building or something, you know, if I can get it at 4%
20:50
or 5%, that could, that could make or break the entire deal.
20:54
And so when the Fed, the Fed basically has this big lever,
20:57
lower rates, higher rates, lower rates, higher rates, and they're
21:01
trying to navigate the economy with this one lever.
21:05
And so all the companies are saying, hey, lower rates are
21:08
good. But the problem is if they just
21:11
make lower rates all all the way to 0, what happens is it
21:14
basically floods new money into the economy.
21:16
All these loans appear new, you know, new building, new, new
21:21
hiring, yada, yada, yada, yada. And that actually has this
21:24
inflationary effect. We're now, since all this new
21:27
money floods into the economy, suddenly people have more money
21:30
and suddenly business businesses can charge more money.
21:33
And then you go to the grocery store that we've experienced
21:36
last few years, which is when a lot of money flowed in the
21:38
economy. And now groceries are twice as
21:40
much money. And if that inflation gets out
21:44
of control, it can be it can tear an economy part of the
21:48
seams. And so if inflation is getting
21:49
high, the Fed Yanks this lever back and says, well, we're going
21:53
to raise rates to lower inflation.
21:55
We're going to slow the influx of new loans, slow the the
21:58
influx of new money into the into the market and the lower
22:01
inflation. But then if businesses start
22:03
laying off people and building stops, they're like, oh, that's
22:07
not good. We're going to push the push the
22:11
lever the other way. We're going to lower rates to
22:13
increase business activity so that, you know, we don't have
22:19
business sewing. And right now, unfortunately,
22:21
what Jerome Powell said is kind of both.
22:23
He's saying jobs, job growth is slowing, which is a cause for,
22:29
you know, lowering of rates, but inflation is still too high,
22:32
which is a cause of raising of rates.
22:35
And so he he's basically stuck between a rock and a hard place
22:38
and everyone blames him. So that's my understanding of
22:42
rates. Wow, that that's pretty good.
22:44
I actually feel like I have more of an understanding and I'm glad
22:46
that you touched on how this effects inflation, because
22:49
that's been a big conversation so far as well.
22:52
So thank you. I'm I'm actually I'm I'm
22:54
learning on my own podcast. Yes, shout out.
22:58
As am I. I learned.
22:59
Like I think I have a better understanding of this like
23:01
behind the scenes Fed Bank of banks than why their rates
23:04
matter. No, you did a good job.
23:05
You should be a teacher. Yeah, Oh my gosh, what a good
23:09
idea. Our last episode.
23:11
I wanted these to be more like in a 20 ish minute.
23:13
So like you can listen to on a commute and and I'm very long
23:16
winded, as you can tell, and we're already in a long episode,
23:19
but so let's move on. What's What's our?
23:21
Next segment, let's move on. But it's OK.
23:22
I'd rather have the information, know the full extent of it than
23:25
cut things down. So let's move on to our next
23:28
segment. Can I ask a dumb one?
23:32
Now I'm really excited about this because this is our first
23:35
question to podcast@personalfinanceclub.com,
23:39
which is the e-mail that you can e-mail if you have a question
23:42
for us. Boom, baby.
23:44
OK, so this is from Claudia. She said I could use her first
23:46
name. I I asked her.
23:48
So shout out Claudia. Claudia, we did cut your
23:50
question down a bit because you was a little long winded too,
23:53
like Jeremy. OK, sorry girl.
23:55
Appreciate you, you our first question.
23:56
We'll never forget you. But we we summarized it.
23:59
So I'm going to read this question.
24:00
Jeremy's going to give his humble opinion about what you
24:04
should do, So Claudia asks. My husband and I purchased a
24:08
home in 2020 with a great interest rate.
24:11
We're already maxing out our four O 1K.
24:13
We want to set ourselves up for the best possible future.
24:16
Should we be focusing more on paying down our mortgage or
24:19
investing more in a taxable brokerage account?
24:22
Jeremy. Great question and it's not
24:25
clear to me. Can I ask a dumb one?
24:27
Is it a dumb question or a dumb person answering and you know
24:30
it? It might depend on the day.
24:32
I'm not calling either you or Claudia dumb, OK?
24:34
And. I think in this case, yeah,
24:36
hopefully it's neither. It's not a dumb question.
24:38
It's a great question and we'll see if it's a dumb answer.
24:41
So first of all, you know you're crushing it, Claudia, you say
24:44
you're debt free except your home.
24:45
You're maxing out your 4O1K, which is 23,500 a year.
24:49
You're crushing it. This isn't this.
24:51
The answer to this question is not a a matter of you're going
24:55
to do poorly, you're going to do well.
24:57
It's you're you're doing well no matter what you do with the
25:00
answer to this question. And so that's the first thing
25:02
way to go. And as a, as a lesson to anyone
25:04
listening, if you can get yourself here where Claudia is,
25:08
you know, paid off all your debt, maxed out your 400K, own a
25:12
home, like that's like totally winning with money.
25:14
So way to go. That said, you're choosing
25:16
between two good options with this excess money you have from
25:19
your income. Are you going to put that money
25:21
by paying down your mortgage more quickly or investing more
25:25
money outside of your forward K in what's called a brokerage
25:28
account and a taxable brokerage account?
25:31
She also said she purchases home in 2020, which means she's at a
25:34
historically low interest rate, her interest rates probably
25:37
around 3%. And so the first thing that I
25:40
could say is for sure on the spreadsheet, you could any of
25:43
that extra money you could put into a high yield savings
25:46
account and get 4% and then keep paying your mortgage as slowly
25:50
as possible. And then the day that you know,
25:52
your higher savings account starts paying less than your
25:55
mortgage charges, go and take all the money, dump it directly
25:58
into your mortgage and you'd be strictly better off.
26:03
And so, you know, strictly by the math letter of the law,
26:07
there's no real reason to pay off a mortgage more quickly when
26:10
their interest rates are higher. On top of that, you can actually
26:14
do better than a high out savings guy.
26:15
You could be investing that money in a, in a index fund, for
26:18
example, which doesn't pay 4%, that historically pays 10%.
26:22
The problem with your 10% is it's not guaranteed your 4%.
26:26
It's guaranteed until they change the rate.
26:27
With a 10%, the market could drop tomorrow and you won't get
26:30
10%. You could get -10% And so that's
26:33
kind of like a range of options. What you do kind of depends on
26:36
your, your risk tolerance and what you want out of life.
26:41
Like I said, this is choosing between two good options.
26:44
If you say, hey, I'm comfortable with the debt, I don't care
26:47
about making this mortgage payment.
26:48
I'm looking for a, a chance at a bigger, you know, long term
26:53
outcome. I'm just going to index fund
26:56
route. I'm going to just dump all
26:57
sexual money into investments and I'm going to accept the fact
27:01
that maybe the market's going to crash temporarily at some point.
27:04
And I will have to look in myself a mirror and say, oh man,
27:07
I could have paid off this mortgage, but instead I steal
27:10
the debt and this money has gone down by half.
27:14
But maybe that's still the option you want.
27:16
Or maybe you want to do that, that like savings account
27:18
arbitrage thing I mentioned where you basically just saved
27:21
off until the moment that the rates, the rate in inversion is
27:24
no longer true and then paid off in one chunk.
27:26
Or, and this is not a crazy option, Claudia, you could just
27:30
ignore all that fancy schmancy mumbo jumbo about this greater
27:35
long term return and pay off your stupid mortgage even though
27:37
it's at 3%. Because you know what?
27:39
If you have a paid for home and that first month comes where you
27:43
don't make a mortgage payment, that's pretty sweet.
27:45
And like, let's say a mortgage payment is $3000 a month.
27:48
If suddenly you don't have a $3000 a month mortgage payment
27:51
anymore and you have $3000 a month of free cash plus all the
27:55
excess you're paying off on it, which is maybe another one or
27:58
two or 3000, and you just had $5000 of bonus money.
28:01
Like what would that mean for your life?
28:03
That could mean like a, a fantastic vacation every single
28:06
month. It could mean, yeah, it could
28:09
mean new cars. It could mean like sleeping like
28:12
an absolute baby because you have no debt owed to anyone.
28:16
And so while like there's like the spreadsheet answer, which is
28:19
like, yeah, you probably shouldn't pay off.
28:20
And then there's like the life answer, which is, hey, do what
28:23
you want. And if if someone comes to me
28:25
and says, hey, I pay off my 30 year mortgage in 10 years and
28:27
now I'm living mortgage free with a cash flow surplus of
28:30
$6000, I would never say to them, you dummy, you could have
28:34
a slightly higher net worth right now.
28:36
If you would have, you know, invested it back then I'd say
28:39
you're crushing it. I am jealous of you and I want
28:42
to be in your shoes, right? And so that's the answer.
28:45
There's no correct answer. It's a personal answer.
28:47
And and I absolutely give you permission to pay off that low
28:50
interest rate mortgage if you want to.
28:52
And I also give you permission to take the more like risky
28:55
ambitious route of, of investing it too, if you want.
28:57
There ain't nothing wrong at all about having a few 100 grand in
29:00
a taxable brokerage account, because you can take that out
29:02
and spend it in whatever you want one day.
29:04
I love it, love 2 good options and I love this because these
29:08
are the kind of questions that you get in your inbox all the
29:11
time, and also when you do office hours.
29:13
So it's cool to be able to have a platform now to talk about.
29:16
I'm sure a lot of people have this question.
29:18
It's a good problem to have. Yeah.
29:19
It's something that people don't really know what to do.
29:21
So awesome. And in longer form, you know, I
29:23
like, people ask me this over Adm and I like sometimes I try
29:25
to scroll out an answer in Adm but you know, it involves some
29:30
context and me screaming into a microphone for a few minutes to
29:33
really instill the options you have before you.
29:37
You love yelling into a microphone.
29:39
All right, thank you so much, Claudia.
29:42
I'm so happy that we guys answer your question on the air.
29:46
All right, let's get into our next segment, Scroll Patrol.
29:53
Scroll Patrol. OK so these actually terrify me.
29:58
I've been scouring the Internet for financial advice and I just,
30:02
some of them feels so risky to just, I don't even want to air
30:06
some of these things. So I'm I'm nervous, but we're
30:09
going to watch a video together. I've seen that Jeremy has not
30:13
and he's going to react to it and tell us what he thinks.
30:16
So, Jeremy, go ahead and click that link and let me know what
30:20
you think about this scroll patrol, and then we'll tell the
30:23
Internet what we think as well. I'm opening it, I already
30:26
recognized the thumbnail or at least the face of the thumbnail,
30:30
right? So how do I get rich?
30:33
I borrow money and I buy assets with it.
30:38
The poor person borrows money and buys liabilities like
30:41
purses, cars, houses, and they get poorer and poorer and
30:46
poorer. But I use debt.
30:50
I borrowed 300 million after the crash dollars in 2000.
30:55
By 2010, I'd borrowed $300 million to buy real estate that
31:00
made me rich. And the interest rates kept
31:02
coming down so that my cost of money kept coming down.
31:07
And so everyone else is saying, oh, we should get out of debt.
31:10
You know why? Because they don't question the
31:12
hypnosis they're under. You've been hypnotized to work
31:16
hard for money to save it. The fractional reserve system
31:20
prints it. And then they pay taxes and
31:26
taxes. So I get, I have all this debt
31:29
and I get rich. So the question is, how do you
31:32
learn to use debt to get rich? Because they tell you not to do,
31:37
not to get out of debt. So all I'm saying to you is, if
31:41
a person does not question what they've been taught, they'll
31:45
always be poor. All right, so that was Robert
31:52
Kiyosaki, who is the author of Rich Dad, Poor Dad.
31:55
And, you know, like all outrageous personalities,
32:01
there's kind of like a hint of truth and a kind of greater
32:04
context that needs to be explained.
32:06
And so I liked a lot of what he was saying, which is you want to
32:10
buy assets and not liabilities. An asset is something that you
32:15
own, has value, pays you while you own it, and is likely to go
32:19
up in value. So if I buy an index fund,
32:22
that's an asset. If I buy a share of Apple,
32:24
that's an asset. If I buy a rental property,
32:26
that's an asset. All those things pay me just for
32:29
owning them and they're likely to go up in value.
32:32
If I buy a boat, that's a liability.
32:34
Boats go down in value. They have a lot of maintenance,
32:37
upkeep, gas, docking fees, trailer, you know, repairs.
32:44
And I think, you know, I also think a lot of what he was kind
32:47
of implying there is like a lot of people don't see that
32:50
picture. We're kind of all trapped in the
32:52
rat race where it's like, OK, I go to my job, work for money, I
32:55
spend my money on liabilities, repeat.
32:57
And we and you're when you're in that work for money, spend on
33:01
liabilities, repeat cycle, then you just are on the the mouse
33:06
wheel forever, right? Whereas if you get into a asset
33:10
rich position where you own a lot of assets, you know a lot of
33:12
real estate, you'll own a lot of index funds, then your money is
33:16
doing the work for you and you can just live.
33:17
So that part's true. His like fixation and
33:22
romantification. Is that a word?
33:25
Romanticizing. What's the word?
33:26
Check that Romanticizing. I think that is a word.
33:30
I don't know how you'd use it in the grammatic cracker medical
33:32
context. Yeah, well, you know what you
33:35
mean. His romanticizing of debt I I
33:38
don't agree with because I think that it has lots of nuance to
33:43
it. So for example, if I took out a
33:47
credit card and bought a jet ski, that would be like the
33:50
worst thing you could do, you know, and he would agree with
33:52
that because that's a liability. A jet ski is a liability.
33:55
If I got a low interest rate mortgage and bought a really
33:58
good rental property that has like all sorts of good
34:01
characteristics, like a high cap rate and you know, isn't risky
34:04
and you know, dawnless that, you know that and that's a whole
34:07
book you could read about, you know, real estate investing,
34:10
then that could be a good investment even considering the
34:14
debt, but it's still it includes certain risk.
34:19
And so when I've met people who have been absolutely annihilated
34:22
in finances, it's because of debt.
34:25
Like, and I've met guys that talk like him who had, you know,
34:29
300 million is an absurd amount of money to have individually in
34:32
debt. But like, you know, have had one
34:34
or two or five or $10 million in debt and you know, a $12 million
34:40
real estate piece of property and that $12 million real estate
34:43
property for whatever reason becomes worth 9 million.
34:46
And suddenly not only are they not worth 12 million, they're
34:49
not worth the 2 million equity they had.
34:51
They're worth -1,000,000. And you know, being worth
34:54
-1,000,000 is not a good position to be in.
34:56
And so, you know, I don't hate, I'm like much more anti debt
35:02
than he is. I've been, had almost no debt in
35:04
my life. I don't like owing money to
35:05
people. I am asset rich.
35:06
I have a net worth of north of $6 million at the point this
35:11
point. And I do have a small mortgage
35:12
relative to my net worth, about half $1,000,000 on my home.
35:16
And that's my only debt. And I, you know, I personally
35:19
don't see a lot of value in going to try to reach this $300
35:23
million in debt position. Because while maybe it could,
35:27
that leverage, leverage is called when you borrow debt to
35:30
buy more expensive assets to grow more quickly, could
35:32
accelerate wealth more quickly. It can also bankrupt to you, you
35:36
know, and for me, you know, and I think for most people, it's
35:39
not worth that trade off. There's ways you can do it in,
35:42
in less risky ways. And so you know, you know, and
35:46
so Robert Kiyosaki is a very lightning pole.
35:50
What's it called? Like lightning rod kind of
35:51
figure. And he says some good things.
35:54
He says some not so good things. He's the kind of guy who who is
35:56
correctly, he's correctly predicted.
35:58
This is one of my favorite quotes.
35:59
He's correctly predicted 37 out of the last three market
36:03
crashes. And that's a joke because, you
36:07
know, he, he says it's going to happen 37 times and it happens
36:10
three times. He's like, see, I told you,
36:12
right. And so when Robert Kiyosaki says
36:14
you should buy, you know, be buying silver because tomorrow's
36:18
going to crash, which he also says, I'm like, I don't, I don't
36:21
really trust that. But you know, it's, it's, it's
36:24
a, it's a perspective that I think is good to, to be aware of
36:27
and to, to talk about. Yeah, it's funny.
36:30
As you were talking, I was, I looked up when Rich Dad, poor
36:33
Dad, came out. It was 1997.
36:35
Because it's a book we all have heard about our whole lives,
36:38
essentially, right? And so I had no idea that he was
36:41
on the Internet going crazy. It's an it's an incredibly good
36:45
book title. The books is the book is good,
36:48
not great. It's not like, I don't think
36:49
it's like the Bible of personal finance or anything.
36:51
It's just, you know, talks about assets and liabilities, which I
36:54
think is valuable. But yeah, I think he's, you
36:57
know, maybe not giving the best advice for most people these
37:00
days. Gotcha.
37:01
OK. All right.
37:02
Good to know. That one scared me a little bit,
37:04
but I'm glad we got through it together.
37:06
It's time for our last segment. Jeremy had time today.
37:13
I had time today. I've actually I do have a lot
37:16
less time now that I have a six month old baby.
37:18
Seven month old baby but I still respond to a lot of DMS and I
37:23
got one of these DMS. Yeah, you are always in the like, one
37:26
thing about you, you're going to be in the comment section.
37:28
Like when I scroll through your Instagram you're replying.
37:30
I'm like, respect. Like to like to mix it up.
37:34
So you sent me this what looks like a text message, is that
37:38
correct? No, this is an Instagram DM.
37:40
It's Instagram, OK. They made it look so much like
37:42
iMessage. It's crazy.
37:43
Any who. So I think what we should do is
37:46
we should read it. Do you want to be you or do you
37:48
want to? Do you want to be the other
37:50
person? I'll be me because I do think
37:52
that like I like my tone of voice and this might be
37:55
important. It's very specific.
37:57
OK, so I'll be this person who wrote to you and said what are
38:00
you talking about? You still haven't retired.
38:03
And for some context, he's I, I, I posted something about how I
38:08
retired at 36 and then he, he said this.
38:11
You, just you, just you in the middle of the scene.
38:14
Come on man. OK, let's let's start over.
38:17
Edit this and and put and put the context on top.
38:21
No, I'm leaving this in. OK, whatever.
38:23
All right. Let me start.
38:25
Let me start the the text over again, OK?
38:27
Start over. Scene OK, what are you talking
38:30
about? You still haven't retired.
38:33
What do you mean? Your bio says you're retired,
38:36
but you pretty clearly run a social media page as a job.
38:40
Oh well, I started this for fun in retirement.
38:44
What am I allowed to do to be considered retired?
38:49
Generally people that are retired don't have jobs.
38:53
Well, what counts as a job? And then he didn't respond.
38:56
So I responded again, that's how much time I have.
38:58
And I said, anyway, it's not a job.
39:01
Almost all the money goes to my team and charity.
39:04
I live off of my investments. If that doesn't satisfy the
39:07
retirement police, then you got me.
39:10
All right, fair play. I like this one because I think
39:13
he like, I think I actually won him over.
39:15
And you know, there's this concept called the retirement
39:19
police where we talked a lot about early, early retirement.
39:23
And I don't want to live in a world where I work until 65 or
39:26
70 and then, you know, just scrape together rice and beans
39:29
means on social Social Security, right?
39:33
And so why not 65? Why not 60?
39:36
Why not 50? Why not 40?
39:37
Why not 36? Which is when I officially was
39:40
living off of my investments forever, as I currently still
39:43
primarily do. But then sometimes the
39:45
retirement police come and say, hey, but you have this other
39:47
stream of income you don't count.
39:49
And so that was my answer. I was like, OK, fine, if it
39:51
doesn't count, it doesn't count. But you know, I, I do have a
39:54
paycheck from personal finance club, but it's, it's the same as
39:58
Jen's and. It's not enough money, not too
39:59
much on my salary. Hold up, I.
40:01
Know not. Too much.
40:03
And, you know, and, and I'm supporting a family of four now
40:06
in Southern California with a primarily stay at home mom who's
40:10
a high, like very successful attorney, but who decide to help
40:13
raise our kids. And so, so Jen can attest that
40:16
like it ain't covering all those bills.
40:19
And so, you know, does this count as retirement?
40:21
I don't know. But, you know, I, I like this
40:23
conversation because it questions the whole, the whole
40:27
premise of like, what is retirement?
40:29
And I, I think most people who retire early like I did, don't
40:33
just sit on a rocking chair with a blanket on their lap, like,
40:36
you know, watching sunsets for the next, you know, 55 years if
40:40
you're retired at 40 or whatever it is.
40:42
But and you did. Have your time.
40:44
When you took trips and you took time off between starting
40:48
personal finance club, you had a moment.
40:49
Yeah, there was a day where I quit my job.
40:51
I, you know, I sold my company, I quit my job.
40:54
And there was like a day and actually more like a year and a
40:56
half where I literally had no obligations.
40:59
But then like things came up like my friend coached
41:01
volleyball team and she's like, do you want me to, do you want
41:04
to be my assistant coach? She was like, yeah.
41:05
And then that was like a job kind of, I paid like minimum
41:07
wage or something. And then I was like, oh, I'll
41:10
start an Instagram account for fun with no obligation of like
41:12
no expectation or plan to make money.
41:14
And then, but then it grew so much.
41:16
Then like there became like a business that kind of popped up
41:19
around it. And so like, does that make me
41:21
unretired? And you know, like, on the face
41:23
of it, if someone looks in my day, it probably looks like I'm
41:25
not retired because here I am in an office on a microphone doing,
41:30
you know what, maybe is this work?
41:32
I don't know. Owning businesses.
41:34
Yeah. So anyway, like if if you're in
41:36
the retirement place and you say I'm not retired, fine, you're
41:39
right. But for me, like I, I, I can
41:42
quit every source of income other than my other than my
41:45
investments and still be very, very likely to live a happy,
41:48
healthy life forever. To me, that's retirement because
41:51
that means I'm doing exactly what I want to do with my time.
41:54
I want to be like you when I grow up.
41:55
Meanwhile, we're like the same age.
41:58
You're in your mid 30s. I'm in my late 40s.
42:01
Maybe I'm in 40 next year like OK, so that's great.
42:05
I I honestly the most the thing I was most curious about is how
42:08
you got to end an Internet conversation with Fairplay
42:11
because that never happens You you're pretty interesting
42:14
situations. But yeah, the.
42:15
First time ever someone changed their mind on the Internet.
42:18
I love that. Well, you did have time for
42:20
that, but we are out of time here on our second episode of
42:23
the Personal Finance Club show. Thank you for listening and we
42:26
hope to see you next week. And don't forget to follow the 2
42:29
rules of Personal Finance Club. Rule #1 live below your means
42:32
and rule #2 invest early and often.
42:35
The Personal Finance Club show is produced by Jeremy Schneider
42:38
and Jen Mundia, music by Essa Balu and Homie.
42:41
Send your questions to podcast@personalfinanceclub.com.
42:45
The Personal Finance Club Show is Co hosted by Jeremy Schneider
42:48
who is a co-owner of Nectarine and SEC Registered Investment
42:52
Advisor. The views expressed on this show
42:54
are those of the hosts and guests and do not necessarily
42:56
reflect the views of Nectarine. Please refer to
42:59
hellonectarine.com for all relevant disclosures.
43:03
This podcast is for informational and educational
43:05
purposes only and should not be construed as personalized
43:08
investment advice or a solicitation to buy or sell any
43:11
security. Listeners should consult their
43:13
own financial, legal or tax professionals for advice
43:16
specific to their situation.