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1 - Is it a good idea to grab some home equity using sites like HomeTap?
2 - Why did I lose a big chunk of my retirement funds when I withdrew some of my investments?
3 - Should I consider buying the house I rent from my landlord?
4 - Do I count extra mortgage payments made to the bank when calculating my savings rate?
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Welcome to Out of Money.
Speaker 2 (00:01):
I'm Joel and I am Matt, and today.
Speaker 1 (00:04):
We're answering your listener questions.
Speaker 3 (00:24):
That's right, man, it's Monday, and we hope that we
are able to help you kick off your week. We
are excited to hear from listeners, to hear their financial
quandaries that they find themselves in.
Speaker 1 (00:34):
Joel, what's better than our two voices in your earbuds
on a Monday morning, sting on.
Speaker 2 (00:37):
A Monday morning.
Speaker 3 (00:38):
Lots of other things, That's what my wife said, Lots
of other things. Yeah, but we are thankful for all
of you listeners out there. We've got a question from
a listener who is asking about his savings rate, specifically,
like what goes into a savings rate? And we've got
maybe an easier just like if you zoom ount, we're
gonna provide an easier way of thinking about your savings rate.
(00:58):
Another listeners asking you about some of these new sites
that are cropping up that allow you to easily tap
your home equity, whether or not that that's something that
they should utilize. Another listener, she's actually she's lost a
chunk of her retirement funds. It came as a shock
to her. So I'm actually pumped to talk about that
and just to help other listeners to prepare for this
(01:19):
inevitable outcome.
Speaker 2 (01:21):
I'm just gonna leave it like that.
Speaker 1 (01:22):
I'm hanging on the edge mat. That was a good tease.
Speaker 2 (01:26):
Oh you like it? Yeah, OK, very good.
Speaker 1 (01:28):
So, yeah, there's an interesting conundrum that this listener finds
herself in. We'll talk about that and more. One great
thing that a different listener wrote in about that she's experienced,
and I don't know that we've ever mentioned this specific
We've been talking a lot about We talked regularly about
the library.
Speaker 3 (01:42):
How to you know, the free service berriers that you
can pick up at our local library at least. Oh
you've talked about that, free trees outside, that's true, but yeah,
free books obviously, But then there's a bunch of other
things there are, even like seed libraries at library. I mean,
there's like so many different things that libraries have branched
down into and they can be money saving and also
a great place to spend time, specifically with kids. There's
(02:05):
like a play kitchen at our local library that my
kids love and we'll go there just like hanging out
the basement.
Speaker 2 (02:10):
Yeah, lower level.
Speaker 3 (02:11):
Well, dude, especially this time a year when you're looking
for things to do that don't involve being outside in
the scorching heat. The public library offers free air conditioning.
Speaker 2 (02:21):
But like legit, that's.
Speaker 3 (02:23):
Yeah, we're spending more time at the public library as well.
Speaker 1 (02:26):
Yeah, you can bump up your AC, turn it off
for a minute, and had to head the library. Well,
that was not what I was going to comment on,
although you're right that is a good place to stay cool.
Speaker 2 (02:35):
It's fun classes during this heat wave. Community. Yeah, there's
lots of great things.
Speaker 1 (02:39):
Something in public library or something else, because I think
recently mentioned about signing up for Consumer Reports to get
reviews of something, or let's say you're looking for reliability
features of your of an automobile you're considering purchasing. Consumer
Reports just has like the data on it. They have
the biggest, the best data Matt when it comes to
their cars and just given all their subscribers.
Speaker 3 (03:01):
Mike Quincy, that's an interview that we had. This is
I guess a couple of years ago, but he talked
about just how in depth they go when it comes
to reviewing their vehicles, especially from from not only from
the readers. But then also from their road testing that
they do every vehicle. They pay for the vehicles and
they put them through and they don't tell them that
they are that they're with Consumer Reports. That's one of
the most fascinating things from from that interview, the fact
(03:24):
that they kind of walk in as unassuming individuals. That's
why who are looking to purchase a vehicle, so that
way they don't like the super nice one that they
know has been that they've gone over with a fine
tooth comb exactly ensure that's not element.
Speaker 2 (03:36):
That kind of thing.
Speaker 1 (03:36):
Well, you can get Consumer Reports from your library, by
the way, and we've there to go that recently, so
it was a big build up and you get it
digitally or physically whatever you prefer. But yeah, you can
get it on the libby app or you can run
into your library and snag a copy. But because I
don't know, Consumer Reports cost twenty something dollars a year,
and honestly, it's it's worth it if if you like
(03:58):
the material they put out, because it is kind of
unbiased information that comes out of Consumer Reports. I trust
everything comes out from them because of their process. So
it's a crucial part of what they do. And so yeah,
love consumer reports. But if you're like, I don't know,
want to be frugal, grab it for free from library.
Speaker 2 (04:16):
Absolutely, yeah, it makes sense, especially if you're already going
to be there because you're there to pick up other
great perks like free passes to your local zoo or
to a local museum, that kind of thing.
Speaker 3 (04:26):
They seriously, your local library has way more resources than
you're probably thinking, I think, And we always talk about books.
Speaker 2 (04:33):
Yeah, because we're nerds.
Speaker 3 (04:35):
We are trying to get smarter, and one of the
ways you do that is by reading more books. The
fact is, though not everybody out there likes the read books,
and that's totally fine, and so because of that, Because
of that, I think there might be a lot of
folks who they hear us.
Speaker 2 (04:46):
Talking about the free public library and it's not.
Speaker 3 (04:48):
Free, by the way, because you pay with your taxes,
but they just tune us out once we start talking
about the library.
Speaker 2 (04:53):
But there's all you can rent movies, there's all sorts
of awesome stuff.
Speaker 1 (04:57):
Oh, we go in there, we get so on our
every road trip, we run in the library before we
go the DVD player and get the DVD player. But
we also even more than that is that they have
these things called play aways, So because they don't know
what that is. So the kids don't have uh smartphones
where they can like listen to stuff.
Speaker 2 (05:13):
On Libby right respect Yeah playways.
Speaker 3 (05:16):
Well it's a bummer that I guess they don't. They
can't listen to an audiobook right, their own personal audiobook.
Speaker 1 (05:20):
Except for they can with playaways. So playaways are audiobooks,
but the specific book it's kind of like a digital
version of a cassette tape proceeds that you would have
had back in the day for a book. And so yeah,
we'll load up get a few of the playaways. Kids
can plug their headphones dirrectly in and they've got books
to listen to on the way And I.
Speaker 2 (05:37):
Didn't even know about that.
Speaker 1 (05:38):
It makes the best card trip ever if they've got
the playoways on hand, because they will sit there contented
for hours listening to their books.
Speaker 4 (05:45):
Yeah.
Speaker 2 (05:45):
Wait, so is it a singular device that they can
all plug into.
Speaker 1 (05:49):
No, it's for every single separate Yeah, they've each got
their own books.
Speaker 2 (05:52):
I guess you can get your own splitter. And let's say,
for instance, you two out of four.
Speaker 1 (05:55):
Kids or whatever wanted to listen to the same book. Yeah,
it's brilliant.
Speaker 2 (05:59):
That's you.
Speaker 1 (06:00):
Yeah, I love it all right, a few library facts
come in your way. I hope that helps.
Speaker 5 (06:05):
Matt.
Speaker 1 (06:05):
Let's mention the beer we're having on this episode. It's
called Hammer Red amber Ale by Sweetwater Brewing. We'll give
our thoughts on this one at the end of the episode,
but let's get to the listener questions. And if you
have a money question, we'd love to tackle it on
an upcoming ask htm episode. Just got a hot money
dot com slash ask for the simple instructions or I
don't know, just record it on the police MEMDMO app
of your phone, send it to us via email, and
(06:25):
hope to take it next week on the show. Let's
get to the first one, Matt. This is about newfangled
ways of tapping your home equity.
Speaker 5 (06:33):
Hi, guys, Stanley Poe here on the North coast of America,
the Great Lakes region. Having had a helock loan years
ago and paying that off, I'm not too excited about
doing that again, but we are looking at potential options
for financing a home improvement project. One thing I came
across just recently is home tap dot com. Home Tap Equities.
(07:00):
No excuse me, Home Tap Investments Incorporated. Wondered if you
knew anything about those folks. As far as I read,
it looks worth looking into. But looking for your sound
advice home tap dot Com. I'll hang up and listen
for your answer.
Speaker 3 (07:18):
Thanks all right, Stanley, thank you for your question. And
first things first, know that you are not alone here
when it comes to considering tapping some of that home
equity in order to do anything with it. I feel
like I'm getting calls like every other day, Joel har Yeah,
it's just like, hey, by the our guess it's calls,
but it's also mailers, it's emails. It's just they're hitting
(07:39):
you on every single front where. It's just like, did
you know that you've got all this equity that is
available to you?
Speaker 1 (07:44):
By the way, you know that you're loaded?
Speaker 3 (07:46):
Yes, Like they are just reminding you of how much
cash that you're sitting on. And Americans like they we
have a record amount of home equity these days thanks
to the rapidly rising home prices. We are talking like
literally tillions of collective dollars is at our disposal. Although
I will say that that quick rise and home equity
and home prizes. It has stapered off, right, because we
(08:07):
saw it skyrocket in twenty twenty, basically around the time
everyone started getting stimmy checks. Yeah, and oh my gosh,
it blew up. But then starting in twenty two it
slowed down a little bit. It's a bit of a question. Yeah,
we'll get to the specifics of your question, Stanley, But
for most folks, we want to highlight the fact that, oh,
this is such a great thing. We've all got so
much equity in our homes. But the best thing to
(08:29):
do is just to pretend that that mountain of money,
that mountain of home equity that were that a lot
of us are sitting on, that it doesn't exist. Because yeah,
it makes you feel a lot wealthier, and you are
wealthier on paper because of that. But using your home
as a piggy bank where you're rating it for the funds,
I think that's a bad idea for the majority of
(08:49):
the time.
Speaker 1 (08:49):
Yeah, at least that's true. I mean, Stanley is planning
on using equity dollars for a fairly defensible reason though, right,
and that's to sink those dollars back into his home
in a form of improved and how there are a
lot of people who use home equity in a lot
worse ways than that, And so when you're talking about
that's also a tax deductible reason to use a home
equity line of credit, there are other ways you could
(09:11):
use that home equity line of credit and you wouldn't
see a tax break for doing so. So I am
okay with using home equity lines of credit within reason
for the reason they're most intended for. But also I
would say, don't assume that the dollars you spend are
going to come back to you in the form of
additional home equity. The truth is almost no upgrades you
make are going to increase the value of your home
(09:33):
commensurate with what it costs to do that addition, or
to you know, make your kitchen look more beautiful. It's
certainly okay to take out some helocked dollars to make
some of those improvements, with a caveat that you're making
those improvements because they bring you joy, right that you
plan on being at home for a while.
Speaker 3 (09:49):
Do it for you, do it for not because don't
justify it by saying, oh, this is going to increase
the ho villues. Because it will but like you said, Jill,
it's not certainly not dollar for dollar.
Speaker 1 (09:56):
And we talked what recently Matt about how the if
you change yourage doors, that's one of the very few
improvements that pays off, like more than the value of
what you put in.
Speaker 3 (10:04):
Should we mention listener Greg his tip about the garage door. Oh, yeah,
it was a great tip to do that.
Speaker 1 (10:09):
Yeah, So basically what he was saying was paint your
garage doors a faux wood color. And that actually is
like an eighty dollars solution to changing out your garage
door instead of like replacing the whole thing and spending
thousands of dollars, just do that one simple thing.
Speaker 3 (10:24):
Which will go a long way replacing the whole thing.
But yeah, I don't know why that's literally when he
sent that in first of all, so he sent before
and after pictures as well, it looked good. Oh, it
looks so good because I don't know, like maybe the
first time you hear that, you think.
Speaker 1 (10:36):
Eh, faux wood paint sounds.
Speaker 2 (10:37):
A little cheesy.
Speaker 3 (10:38):
But when he said the picture of it, it looked amazing,
so much so that I afforded it to my wife
because we've been literally we've been trying to figure out
what we're going to do in this in a similar situation,
like one hole side of our house is basically this
giant white garage door on a white house, and I'm like, oh,
wait a minute, we could paint the stupid thing and
that would go so even just a solid color. Like
it's not something that's really crossed our mind, and we're
(10:58):
not necessarily looking to increase our home value necessarily, but
it could go a really long ways and making it
look nice. Yeah, Like that's why it by default does
make your home values go up because it looks nicer, yeah,
than it does if.
Speaker 2 (11:09):
It's just been in the same color as the house.
Speaker 1 (11:10):
So that's like anyway that eighty bucks is more than
going to pay for itself.
Speaker 4 (11:13):
Oh yeah.
Speaker 1 (11:14):
But most of the time, whatever you're trying to do
to your home, do it for you, and do it
because you can afford to do it, not because you're hoping.
That's exactly you're banking on the fact that, hey, if
I take this money out push it into my home,
then now my home is going to be worth just
as much, if not more than what I put into it.
Speaker 2 (11:28):
Totally. Yeah, And here's the other thing.
Speaker 3 (11:30):
Most helocks, they come with a variable rate, and those
rates have gone up significantly in recent years, making that
decision even more fraud even more costly. And so if
you're looking at getting a helock, you might have a
rate that potentially even starts with a nine, unless, that is,
you opted to go with one of these new fangled
services like home Tap. And that's what Stanley is asking about.
(11:54):
Their pitch is that you can access some of your
home equity without taking on a loan, which sounds pretty nice,
but of course there's a catch instead of saddling, because
what they say on the website is like, it's not alone.
They don't stick you with a monthly payment. Instead, what
they do they take partial ownership of your home instead.
They're essentially in the whole pitch. The whole idea is
(12:15):
to oh.
Speaker 2 (12:16):
Man, we're gonna make this as easy as possible for you.
Speaker 3 (12:19):
Oh you know all those hoops you have to jump
through where you have to get a credit check. Oh
your credit's not so great, Sorry, you don't get the
heel act. They're like, no, no, no, we don't ask those
kind of questions. All we do we just take a
stake in your actual home.
Speaker 1 (12:30):
Ye to me, like, this is a scary uh form
of borrowing because you're not just borrowing, like you said, Matt,
you're giving up ownership rights to a portion of a
percentage of your home. You're taking on an investor, which
to me sounds like a terrible idea. It's got like
ursula aerial tendencies, right, it's the in exchange for those
(12:51):
feet give me your voice. Yeah, and obviously aerial comes
off fine in the end. Spoiler alert if you haven't
seen heads up, though, you don't always come out ahead
right exactly? What makes you think of the like fintech companies.
When fintech companies first started kind of coming into bogue,
Acorns was one of those first ones. They were helping
people solve problems, and there were really good ones. They're
budgeting apps and stuff that really do a lot of
good for people. But what about those apps that help
(13:12):
you get paid early? Those seem really nice too. And
there's all sorts of fintech apps like like earn in
or whatever who say, oh, yeah, I get your paycheck
a few days early, get paid on the day you
work instead of waiting for your paycheck to come through
a lot of fintech companies. Now you have to watch
out for the products because in the fine print it's
not nearly as good as it seems on the marketing material.
(13:32):
Because yes, now you're home, you've got an investor attached
to it. If you go with a company like hometap
and there are other companies in this space too, they
stand a benefit when your home goes up in value,
taking a piece of the proceeds when you sell your
home in the future. So for example, if you borrow
twenty percent of the value of your home, they add
a discount value to their investment, meaning they'll get a
stake that's larger than twenty percent, maybe like twenty five percent,
(13:53):
could be even more than that. And then if you
use those funds to improve your property, they're winning with
every renovation you make. And while you don't have to
pay them back on a monthly basis, there's a ticking
ten year clock. So yes, you're right, like you don't
have a monthly obligation like you do with a helock,
but they're gonna still want their payback and they want
it within a decade. And then if you don't have
the money, because they're part owners, they can force the
(14:15):
sale of your home at that point in time, so
basically within ten years, you got to pay them back
a big, pretty penny. If you don't have the cash,
they might be able to say, all right.
Speaker 3 (14:23):
We need our cash yep, and we own a portion
of this house, forcing it to go to sale.
Speaker 1 (14:27):
Yeah, hey, Stanley, let's put that on the market. And
you're like, no, I still like this place, and it's like,
you know, we do two.
Speaker 6 (14:33):
For the part.
Speaker 2 (14:34):
Yeah.
Speaker 3 (14:34):
But then on top of that, there's fees on the
front end as well. There's a three and a half
percent fee off the top. There are appraisal fees, title charges,
government courting charges as well. Many banks and credit unions
they will allow you to avoid those fees completely when
taking on a heelock, not with home tap, Like, yeah,
the more you read into the details, the worse it
looks like. I wouldn't necessarily go as far as to
(14:56):
say that this is predatory, but it's close because the
folks who are wanting to borrow from their home but
they can't afford the monthly payments. I feel like the
magic of home tap is the fact that the downsides
are way far down the road. Yeah, and what it
reminds me of what it mirrors, essentially, are like credit cards,
where it's just like, oh, you don't you can't handle
the cost of buying this thing, not just oh just
(15:18):
stick it on plastic, or just tap your card buy
not pay later, just double click that home button face
ID recognize boo vibrates in your hand.
Speaker 1 (15:28):
I love that, by the way, it's so great. It's
like bupple stealskin.
Speaker 2 (15:31):
Yes, But here's the thing.
Speaker 3 (15:33):
With credit cards, though you like you realize the error
of your ways in thirty days, Like it doesn't take
long for you to be like, oh man, I don't
really like that, Whereas with this, like you don't realize
how royally you've been screwed potentially for a decade. And
that's what's so crazy, is I mean, so what the
majority of Americans net worth is tied up in their homes.
(15:54):
We don't like that that's the case, but that's just
the case. And if potentially in a decade, you're giving
up a quarter of that growth down the road, you know,
if not more to this company that you signed your
soul away ten years prior, Like, that's to me, that's
the biggest downside is folks might be signing up for
this without completely realizing that's what they what they're what
they're giving away way off down the future.
Speaker 2 (16:15):
That's exactly right.
Speaker 1 (16:15):
I mean, this is I don't know that I would
call it predatory. I don't know that I would go
that far, but I would say.
Speaker 2 (16:20):
That it's close.
Speaker 1 (16:21):
It's very close predatory adjacent probably, And so I think
people who want to borrow from their home but they
can't afford the monthly payments, they're going to find this
appealing that people who can least afford to oh, home
Tap ten years down the road a massive sum of money.
And then you know, taking on an investor in your
primary home means you know, appreciation is going to be
split as your value grows. This is one of those
(16:43):
things it sounds too good to be true, and the
fine print reveals that it is. Like I just I
get why people might be attracted to something like home Tap,
but when you dig into the details, it's a turd
with gold spray paint on it.
Speaker 3 (16:57):
And you know, you mentioned there's other companies there in
the space as well, Joel, but we've seen a massive
increase in home equity, so there should be no surprise
that there are going to be new companies innovating and
trying to find ways to tap into this.
Speaker 1 (17:09):
How do we profit from this boon in home equity?
Speaker 3 (17:11):
Yeah, and what there's money to be made market and
encourage people in fact to tap the money they have
in their homes totally. And because of that, I feel
like it's it kind of has like some Wild West
elements to it where we're still figuring some of this out.
Ideally Stanley and anybody else out there who has a
home project that they're looking to accomplish, Like you're gonna
want to save up, you want to pay cash for
(17:31):
those improvements that you want to make, But if you
can't wait, we would say shopping around for a regular
helock is going to be a much better plan. I
think one of the other things I like about helocks too,
is like it's just more gradual. It's more akin to
credit cards, right where you kind of immediately feel the
pain of that, Like you get your heelock, Okay, it's
sitting there. It's just kind of waiting on you right,
like you haven't even pulled this. I like helocks even
(17:54):
better than home equity loans, even though home equity loans
tend to have lower rates because when you take out
a home equity loan, you've got a big old chunk
of money. It's kind of burning a hole in your pocket,
like to.
Speaker 2 (18:03):
Use it all. Whereas with the helock, it's there.
Speaker 3 (18:05):
If you need it. We pull some money out. Oh,
we're starting to make interest payments on that. You can
easily gauge how that makes you feel. Yeah, Instaney even
mentioned that right earlier. He's just like, Oh, this is
something that I've done in the past. I definitely don't
want to do that again. He's trying to avoid that
downside feeling. But with home tap you avoid that feeling
all together because you're kicking it ten years down down
(18:26):
the road, off into the future, and which at that
point is too late. It's too late to make any
changes to what it is that you've done with that money.
You did something with that money ten years.
Speaker 1 (18:33):
Ago, A decade later, it's like in an anvil dropped
on your head. Yeah, and almost unsuspecting because you remember
what you signed, you know, ten years ago, I guess,
but maybe vaguely. I barely remember what happened ten years ago.
Speaker 4 (18:44):
Matt.
Speaker 1 (18:45):
My memory, my memory sucks, and so yeah, I just
think that this is this is one of those products
that should be avoided at all costs, and I would
rather forego any sort of improvement. I would rather take
out a regular helock. I would rather take longer to
save up the money all of the above than do
any sort of deal with one of these companies that
wants to take a portion of my home and own
(19:06):
a percentage with me. No way, Jose. It's different than
a traditional mortgage in that sense where yes, you're not
the full owner of your home until you fully pay
off that mortgage. But a traditional mortgage is something that's
easily understood and it's not nearly as egregious as this is.
Speaker 2 (19:19):
That's right, Okay, we've got more to get to.
Speaker 3 (19:21):
We're gonna hear from a listener who is considering an
innovative way of purchasing his first home.
Speaker 2 (19:26):
We'll get to that and more right after this.
Speaker 1 (19:35):
All right, we're back, and we've got more of your
money questions to get to, including that one about an
interesting way to potentially buy your first home. But Matt,
now we've got to get to a question about cashing
out a retirement account and finding you didn't get as
much money as you thought you were going to.
Speaker 5 (19:51):
Hi.
Speaker 6 (19:52):
My name is Evelyn. I'm from Los Angeles, California. I
took out one hundred thousand dollars this year out of
my four h three B two buy a house. They
socked me with a twenty eight thousand dollars tax bill,
which they just took right out of the rest of
my four H three B. I was wondering, is there
any way I'm going to be able to get that
(20:13):
back next year. I will be retiring in twenty twenty five,
if that helps, and I am in my seventies. Thank you.
I love your show. I learn something every week.
Speaker 3 (20:27):
All right, Evelyn, thank you for saying that. Very glad
that the show has been helpful, not only for folks
who are maybe just starting in their careers, which is
a lot of our listeners, but even for folks who
are reaching the end of their working career. And actually,
let's dwell on her age here for a second, because
she said that she's in her seventies. This is really
important because what I'm highlighting here is the fact that
(20:48):
we're not talking about a four h three B loan.
We're also not talking about tapping a four to three B.
Early we're talking about distributions like these are Evelyn's retirement
savings that she has socked away within her fourth three B.
Speaker 1 (21:00):
This is the intended time, Yeah, exactly exactly, the government
apportion time to take that money without taking a tax
hit or a penalty for withdrawing those funds, because after
fifty nine and a half, it's all fair game, doesn't
mean And it's funny, maoun. I've talked to people before
who they think retirement money. They reach retirement and they're like,
let me add it, and they want to like gobble
(21:20):
it all up really quickly. No, it's meant the last year,
whole retirement years, right for decades, but still at least
now you don't it doesn't come with those those penalties
attached to it. So let's talk about Evelynce four or
three B. Why did they withhold tax which she took
money out out of it? Well, it's because the company
that manages your retirement account, Evelyn, they don't want you
to get caught flat footed at tax time, and more
(21:42):
than your company, the irs actually makes this mandatory. So
they're really the ones if you want to yell at somebody,
although I don't know matter if you've seen a those
stats about people getting the IRS on the phone, it's
like impossible, somebody lower than ever, something like one in
five people are able to get through to somebody at
the IRS, and when they do it they wait hours.
So don't don't bother calling. But this is this is
a mandatory thing. They're the ones who want to make
(22:03):
sure you're prepared for the tax bill, which is why
they make your retirement provider that company withhold that money
on your behalf. So if you've contributed to that four
or three B with pre tax dollars, you're going to
owe a decent chunk of tax in April. But if
you ended up spending all the money you took out,
you could find yourself in a buying come tax time. Right,
Let's say they did float you all of the money
(22:25):
that you requested, and you spent all of it, and
then tax time comes around. The IRS is saying is
holding out their hands, please pay us, and you're like, hey,
we'll have any money. That's why they do this. So
withholding taxes from your withdrawal is basically a way to
prevent that from happening to you.
Speaker 2 (22:39):
That's right.
Speaker 3 (22:40):
Yeah, And Evelyn asked about getting that money back. Well,
you're not going to be able to get that full
twenty eight thousand dollars back that was withheld. But depending
on your actual income this year, there's a chance that
you might find that you get some of it back
when you file your taxes.
Speaker 2 (22:56):
But it's not likely.
Speaker 3 (22:58):
Because given two things that you may mention, the fact
that she's still working, so she has her the income
that she's normally used to, but then on top of
that the money that she took out as well.
Speaker 2 (23:07):
But what we're talking.
Speaker 3 (23:08):
About here, though, Evelyn, is the difference between taxes and fees.
Speaker 2 (23:12):
Right, there's no way to avoid.
Speaker 1 (23:14):
Taxes, like I guess the hsaying, but well, yes, but
it's only the tax code.
Speaker 3 (23:20):
It's the loopholes that the IRS has created. If you
follow the rules, Yeah, there are ways to avoid taxes
in that way, but if they have basically outlined that're like,
oh no, this is income tax like youos taxes, it's
not something that it's not like you can get on
the phone with the IRS. You're one of the five
people that makes it through and ask them politely, hey,
is there a way that we can just kind of
wave that twenty.
Speaker 2 (23:40):
Eight thousand dollars.
Speaker 3 (23:42):
It's not like a credit card angel fee where you
call them up and you're like, hey, I don't want
to pay this anymore and they're.
Speaker 2 (23:46):
Like, wait, wait, wait, don't leave. Well, let's just wave
that for a year. We'll cut that for you.
Speaker 1 (23:51):
So, while yes, the tax man always gets his money
and it kind of stinks to take on one hundred
thousand dollars and only get eighty thousand dollars of it,
you won't be nearly as shock to come April. And
if I were you, I would also allow that to
be like a little bit of a bomb that hey,
maybe you've got better terms. You were able to buy
this house that you're going to be in for many
(24:12):
years to come, and your diligence in saving and investing
for your retirement has paid off at this point in
time to allow you to use those funds in a
wise way to provide that roof over your house for
a long time to come.
Speaker 3 (24:25):
Yeah, I think the biggest lesson learned here for Evelyn,
but then also for other folks is to have a
plan with it, Like when it comes to how it
is that you are going to draw down on your
retirement funds goes a really long way, because, like we
were talking about earlier, how there's you know, most likely
she her tax rate probably went up, right, because again
she is currently working, she's still is she a teacher?
Speaker 2 (24:47):
Is that what she said?
Speaker 3 (24:48):
And she's thinking about retiring maybe after twenty twenty five.
And so she's got her regular income that she's used
to paying. But then on top of that she one
hundred thousand dollars chunk. That's a huge amount of money,
which more than likely bumped her up to an even
higher tax bracket. And so to have a plan of
how it is that you want to approach pulling that
money out could save you a good amount of money,
(25:09):
not just in the amount of money that's taxed at
the higher rate, but even just money that's taxed at all.
Because I think, like she said, it doesn't matter that
she pulled the money out right for a home purchase.
She could have just pulled it out because she wanted
to go on some global trip. That's fine, it's at
least the home purchase. It's her money, Yeah, but at
least the.
Speaker 1 (25:23):
Home purchase potentially allows you to get better terms and
saved money, whereas yeah, yeah, the trip, it's like put
it off just a little.
Speaker 2 (25:30):
True.
Speaker 3 (25:30):
But ultimately, Evelyn, you can do what you want with
your money is your money. But the fact that you
did use that to buy the house, like I would
have taken out as much money as possible before getting
bumped up to the next tax bracket, and then personally
I keep it pretty fat emergency fund on hand, but
I would have rated the heck out of my savings
account just to find any spare dollar that I could
(25:51):
find to put towards that down payment, knowing, well, if
worst comes to worst and I need to tap some
additional funds because there is an emergency, oh well, I've
got my retirement. Is that I am not going to
get hit with a ten percent penalty because I'm withdrawing
it early. No, In fact, these are my retirement dollars.
I can use them how it is that I would
like to use them.
Speaker 2 (26:09):
But the whole name of the game is avoiding tax
as much as possible.
Speaker 3 (26:12):
Yes, and avoiding the years in particular where you're going
to have an elevated adjusted gross income and you just
unfortunately experienced a year where that was much higher than usual.
Meeting that you paid more taxes than you otherwise would have.
Speaker 2 (26:23):
Yeah, so those are the kind of years that we're
trying to avoid.
Speaker 1 (26:26):
Here, and I think from here on out the four
percent rule, using that as a rule of thumb at
least to help you figure out how much money to
take out and give in your grain. And this is
an extenuating circumstance, right buying a house. This isn't probably
not gonna do that next year or the year after exactly. Yeah,
having done this, but yeah, ultimately we just don't want
you rating your account because you're done with work or
you're soon to be done with work. Just a smart
(26:47):
withdrawal strategy will help you minimize that tax burden exactly
over the coming years. And by the way, Matt, coming
up on Wednesday, we're going to have a conversation with
Dan Otter, who runs the nonprofit four or three bys
dot org. So if you're a teacher, if you have
teacher friends, make sure they listen to this episode. Dan
Otter has so much wisdom on minimizing the fees when
you're investing in a four H three B as an educator,
(27:10):
and ultimately a lot of advice too on how to
retire rich as someone who is a teacher in K
through twelve. That might sound like an oxymoron, but Dan
says it's not, so I'm looking forward to that combo.
Let's get to our next question, Matt. This one comes
from a listener who wants to buy a house, and
he's got an interesting way he's trying to go about it.
Speaker 4 (27:28):
Hey guys, my name's Ethan, and I'm a big fan
of the podcast. The information you put out there is priceless,
so huge. Thanks for that and hope you keep it up.
I'm currently renting a house with my fiance in Denver.
We love the house and have a great relationship with
our landlord. I am eager to get into real estate
and have been thinking about asking my landlord if he'd
be willing to sell. We would intend to live in
the house for two years to avoid capital gains tax,
(27:49):
and rent it thereafter. I'm pretty confident it would rent well.
We are both on money Gear number seven and are
probably ready to take the next big step with our finances.
I'm thinking that buying from our landlord would be a
great way to get a deal off the market and
skip some realtor fees. Plus we know the house well
because we're living in it. My main hesitation is due
to the inflated Denver real estate market. You can find
(28:12):
the same size house in other cities for three fourths
of the price. Denver is attractive right now, which adds
to my rentability confidence, but the high price may make
it very difficult to cash flow. Our monthly payments will
definitely be more than our monthly rent, so I'm curious
what you guys think about the idea and if there
is something else I should be considering first. I am
(28:32):
also curious how we should bring this up to our
landlord in a way that is both thoughtful and respectful.
He only recently purchased the house for below market value,
and he probably put about fifty K into the house
before renting it out. How do we make sure that
we are offering the right amount for the house? Are
there any other favorable offers we could pitch to him
to increase his chances in selling to us. I'm not
(28:54):
sure if my landlord would even be willing to sell,
but I want to go into this well educated in
Any advice you can provide from the landlord's point of
view would be greatly appreciated.
Speaker 2 (29:04):
Thanks Matt.
Speaker 1 (29:05):
Is this one of your tenants trying to buy it?
Speaker 2 (29:07):
Actually?
Speaker 3 (29:08):
I was going to ask you if you've ever had
tenants ask you, you know, a question like this where
they're like, Hey, would you ever.
Speaker 2 (29:13):
Consider selling to me? I you have?
Speaker 1 (29:15):
I think, right?
Speaker 4 (29:16):
I have you?
Speaker 2 (29:17):
Or have you not?
Speaker 1 (29:17):
Okay, No, I don't think I can remember. I've never
had anyone ask me that question. I'm kind of surprised.
So well, I did have one couple they moved right
around the corner, and so like, they love the neighborhood,
and they kind of mentioned it in passing, but they
didn't seem super serious about it.
Speaker 3 (29:31):
Okay, So I have some tenants that did that did
a very similar thing, like literally you could see from
the front ports of the rental to the house that
they purchased.
Speaker 2 (29:39):
Yes, and they love the neighborhood.
Speaker 3 (29:41):
And even if that's y'all, like, I don't see why
you wouldn't at least try to reach out to your landlord.
Try to have the conversation, see if you can buy it.
You would be a good judge as to whether or
not it would rent. Well, you're you're currently renting it,
you're currently loving it. Enough to want to buy it,
so that's a check mark on the side of actually
going through with it. You mentioned cash flow, keep mind
that that is not the only benefit of owning real estate,
(30:03):
because of course, in higher cost cities you might lose
money every single month but still be making a wise investment, Totael. Matt,
that's thanks to the appreciation of the property that you
will be able to realize over time. So like you
do need to know that you need to have the
mental and you need to have the financial fortitude in
order to be willing to lose money on a consistent basis.
(30:25):
And this is certainly more of a long term approach,
but I think it's one that could make sense for
some folks. And it sounds like in your case, like
you mentioned avoiding capital gain, so you do want to
live in it for at least two years before transitioning
it to a rental, so you're at least looking at
a five year timeframe, which I think.
Speaker 2 (30:42):
Is pretty healthy.
Speaker 3 (30:43):
Yeah, I'm encouraged by the fact that he's not saying
I want to buy and then in a year or
two I want to flip it.
Speaker 1 (30:48):
And basically so what you're saying too, Matt on the
cash flow versus appreciation thing. It's really important to recognize
that because I have a friend who recently texted me
and he's like, Oh, I'm thinking about buying this triplex
in this random location in Texas, and the numbers worked
from a monthly cash flow perspective, it more than exceeded
the one percent rule, which is awesome. The one thing
you have to realize, which means, by the way, that's
(31:09):
going to be profitable regularly and ongoing. The downside of
investing in a property like that is the appreciation is
going to be minimal in kind of backwards Texas. Essentially,
Yeah and sore.
Speaker 2 (31:19):
Two different ways of realizing income.
Speaker 1 (31:21):
It's nice if you can do both, but the truth
is you can't do both in all markets, especially in
market like Denver. Sure anything you said you're in money
gear number seven. That's another point in your favor to
try to pull this off. I think you know, trying
to buy rental real estate early or too early in
your wealth building endeavors. Unless you're doing something crazy like
house hacking, where the numbers just make a whole lot
(31:42):
more sense, it can take away from your ability to
fund those all important tax advantaged accounts. But if you've
been doing that and you've jettisoned all your troublesome debts,
which is where you're at of here in money gear seven,
and you're interested in owning rental properties heading in this
direction at this point in your financial journey, I think
it can make a whole lot of sense. I think
you have the financial wherewithal, you have the history of
(32:05):
handling your money properly, where you're trying to jump in
with both feet into owning a rental property at this
point in your you know, with the financial progress you've made,
I think it makes a whole.
Speaker 2 (32:15):
Lot of sense.
Speaker 3 (32:16):
Yeah, And I think the best way to broach the
subject is just to tell your landlord that you'd like
the house. In fact, we like it so much that
I want to own it. Would you consider selling it
to us? Because that's I don't know, you kind of
stroke his ego a little bit, like it's flattering to him.
Speaker 2 (32:30):
It's like, hey, you've you've got yourself such a beautiful
home here. We would love to own it ourselves.
Speaker 3 (32:34):
And it sounds like that y'all have a good relationship
with him, and so I think just putting the cards
out there on the table is a smart move, Like,
I don't think that there is any sort of sneaky
angle per se that you need to try to find
a way to weave in there. It puts the ball
there in his court. But then i'd make sure that
you've got the liquidity on hand to actually proceed and
move forward if he does express any interest. I'd also
(32:56):
make sure that I knew what the market value of
the home current is based on comps of recent comps
there in the area, based on what Zillo is saying
that it's worth.
Speaker 1 (33:05):
Let's say, not just the zestament, but looking up to see, okay,
similar size, similar kind of homes he sent sales in
the past three months.
Speaker 3 (33:11):
Yeah, it does a pretty accurate job at predicting that.
But let's say, for instance, and this is in Denver,
so home values are pretty sky high. That's a Denver
reference for folks out there. But let's say this home
is worth eight hundred thousand dollars. Well, no matter what
your landlord bought it for, no matter what he sunk
into it, it's likely what he's going to want to
sell it for. Now, I guess don't don't necessarily expect
(33:33):
him because he got such a great deal on it
that he's willing to say, oh, I got such a
good deal on it, maybe I offer these guys a
deal because then, like you said, it sounds like like
he is an investor himself, and so it doesn't hurt
to ask. But I think there's honestly probably a slim
chance of him actually giving this up because he's this
is something that is doing.
Speaker 2 (33:52):
Well for him and his networth. But you never know.
But you never know, so go for it.
Speaker 1 (33:55):
You never know what the landlord. Maybe he's saying, Man,
these are great tenants, but I did have to do
a lot of improvements, and man, I am lacking liquidity,
and you know, I guess this rental property game. Maybe
it's not I'm not cut out for it like I
thought I was going to. Maybe this is his first
endeavor and he's realized that it's more of a headache
than he thought it was going to be. You just
don't know, right what the landlord is going through, where
(34:16):
their head is at, and the other kind of what
you were just saying there at the end, Matt, If
you're going to pay roughly market rate anyway, why would
they want to buy this house, and I would say
because of the reduction in fees involved in buying and
selling a home, because of your familiarity with the home already.
I think the way you're going to be able to
negotiate is by telling your landlord that you'll split the
savings of you know, reduced agent costs with him. He
(34:39):
makes market rate or close to it when during on
the sale, and he saves a few extra percentage points
as well. You too, right, you also save on that front, right,
And so if we're talking about a home, let's say
it's worth eight hundred thousand dollars, that's twenty thousand dollars
worth of savings, which is substantial. I think that's why
it's at least worth feeling this out right, especially since
(35:00):
you like the place, you have long term goals for it,
you are in the financial position to likely pull this
off without being over your head too.
Speaker 3 (35:07):
Yeah, Basically, you're appealing to the financial side of the
decision making matrix.
Speaker 5 (35:11):
Here.
Speaker 3 (35:11):
It's like, Okay, like I've realized some profit from those property,
Let's go ahead pull that profit out of that house.
I get to do something else with my money. But
on the other side, like there's so that's like the
financial lens to look through, but also like look through
the psychological or the emotional lens as well, and try
to figure out any potential pain points that he might
have as a landlord himself. Like you kind of mentioned
(35:33):
this sho like maybe this is his first rental property
and maybe he hates it. Maybe you can ethan it
sounds like y'all have a great relationship. Maybe you can say, hey,
we're great tenants. Not all tenants are great, or maybe
the tenants that were in here before, maybe you realize
that's not always the case. And if it's basically if
it's going to be a hassle for him to continue
to service and to essentially have a part time job
(35:54):
managing this property, that might not be something that he
wants to continue to do.
Speaker 1 (35:57):
And maybe he's thought about selling it and he's like, oh,
that's kind of a yeah, right, And so if I'm
gonna sell it, I have to get the house ready,
I gotta do I gotta pay landscape blah blah blah
blah blah all this other stuff to it. And like
that sounds like a big giant thorn in my side
as well. And so you're saying, hey, we want to
buy it, we want to take it as is. You
don't have to do any of those things to get
to get this listing ready. You don't have to spend
the money to get the pictures taken. And now, guess what,
(36:19):
at a certain price point, videos are a necessity too.
Now to mention the agencies, there's all these different things
where if it's even crossed his mind, he's going to
entertain if you're in the range of a market offer,
because like we talked about the reduction of fees, the
reduction in hassle, So yeah, I think this is definitely
worth pursuing. I want to mention too, I'd still get
an inspection if I were you. Yeah, you live in
(36:40):
the house. Sure you're familiar with the minor issues that
it might have, but you might not know about something
that's lurking beneath the surface. And I think it's worth,
that's true, the five hundred bucks or so to get
that inspection.
Speaker 3 (36:50):
There are still some professional services that are worth getting,
like even like, yeah, you're going to see a ton
by avoiding a realtor, but I think it would even
still pay to hire a real estate attorney as well.
Which is required only in something like half of all
states in the country. I'm not sure what it is,
Ethan there for you in Colorado, but that's not a
cost that I would skimp on just to make sure
(37:11):
everything is buttoned up well, especially if you're dealing with
somebody you know, you all have a great relationship, but
you just want to make sure that all the tea's
are crossed, all the eyes are dotted, and so even
if he's not willing he or she is not willing
to split that cost with you, that would be something
I would be more than happy. I guess not more
than happy, but I would be willing to pay out
of pocket one hundred percent myself. One thing I want
(37:32):
you to consider, Ethan, is to consider that you're saying
that it's going to be difficult for you to make
this work.
Speaker 2 (37:37):
There in Denver.
Speaker 3 (37:39):
If it was me, knowing what I know about rental properties,
I would want to make sure that you are doing
this because this is something that you want to pursue,
not just because it makes sense financially, because it is
harder to do these days, given where home prices are.
It is harder to do giving financing costs, mortgage rates,
and if that is all you're looking at, I think
you might be better served taking that money investing it
in the market like you've done. Y'all are in on
(38:02):
money gear number seven. But make sure you're doing this
for you, Like if you and your fiance are seeing
this as a way to put down roots and actually
we just love this house so much, we're actually not
going to sell it. We're going to end up renovating
this home. I think that that's a totally great reason
to purchase that home and to do all that you
can to purchase that home, because more than ever, it's
(38:22):
harder to get a great deal, especially on something like this,
given the market conditions that we're in.
Speaker 1 (38:27):
Last thing I think i'd want to say, I would
want to make sure that Denver was going to be
where I called home for a long time to come.
Speaker 3 (38:34):
Yes, that was a part of the renovation, like we're
going to live here forever, because it's kind of mindset
if you're thinking, oh, it is kind of expensive and
we're going to buy this, it'll be a rental property,
but then we might move to I don't know, Minnesota
because it's cheaper or something like that, or we've got
family there.
Speaker 1 (38:47):
Well, then you're talking about it being even less profitable
because you're hiring a property manager and just you're adding
a whole bunch of stress to that decision. So if
you decide, hey, this is a good rental property, we
want to buy it, living it for a while, then
we'll r it out, but we're just going to move
down the street and will self manage, I think that
adds credence to this idea. But I think if if
in the back of your mind you're saying, three years
(39:08):
from now, we might not be around, then I would
just keep renting and I would save up that cash
for a rental property in the next place I was
planning to move to.
Speaker 3 (39:17):
Totally Okay, I just thought of one other thing, which
is don't forget about the endowment effect, which is like
this behavioral psychological term that applies when something that you own.
In this case, you don't own it yet, Ethan, but
you're living there, you're renting it, so it kind of
feels like it's yours. But you might be valuing where
you are a little bit higher than maybe the next
rental property that you and your fiance are renting. Maybe
(39:39):
this is the first maybe up until now, you've always
lived in apartments and this is the first home that
y'all have rented together, and you're like, oh my gosh,
we're in a great stage of life. I want to
do this. How can I do this? Times five or whatever?
Just already like this property, maybe why not just ask?
But there are also other properties out there, So just
keep that in the back of your mind. I'm not
saying that that's completely driving your decision to once buy
(40:00):
that particular to play.
Speaker 2 (40:01):
The field in particular help, but yeah, keep your eyes open,
and there could be other great properties out.
Speaker 3 (40:05):
There, and you might find better deals by looking at
and better opportunities by waiting. Given again, the conditions of
the market that we're currently in. Point yeah, we hope
that gets you pointed in the right direction. And Joel,
we've got more to get to. We're going to take
a question from a listener who's asking about a foundational
personal finance metric.
Speaker 2 (40:21):
We'll get to that right after this.
Speaker 1 (40:30):
All right, we're back. This asks how the money episode continues.
Now it's time to get to the Facebook question of
the week. This one comes from Calvin, who says should
additional mortgage payments be considered when determining my savings rate, Matt,
the savings rate conversation continues, Oh, that's it.
Speaker 2 (40:46):
That's a short question the question.
Speaker 1 (40:47):
Yeah, And I like how short and to the point
this is. And it's a good question. And you and
I we have been talking more about savings rates and
it's more complex of an answer then. I don't know,
maybe I thought it was on the face, and then
you and I started kind of like having conversations about
what is included in your savings rate, and it started
to get a little nerdy, and it's gotten nerdy on
(41:09):
on the podcast, on this show. The short answer for
Calvin here, though I don't know, I'm curious to hear
if you see if you agree with me, Matt, I
think is yes. Many of the how to Money commenters,
interestingly enough, didn't seem to agree with my take on this,
and so I think, you know, while making an additional
payment or adding more to your monthly payment doesn't add
more money to your high yield savings account, so it's
(41:30):
not going to your savings. It's we consider paying down
debt as money that isn't being consumed, which means I
think of it as impacting your savings rate. So paying
off your credit card debt, it's another money move that
would also be included in your savings rate, even though
it's not boosting your cash on hand. Matt, does that
make sense to you? Agree with that totally makes sense. Okay, yes,
(41:51):
you're not increasing savings, but it does count as your
savings rate exactly.
Speaker 3 (41:54):
And this is this is taking the more zoomed out,
high level view of what it is that you can
do with your money, which is that your your net worth.
It's either growing or shrinking. Like makes me think of
like squirrels. They're either like eating an acorn or they're
burying it in the ground like slocking aside, setting it aside.
And so I think that's the best sort of filter
(42:16):
that you can run some of these questions through. Is
this making me wealthier or is this making me poorer?
But that doesn't mean that you don't need liquidity. By
the way, that this doesn't mean that you don't need
access to cash at all, because we don't want you
to start paying off your mortgage until you have some
solid savings on hand. Just because we include debt payoff
in your savings rate, that doesn't let you off the
(42:37):
hook or it doesn't mean that it's not incredibly important
to have cash on hand, cash in the bank that
you have access easy access to because you can't eat
your house because you know, someone would say, hey.
Speaker 2 (42:47):
Actually your bread houses right time. What about the heelock
you can actually eat your house.
Speaker 3 (42:52):
It's not very easy to do that, and it's not
cost effective or efficient.
Speaker 1 (42:55):
To do that. And if you're buying groceries with helock
money like you're doing it wrong.
Speaker 2 (42:59):
You're doing it folks.
Speaker 3 (43:00):
Paying off your home, while it is an incredible accomplishment,
it will take some time and it's just too risky
to put all your eggs in that basket, to the
exclusion of having a solid.
Speaker 2 (43:11):
Cash backup as well. So yes, it's part.
Speaker 3 (43:13):
Of your savings rate because it is money that you
could have otherwise consumed. But if your cash on hand
is tiny, if it's mini school, well you could still
be in a big mind if you don't appropriate your
funds properly.
Speaker 1 (43:25):
Yeah, I feel like that's a good answer. Yes, yeah, yeah,
council savings rate doesn't count a savings You still need savings,
you still need liquid cash.
Speaker 2 (43:32):
No matter what you're saving. It's just how do you
want to save it, right, Yeah.
Speaker 1 (43:34):
And you'd be remiss if you started paying off your
mortgage before you had proper savings on hand. But yeah,
once you do, that's a reasonable choice to make. But
as you know, also, Calvin, like, we're not fans of
early mortgage payoff. If you've got a locked in low rate, Like,
why would you want to get rid of it? Because
there are so many better things you could do with
that money, and especially with where savings rates are now
(43:57):
if you've taken out a mortgage more recently though, right,
And I think Calvin actually mentioned in the comments on Facebook,
Matt that his rate is six point twenty five percent.
The calculations change, okay, right, and it might make more change, right,
It's a higher priority if that's the case than it
is if you're one of those folks you took out
a three percent loan five years ago. The goals here, though,
(44:18):
are to make sure you aren't getting too risky, which
means not having enough liquidity while building your net worth,
which means debt payoff and investing both those things at
the same time. And one great way to pay off
your mortgage early without feeling like you're going overboard because Matt.
Some people are like, they are so averse to debt,
even low interest mortgage rate debt. They're saying, I've got
to pay off my home early. I think my favorite
(44:39):
way for people to think about doing that is making
bi weekly payments, because you're not really sacrificing other financial goals.
You end up making one extra payment a year thirteen
instead of twelve. If you make bi weekly payments and
so on a traditional thirty year mortgage, that can RaSE
roughly six years off the back end of your loan.
So I like that as kind of a way to
(45:01):
do it, a small behavioral tweak that does allow you
to accelerate mortgage payoff without feeling like you're shoveling cold
into a steam engine. You're trying to go as hard
as you can.
Speaker 2 (45:09):
That's true.
Speaker 3 (45:10):
I will say, though, as we're sitting here and you
mentioned six and a quarter percent mortgage rate, it doesn't
make me think, well, whatever where rate's going to be
in the future, and imagine if we are living in
a world five years from now where rates are even higher. Yep,
Like that's when the paying down the low mortgage, and
right now six point twenty five does not sound like
it's low, but it could be low. And that's when
(45:31):
paying extra on a mortgage like this, where you're locking
the money up. Personally, I have a hard time feeling
one hundred percent comfortable with that, even just making that
moderate additional payment, Like it's not like you're going balls
of the wall, going hardcore extreme by doing them bi
weekly payment thing, but even still, you're locking that money,
you're setting it aside, and it's not money that you can.
Speaker 2 (45:52):
Pull back out.
Speaker 3 (45:53):
And that's the part that makes me a little bit uncomfortable,
especially like when you consider the fact that how often
do Americans move. Yes, you will see the benefit of
eliminating that mortgage six years early.
Speaker 2 (46:04):
Is that what it is?
Speaker 3 (46:05):
Yeah, so twenty four years are you going to be
in that home twenty four years from now when the
average American moves.
Speaker 1 (46:10):
You'd still come out ahead if you sold, though, too,
because you would have paid down some of the principles.
Speaker 2 (46:13):
That is true.
Speaker 3 (46:14):
That's another tip, by the way, if you're doing this,
make sure that those additional payments are being applied towards
the balance, the principal balance, not as additional or prepaid
interest payments essentially, But even still, that's money that's just
sitting there in equity in that home, as opposed to
even just if it was socked set aside in a
highield savings account. Think about again the liquidity the options
(46:35):
that that gives you versus making these additional payments and
not even seeing your monthly mortgage amount go down unless
you get your mortgage recasted or something like that, which
costs money though. And so that's the thing I just like,
I really like the idea of if you're disciplined, sitting
on that money, having that money grow. And you know what,
at a certain point, if you feel that you know what, no,
(46:55):
I really do want to be done with this mortgage, man,
go ahead, pull the trigger, eliminate that mortgage completely. But
I think you might find in a couple of years,
like we're constantly changing and we're dynamic individuals, and you
might have different goals in a couple of years. You
might want to buy a different house, you might want
to fully fund your kids college savings. You might want
to start a new business, and these are all things
(47:17):
that having options in cash on hand afford you off
mortgage doesn't. You can't you can't start a business with
a paidoff house that's all you have. You have the
payoff and that's fantastic, and then you might need to
borrow against it at worst at a higher term exactly.
Speaker 2 (47:29):
So, yeah, you're right, I put you to have optionality.
Speaker 1 (47:31):
Liquidity is under is underrated, and I think especially with
higher savings rates these days, if you're if we're talking
about an eight and a quarter percent mortgage, different story, right,
but we're talking about six in a quarter, and it's
not ideal, but it could be worse. And you're you're
also right to point out, Matt that just because we've
recently seen rates in the three percent range in recent memory,
that doesn't mean like that we're likely to see those
(47:53):
rates again. Some people think we're heading back to those rates,
not before too long. I wouldn't bank on it, Like, yeah,
I don't know if that's the case, and what if
savings rates continue to go up, because yeah, I don't
want to get into all that, but like, it's you're right,
there's the bird in the hand, and I think the
bird in the hand is liquidity.
Speaker 3 (48:10):
And so the fact that you're able to get a
pretty dissent rate right now in savings let alone, actually
if you were to actually invest it in the market
over then you know, if you knew you were.
Speaker 1 (48:17):
Going to touch it for three four years, go ahead
and stick it in the market. But you mentioned one keyword, discipline.
You gotta have a discipline. If you don't have the
discipline to do the money, pay off the house yep,
and make those extra payments. Yeah, totally agree. But either way, yes,
it counts as your savings. Right, that was the beginning
of the question. All right, Matt, let's get back to
the beer that we had on this episode. This one
is called hammer Red. It's an amber ale by Sweetwater
(48:40):
Brewing Company in collaboration with the Georgia Aquarium right down
the road from US.
Speaker 3 (48:45):
Now, now, folks understand the naming convention. It's not a
hammer head. It's a hammer red. Yes, it's got a
hammerhead on the logo.
Speaker 2 (48:53):
Yeah, yeah, but.
Speaker 3 (48:54):
People can see that unless they're looking at her show
right right now. But yeah, which, I thought this was
pretty good. Had that nice kind of bready mouth feels
got that amber. I don't know, just the kind of
viscosity and thickness that you expect to enjoy when you're
drinking enjoying red, when you're enjoying an amber ale.
Speaker 1 (49:10):
I think those first red I ever had was Killions
Irish red. Oh dude, that's like not good, No, this
is I think that's the first red ever. You know,
one of my best memories with Killians is when I
was first getting into craft beer and I remember thinking, oh,
that's that sounds like something that's more interesting than Core's Light,
right or whatever. Macro pills was being made that I
(49:30):
was skipping over. But Kate and I were at the beach,
and I remember thinking, yeah, Killian's red, take that out.
Speaker 2 (49:37):
To the beach. It's rough.
Speaker 4 (49:39):
I think.
Speaker 2 (49:40):
I think that's what I.
Speaker 3 (49:40):
Learned, that, Oh there's the right place and time for
different types of beers. And for me, yeah, red Ale
out on the beach wasn't wasn't hitting the spot for me.
Speaker 1 (49:48):
The other beer people confused with craft beer far too
often is blue Moon. Sorry, guys, not craft beer, not.
Speaker 3 (49:55):
Even taste, which again, back in the day you're probably like, oh, yeah,
this isn't bud Light. But at the same time, it's
not the most interesting of Belgian wits.
Speaker 2 (50:03):
Out there either.
Speaker 1 (50:04):
No, it's not all right, Matt, that's gonna do it.
For this episode, we'll put links to some of the
resources we mentioned up in the show notes on our
website at howtmoney dot com.
Speaker 3 (50:12):
That's right, and we will see you back here on
Wednesday with our conversation with Dan Otter.
Speaker 2 (50:16):
And here's a little teaser. Dan's a man after own heart.
If it was a different year, different location, I could
see him being like a even almost like a third
co host. He's a good guy. All right.
Speaker 3 (50:26):
That's gonna be it for this episode until next time.
Best friends are best friends out.
Speaker 2 (50:42):
This is like a fundraising beer or something like that.
Speaker 1 (50:44):
I'm sure it is, ye
Welcome to Out of Money.
Speaker 2 (00:01):
I'm Joel and I am Matt, and today.
Speaker 1 (00:04):
We're answering your listener questions.
Speaker 3 (00:24):
That's right, man, it's Monday, and we hope that we
are able to help you kick off your week. We
are excited to hear from listeners, to hear their financial
quandaries that they find themselves in.
Speaker 1 (00:34):
Joel, what's better than our two voices in your earbuds
on a Monday morning, sting on.
Speaker 2 (00:37):
A Monday morning.
Speaker 3 (00:38):
Lots of other things, That's what my wife said, Lots
of other things. Yeah, but we are thankful for all
of you listeners out there. We've got a question from
a listener who is asking about his savings rate, specifically,
like what goes into a savings rate? And we've got
maybe an easier just like if you zoom ount, we're
gonna provide an easier way of thinking about your savings rate.
(00:58):
Another listeners asking you about some of these new sites
that are cropping up that allow you to easily tap
your home equity, whether or not that that's something that
they should utilize. Another listener, she's actually she's lost a
chunk of her retirement funds. It came as a shock
to her. So I'm actually pumped to talk about that
and just to help other listeners to prepare for this
(01:19):
inevitable outcome.
Speaker 2 (01:21):
I'm just gonna leave it like that.
Speaker 1 (01:22):
I'm hanging on the edge mat. That was a good tease.
Speaker 2 (01:26):
Oh you like it? Yeah, OK, very good.
Speaker 1 (01:28):
So, yeah, there's an interesting conundrum that this listener finds
herself in. We'll talk about that and more. One great
thing that a different listener wrote in about that she's experienced,
and I don't know that we've ever mentioned this specific
We've been talking a lot about We talked regularly about
the library.
Speaker 3 (01:42):
How to you know, the free service berriers that you
can pick up at our local library at least. Oh
you've talked about that, free trees outside, that's true, but yeah,
free books obviously, But then there's a bunch of other
things there are, even like seed libraries at library. I mean,
there's like so many different things that libraries have branched
down into and they can be money saving and also
a great place to spend time, specifically with kids. There's
(02:05):
like a play kitchen at our local library that my
kids love and we'll go there just like hanging out
the basement.
Speaker 2 (02:10):
Yeah, lower level.
Speaker 3 (02:11):
Well, dude, especially this time a year when you're looking
for things to do that don't involve being outside in
the scorching heat. The public library offers free air conditioning.
Speaker 2 (02:21):
But like legit, that's.
Speaker 3 (02:23):
Yeah, we're spending more time at the public library as well.
Speaker 1 (02:26):
Yeah, you can bump up your AC, turn it off
for a minute, and had to head the library. Well,
that was not what I was going to comment on,
although you're right that is a good place to stay cool.
Speaker 2 (02:35):
It's fun classes during this heat wave. Community. Yeah, there's
lots of great things.
Speaker 1 (02:39):
Something in public library or something else, because I think
recently mentioned about signing up for Consumer Reports to get
reviews of something, or let's say you're looking for reliability
features of your of an automobile you're considering purchasing. Consumer
Reports just has like the data on it. They have
the biggest, the best data Matt when it comes to
their cars and just given all their subscribers.
Speaker 3 (03:01):
Mike Quincy, that's an interview that we had. This is
I guess a couple of years ago, but he talked
about just how in depth they go when it comes
to reviewing their vehicles, especially from from not only from
the readers. But then also from their road testing that
they do every vehicle. They pay for the vehicles and
they put them through and they don't tell them that
they are that they're with Consumer Reports. That's one of
the most fascinating things from from that interview, the fact
(03:24):
that they kind of walk in as unassuming individuals. That's
why who are looking to purchase a vehicle, so that
way they don't like the super nice one that they
know has been that they've gone over with a fine
tooth comb exactly ensure that's not element.
Speaker 2 (03:36):
That kind of thing.
Speaker 1 (03:36):
Well, you can get Consumer Reports from your library, by
the way, and we've there to go that recently, so
it was a big build up and you get it
digitally or physically whatever you prefer. But yeah, you can
get it on the libby app or you can run
into your library and snag a copy. But because I
don't know, Consumer Reports cost twenty something dollars a year,
and honestly, it's it's worth it if if you like
(03:58):
the material they put out, because it is kind of
unbiased information that comes out of Consumer Reports. I trust
everything comes out from them because of their process. So
it's a crucial part of what they do. And so yeah,
love consumer reports. But if you're like, I don't know,
want to be frugal, grab it for free from library.
Speaker 2 (04:16):
Absolutely, yeah, it makes sense, especially if you're already going
to be there because you're there to pick up other
great perks like free passes to your local zoo or
to a local museum, that kind of thing.
Speaker 3 (04:26):
They seriously, your local library has way more resources than
you're probably thinking, I think, And we always talk about books.
Speaker 2 (04:33):
Yeah, because we're nerds.
Speaker 3 (04:35):
We are trying to get smarter, and one of the
ways you do that is by reading more books. The
fact is, though not everybody out there likes the read books,
and that's totally fine, and so because of that, Because
of that, I think there might be a lot of
folks who they hear us.
Speaker 2 (04:46):
Talking about the free public library and it's not.
Speaker 3 (04:48):
Free, by the way, because you pay with your taxes,
but they just tune us out once we start talking
about the library.
Speaker 2 (04:53):
But there's all you can rent movies, there's all sorts
of awesome stuff.
Speaker 1 (04:57):
Oh, we go in there, we get so on our
every road trip, we run in the library before we
go the DVD player and get the DVD player. But
we also even more than that is that they have
these things called play aways, So because they don't know
what that is. So the kids don't have uh smartphones
where they can like listen to stuff.
Speaker 2 (05:13):
On Libby right respect Yeah playways.
Speaker 3 (05:16):
Well it's a bummer that I guess they don't. They
can't listen to an audiobook right, their own personal audiobook.
Speaker 1 (05:20):
Except for they can with playaways. So playaways are audiobooks,
but the specific book it's kind of like a digital
version of a cassette tape proceeds that you would have
had back in the day for a book. And so yeah,
we'll load up get a few of the playaways. Kids
can plug their headphones dirrectly in and they've got books
to listen to on the way And I.
Speaker 2 (05:37):
Didn't even know about that.
Speaker 1 (05:38):
It makes the best card trip ever if they've got
the playoways on hand, because they will sit there contented
for hours listening to their books.
Speaker 4 (05:45):
Yeah.
Speaker 2 (05:45):
Wait, so is it a singular device that they can
all plug into.
Speaker 1 (05:49):
No, it's for every single separate Yeah, they've each got
their own books.
Speaker 2 (05:52):
I guess you can get your own splitter. And let's say,
for instance, you two out of four.
Speaker 1 (05:55):
Kids or whatever wanted to listen to the same book. Yeah,
it's brilliant.
Speaker 2 (05:59):
That's you.
Speaker 1 (06:00):
Yeah, I love it all right, a few library facts
come in your way. I hope that helps.
Speaker 5 (06:05):
Matt.
Speaker 1 (06:05):
Let's mention the beer we're having on this episode. It's
called Hammer Red amber Ale by Sweetwater Brewing. We'll give
our thoughts on this one at the end of the episode,
but let's get to the listener questions. And if you
have a money question, we'd love to tackle it on
an upcoming ask htm episode. Just got a hot money
dot com slash ask for the simple instructions or I
don't know, just record it on the police MEMDMO app
of your phone, send it to us via email, and
(06:25):
hope to take it next week on the show. Let's
get to the first one, Matt. This is about newfangled
ways of tapping your home equity.
Speaker 5 (06:33):
Hi, guys, Stanley Poe here on the North coast of America,
the Great Lakes region. Having had a helock loan years
ago and paying that off, I'm not too excited about
doing that again, but we are looking at potential options
for financing a home improvement project. One thing I came
across just recently is home tap dot com. Home Tap Equities.
(07:00):
No excuse me, Home Tap Investments Incorporated. Wondered if you
knew anything about those folks. As far as I read,
it looks worth looking into. But looking for your sound
advice home tap dot Com. I'll hang up and listen
for your answer.
Speaker 3 (07:18):
Thanks all right, Stanley, thank you for your question. And
first things first, know that you are not alone here
when it comes to considering tapping some of that home
equity in order to do anything with it. I feel
like I'm getting calls like every other day, Joel har Yeah,
it's just like, hey, by the our guess it's calls,
but it's also mailers, it's emails. It's just they're hitting
(07:39):
you on every single front where. It's just like, did
you know that you've got all this equity that is
available to you?
Speaker 1 (07:44):
By the way, you know that you're loaded?
Speaker 3 (07:46):
Yes, Like they are just reminding you of how much
cash that you're sitting on. And Americans like they we
have a record amount of home equity these days thanks
to the rapidly rising home prices. We are talking like
literally tillions of collective dollars is at our disposal. Although
I will say that that quick rise and home equity
and home prizes. It has stapered off, right, because we
(08:07):
saw it skyrocket in twenty twenty, basically around the time
everyone started getting stimmy checks. Yeah, and oh my gosh,
it blew up. But then starting in twenty two it
slowed down a little bit. It's a bit of a question. Yeah,
we'll get to the specifics of your question, Stanley, But
for most folks, we want to highlight the fact that, oh,
this is such a great thing. We've all got so
much equity in our homes. But the best thing to
(08:29):
do is just to pretend that that mountain of money,
that mountain of home equity that were that a lot
of us are sitting on, that it doesn't exist. Because yeah,
it makes you feel a lot wealthier, and you are
wealthier on paper because of that. But using your home
as a piggy bank where you're rating it for the funds,
I think that's a bad idea for the majority of
(08:49):
the time.
Speaker 1 (08:49):
Yeah, at least that's true. I mean, Stanley is planning
on using equity dollars for a fairly defensible reason though, right,
and that's to sink those dollars back into his home
in a form of improved and how there are a
lot of people who use home equity in a lot
worse ways than that, And so when you're talking about
that's also a tax deductible reason to use a home
equity line of credit, there are other ways you could
(09:11):
use that home equity line of credit and you wouldn't
see a tax break for doing so. So I am
okay with using home equity lines of credit within reason
for the reason they're most intended for. But also I
would say, don't assume that the dollars you spend are
going to come back to you in the form of
additional home equity. The truth is almost no upgrades you
make are going to increase the value of your home
(09:33):
commensurate with what it costs to do that addition, or
to you know, make your kitchen look more beautiful. It's
certainly okay to take out some helocked dollars to make
some of those improvements, with a caveat that you're making
those improvements because they bring you joy, right that you
plan on being at home for a while.
Speaker 3 (09:49):
Do it for you, do it for not because don't
justify it by saying, oh, this is going to increase
the ho villues. Because it will but like you said, Jill,
it's not certainly not dollar for dollar.
Speaker 1 (09:56):
And we talked what recently Matt about how the if
you change yourage doors, that's one of the very few
improvements that pays off, like more than the value of
what you put in.
Speaker 3 (10:04):
Should we mention listener Greg his tip about the garage door. Oh, yeah,
it was a great tip to do that.
Speaker 1 (10:09):
Yeah, So basically what he was saying was paint your
garage doors a faux wood color. And that actually is
like an eighty dollars solution to changing out your garage
door instead of like replacing the whole thing and spending
thousands of dollars, just do that one simple thing.
Speaker 3 (10:24):
Which will go a long way replacing the whole thing.
But yeah, I don't know why that's literally when he
sent that in first of all, so he sent before
and after pictures as well, it looked good. Oh, it
looks so good because I don't know, like maybe the
first time you hear that, you think.
Speaker 1 (10:36):
Eh, faux wood paint sounds.
Speaker 2 (10:37):
A little cheesy.
Speaker 3 (10:38):
But when he said the picture of it, it looked amazing,
so much so that I afforded it to my wife
because we've been literally we've been trying to figure out
what we're going to do in this in a similar situation,
like one hole side of our house is basically this
giant white garage door on a white house, and I'm like, oh,
wait a minute, we could paint the stupid thing and
that would go so even just a solid color. Like
it's not something that's really crossed our mind, and we're
(10:58):
not necessarily looking to increase our home value necessarily, but
it could go a really long ways and making it
look nice. Yeah, Like that's why it by default does
make your home values go up because it looks nicer, yeah,
than it does if.
Speaker 2 (11:09):
It's just been in the same color as the house.
Speaker 1 (11:10):
So that's like anyway that eighty bucks is more than
going to pay for itself.
Speaker 4 (11:13):
Oh yeah.
Speaker 1 (11:14):
But most of the time, whatever you're trying to do
to your home, do it for you, and do it
because you can afford to do it, not because you're hoping.
That's exactly you're banking on the fact that, hey, if
I take this money out push it into my home,
then now my home is going to be worth just
as much, if not more than what I put into it.
Speaker 2 (11:28):
Totally. Yeah, And here's the other thing.
Speaker 3 (11:30):
Most helocks, they come with a variable rate, and those
rates have gone up significantly in recent years, making that
decision even more fraud even more costly. And so if
you're looking at getting a helock, you might have a
rate that potentially even starts with a nine, unless, that is,
you opted to go with one of these new fangled
services like home Tap. And that's what Stanley is asking about.
(11:54):
Their pitch is that you can access some of your
home equity without taking on a loan, which sounds pretty nice,
but of course there's a catch instead of saddling, because
what they say on the website is like, it's not alone.
They don't stick you with a monthly payment. Instead, what
they do they take partial ownership of your home instead.
They're essentially in the whole pitch. The whole idea is
(12:15):
to oh.
Speaker 2 (12:16):
Man, we're gonna make this as easy as possible for you.
Speaker 3 (12:19):
Oh you know all those hoops you have to jump
through where you have to get a credit check. Oh
your credit's not so great, Sorry, you don't get the
heel act. They're like, no, no, no, we don't ask those
kind of questions. All we do we just take a
stake in your actual home.
Speaker 1 (12:30):
Ye to me, like, this is a scary uh form
of borrowing because you're not just borrowing, like you said, Matt,
you're giving up ownership rights to a portion of a
percentage of your home. You're taking on an investor, which
to me sounds like a terrible idea. It's got like
ursula aerial tendencies, right, it's the in exchange for those
(12:51):
feet give me your voice. Yeah, and obviously aerial comes
off fine in the end. Spoiler alert if you haven't
seen heads up, though, you don't always come out ahead
right exactly? What makes you think of the like fintech companies.
When fintech companies first started kind of coming into bogue,
Acorns was one of those first ones. They were helping
people solve problems, and there were really good ones. They're
budgeting apps and stuff that really do a lot of
good for people. But what about those apps that help
(13:12):
you get paid early? Those seem really nice too. And
there's all sorts of fintech apps like like earn in
or whatever who say, oh, yeah, I get your paycheck
a few days early, get paid on the day you
work instead of waiting for your paycheck to come through
a lot of fintech companies. Now you have to watch
out for the products because in the fine print it's
not nearly as good as it seems on the marketing material.
(13:32):
Because yes, now you're home, you've got an investor attached
to it. If you go with a company like hometap
and there are other companies in this space too, they
stand a benefit when your home goes up in value,
taking a piece of the proceeds when you sell your
home in the future. So for example, if you borrow
twenty percent of the value of your home, they add
a discount value to their investment, meaning they'll get a
stake that's larger than twenty percent, maybe like twenty five percent,
(13:53):
could be even more than that. And then if you
use those funds to improve your property, they're winning with
every renovation you make. And while you don't have to
pay them back on a monthly basis, there's a ticking
ten year clock. So yes, you're right, like you don't
have a monthly obligation like you do with a helock,
but they're gonna still want their payback and they want
it within a decade. And then if you don't have
the money, because they're part owners, they can force the
(14:15):
sale of your home at that point in time, so
basically within ten years, you got to pay them back
a big, pretty penny. If you don't have the cash,
they might be able to say, all right.
Speaker 3 (14:23):
We need our cash yep, and we own a portion
of this house, forcing it to go to sale.
Speaker 1 (14:27):
Yeah, hey, Stanley, let's put that on the market. And
you're like, no, I still like this place, and it's like,
you know, we do two.
Speaker 6 (14:33):
For the part.
Speaker 2 (14:34):
Yeah.
Speaker 3 (14:34):
But then on top of that, there's fees on the
front end as well. There's a three and a half
percent fee off the top. There are appraisal fees, title charges,
government courting charges as well. Many banks and credit unions
they will allow you to avoid those fees completely when
taking on a heelock, not with home tap, Like, yeah,
the more you read into the details, the worse it
looks like. I wouldn't necessarily go as far as to
(14:56):
say that this is predatory, but it's close because the
folks who are wanting to borrow from their home but
they can't afford the monthly payments. I feel like the
magic of home tap is the fact that the downsides
are way far down the road. Yeah, and what it
reminds me of what it mirrors, essentially, are like credit cards,
where it's just like, oh, you don't you can't handle
the cost of buying this thing, not just oh just
(15:18):
stick it on plastic, or just tap your card buy
not pay later, just double click that home button face
ID recognize boo vibrates in your hand.
Speaker 1 (15:28):
I love that, by the way, it's so great. It's
like bupple stealskin.
Speaker 2 (15:31):
Yes, But here's the thing.
Speaker 3 (15:33):
With credit cards, though you like you realize the error
of your ways in thirty days, Like it doesn't take
long for you to be like, oh man, I don't
really like that, Whereas with this, like you don't realize
how royally you've been screwed potentially for a decade. And
that's what's so crazy, is I mean, so what the
majority of Americans net worth is tied up in their homes.
(15:54):
We don't like that that's the case, but that's just
the case. And if potentially in a decade, you're giving
up a quarter of that growth down the road, you know,
if not more to this company that you signed your
soul away ten years prior, Like, that's to me, that's
the biggest downside is folks might be signing up for
this without completely realizing that's what they what they're what
they're giving away way off down the future.
Speaker 2 (16:15):
That's exactly right.
Speaker 1 (16:15):
I mean, this is I don't know that I would
call it predatory. I don't know that I would go
that far, but I would say.
Speaker 2 (16:20):
That it's close.
Speaker 1 (16:21):
It's very close predatory adjacent probably, And so I think
people who want to borrow from their home but they
can't afford the monthly payments, they're going to find this
appealing that people who can least afford to oh, home
Tap ten years down the road a massive sum of money.
And then you know, taking on an investor in your
primary home means you know, appreciation is going to be
split as your value grows. This is one of those
(16:43):
things it sounds too good to be true, and the
fine print reveals that it is. Like I just I
get why people might be attracted to something like home Tap,
but when you dig into the details, it's a turd
with gold spray paint on it.
Speaker 3 (16:57):
And you know, you mentioned there's other companies there in
the space as well, Joel, but we've seen a massive
increase in home equity, so there should be no surprise
that there are going to be new companies innovating and
trying to find ways to tap into this.
Speaker 1 (17:09):
How do we profit from this boon in home equity?
Speaker 3 (17:11):
Yeah, and what there's money to be made market and
encourage people in fact to tap the money they have
in their homes totally. And because of that, I feel
like it's it kind of has like some Wild West
elements to it where we're still figuring some of this out.
Ideally Stanley and anybody else out there who has a
home project that they're looking to accomplish, Like you're gonna
want to save up, you want to pay cash for
(17:31):
those improvements that you want to make, But if you
can't wait, we would say shopping around for a regular
helock is going to be a much better plan. I
think one of the other things I like about helocks too,
is like it's just more gradual. It's more akin to
credit cards, right where you kind of immediately feel the
pain of that, Like you get your heelock, Okay, it's
sitting there. It's just kind of waiting on you right,
like you haven't even pulled this. I like helocks even
(17:54):
better than home equity loans, even though home equity loans
tend to have lower rates because when you take out
a home equity loan, you've got a big old chunk
of money. It's kind of burning a hole in your pocket,
like to.
Speaker 2 (18:03):
Use it all. Whereas with the helock, it's there.
Speaker 3 (18:05):
If you need it. We pull some money out. Oh,
we're starting to make interest payments on that. You can
easily gauge how that makes you feel. Yeah, Instaney even
mentioned that right earlier. He's just like, Oh, this is
something that I've done in the past. I definitely don't
want to do that again. He's trying to avoid that
downside feeling. But with home tap you avoid that feeling
all together because you're kicking it ten years down down
(18:26):
the road, off into the future, and which at that
point is too late. It's too late to make any
changes to what it is that you've done with that money.
You did something with that money ten years.
Speaker 1 (18:33):
Ago, A decade later, it's like in an anvil dropped
on your head. Yeah, and almost unsuspecting because you remember
what you signed, you know, ten years ago, I guess,
but maybe vaguely. I barely remember what happened ten years ago.
Speaker 4 (18:44):
Matt.
Speaker 1 (18:45):
My memory, my memory sucks, and so yeah, I just
think that this is this is one of those products
that should be avoided at all costs, and I would
rather forego any sort of improvement. I would rather take
out a regular helock. I would rather take longer to
save up the money all of the above than do
any sort of deal with one of these companies that
wants to take a portion of my home and own
(19:06):
a percentage with me. No way, Jose. It's different than
a traditional mortgage in that sense where yes, you're not
the full owner of your home until you fully pay
off that mortgage. But a traditional mortgage is something that's
easily understood and it's not nearly as egregious as this is.
Speaker 2 (19:19):
That's right, Okay, we've got more to get to.
Speaker 3 (19:21):
We're gonna hear from a listener who is considering an
innovative way of purchasing his first home.
Speaker 2 (19:26):
We'll get to that and more right after this.
Speaker 1 (19:35):
All right, we're back, and we've got more of your
money questions to get to, including that one about an
interesting way to potentially buy your first home. But Matt,
now we've got to get to a question about cashing
out a retirement account and finding you didn't get as
much money as you thought you were going to.
Speaker 5 (19:51):
Hi.
Speaker 6 (19:52):
My name is Evelyn. I'm from Los Angeles, California. I
took out one hundred thousand dollars this year out of
my four h three B two buy a house. They
socked me with a twenty eight thousand dollars tax bill,
which they just took right out of the rest of
my four H three B. I was wondering, is there
any way I'm going to be able to get that
(20:13):
back next year. I will be retiring in twenty twenty five,
if that helps, and I am in my seventies. Thank you.
I love your show. I learn something every week.
Speaker 3 (20:27):
All right, Evelyn, thank you for saying that. Very glad
that the show has been helpful, not only for folks
who are maybe just starting in their careers, which is
a lot of our listeners, but even for folks who
are reaching the end of their working career. And actually,
let's dwell on her age here for a second, because
she said that she's in her seventies. This is really
important because what I'm highlighting here is the fact that
(20:48):
we're not talking about a four h three B loan.
We're also not talking about tapping a four to three B.
Early we're talking about distributions like these are Evelyn's retirement
savings that she has socked away within her fourth three B.
Speaker 1 (21:00):
This is the intended time, Yeah, exactly exactly, the government
apportion time to take that money without taking a tax
hit or a penalty for withdrawing those funds, because after
fifty nine and a half, it's all fair game, doesn't
mean And it's funny, maoun. I've talked to people before
who they think retirement money. They reach retirement and they're like,
let me add it, and they want to like gobble
(21:20):
it all up really quickly. No, it's meant the last year,
whole retirement years, right for decades, but still at least
now you don't it doesn't come with those those penalties
attached to it. So let's talk about Evelynce four or
three B. Why did they withhold tax which she took
money out out of it? Well, it's because the company
that manages your retirement account, Evelyn, they don't want you
to get caught flat footed at tax time, and more
(21:42):
than your company, the irs actually makes this mandatory. So
they're really the ones if you want to yell at somebody,
although I don't know matter if you've seen a those
stats about people getting the IRS on the phone, it's
like impossible, somebody lower than ever, something like one in
five people are able to get through to somebody at
the IRS, and when they do it they wait hours.
So don't don't bother calling. But this is this is
a mandatory thing. They're the ones who want to make
(22:03):
sure you're prepared for the tax bill, which is why
they make your retirement provider that company withhold that money
on your behalf. So if you've contributed to that four
or three B with pre tax dollars, you're going to
owe a decent chunk of tax in April. But if
you ended up spending all the money you took out,
you could find yourself in a buying come tax time. Right,
Let's say they did float you all of the money
(22:25):
that you requested, and you spent all of it, and
then tax time comes around. The IRS is saying is
holding out their hands, please pay us, and you're like, hey,
we'll have any money. That's why they do this. So
withholding taxes from your withdrawal is basically a way to
prevent that from happening to you.
Speaker 2 (22:39):
That's right.
Speaker 3 (22:40):
Yeah, And Evelyn asked about getting that money back. Well,
you're not going to be able to get that full
twenty eight thousand dollars back that was withheld. But depending
on your actual income this year, there's a chance that
you might find that you get some of it back
when you file your taxes.
Speaker 2 (22:56):
But it's not likely.
Speaker 3 (22:58):
Because given two things that you may mention, the fact
that she's still working, so she has her the income
that she's normally used to, but then on top of
that the money that she took out as well.
Speaker 2 (23:07):
But what we're talking.
Speaker 3 (23:08):
About here, though, Evelyn, is the difference between taxes and fees.
Speaker 2 (23:12):
Right, there's no way to avoid.
Speaker 1 (23:14):
Taxes, like I guess the hsaying, but well, yes, but
it's only the tax code.
Speaker 3 (23:20):
It's the loopholes that the IRS has created. If you
follow the rules, Yeah, there are ways to avoid taxes
in that way, but if they have basically outlined that're like,
oh no, this is income tax like youos taxes, it's
not something that it's not like you can get on
the phone with the IRS. You're one of the five
people that makes it through and ask them politely, hey,
is there a way that we can just kind of
wave that twenty.
Speaker 2 (23:40):
Eight thousand dollars.
Speaker 3 (23:42):
It's not like a credit card angel fee where you
call them up and you're like, hey, I don't want
to pay this anymore and they're.
Speaker 2 (23:46):
Like, wait, wait, wait, don't leave. Well, let's just wave
that for a year. We'll cut that for you.
Speaker 1 (23:51):
So, while yes, the tax man always gets his money
and it kind of stinks to take on one hundred
thousand dollars and only get eighty thousand dollars of it,
you won't be nearly as shock to come April. And
if I were you, I would also allow that to
be like a little bit of a bomb that hey,
maybe you've got better terms. You were able to buy
this house that you're going to be in for many
(24:12):
years to come, and your diligence in saving and investing
for your retirement has paid off at this point in
time to allow you to use those funds in a
wise way to provide that roof over your house for
a long time to come.
Speaker 3 (24:25):
Yeah, I think the biggest lesson learned here for Evelyn,
but then also for other folks is to have a
plan with it, Like when it comes to how it
is that you are going to draw down on your
retirement funds goes a really long way, because, like we
were talking about earlier, how there's you know, most likely
she her tax rate probably went up, right, because again
she is currently working, she's still is she a teacher?
Speaker 2 (24:47):
Is that what she said?
Speaker 3 (24:48):
And she's thinking about retiring maybe after twenty twenty five.
And so she's got her regular income that she's used
to paying. But then on top of that she one
hundred thousand dollars chunk. That's a huge amount of money,
which more than likely bumped her up to an even
higher tax bracket. And so to have a plan of
how it is that you want to approach pulling that
money out could save you a good amount of money,
(25:09):
not just in the amount of money that's taxed at
the higher rate, but even just money that's taxed at all.
Because I think, like she said, it doesn't matter that
she pulled the money out right for a home purchase.
She could have just pulled it out because she wanted
to go on some global trip. That's fine, it's at
least the home purchase. It's her money, Yeah, but at
least the.
Speaker 1 (25:23):
Home purchase potentially allows you to get better terms and
saved money, whereas yeah, yeah, the trip, it's like put
it off just a little.
Speaker 2 (25:30):
True.
Speaker 3 (25:30):
But ultimately, Evelyn, you can do what you want with
your money is your money. But the fact that you
did use that to buy the house, like I would
have taken out as much money as possible before getting
bumped up to the next tax bracket, and then personally
I keep it pretty fat emergency fund on hand, but
I would have rated the heck out of my savings
account just to find any spare dollar that I could
(25:51):
find to put towards that down payment, knowing, well, if
worst comes to worst and I need to tap some
additional funds because there is an emergency, oh well, I've
got my retirement. Is that I am not going to
get hit with a ten percent penalty because I'm withdrawing
it early. No, In fact, these are my retirement dollars.
I can use them how it is that I would
like to use them.
Speaker 2 (26:09):
But the whole name of the game is avoiding tax
as much as possible.
Speaker 3 (26:12):
Yes, and avoiding the years in particular where you're going
to have an elevated adjusted gross income and you just
unfortunately experienced a year where that was much higher than usual.
Meeting that you paid more taxes than you otherwise would have.
Speaker 2 (26:23):
Yeah, so those are the kind of years that we're
trying to avoid.
Speaker 1 (26:26):
Here, and I think from here on out the four
percent rule, using that as a rule of thumb at
least to help you figure out how much money to
take out and give in your grain. And this is
an extenuating circumstance, right buying a house. This isn't probably
not gonna do that next year or the year after exactly. Yeah,
having done this, but yeah, ultimately we just don't want
you rating your account because you're done with work or
you're soon to be done with work. Just a smart
(26:47):
withdrawal strategy will help you minimize that tax burden exactly
over the coming years. And by the way, Matt, coming
up on Wednesday, we're going to have a conversation with
Dan Otter, who runs the nonprofit four or three bys
dot org. So if you're a teacher, if you have
teacher friends, make sure they listen to this episode. Dan
Otter has so much wisdom on minimizing the fees when
you're investing in a four H three B as an educator,
(27:10):
and ultimately a lot of advice too on how to
retire rich as someone who is a teacher in K
through twelve. That might sound like an oxymoron, but Dan
says it's not, so I'm looking forward to that combo.
Let's get to our next question, Matt. This one comes
from a listener who wants to buy a house, and
he's got an interesting way he's trying to go about it.
Speaker 4 (27:28):
Hey guys, my name's Ethan, and I'm a big fan
of the podcast. The information you put out there is priceless,
so huge. Thanks for that and hope you keep it up.
I'm currently renting a house with my fiance in Denver.
We love the house and have a great relationship with
our landlord. I am eager to get into real estate
and have been thinking about asking my landlord if he'd
be willing to sell. We would intend to live in
the house for two years to avoid capital gains tax,
(27:49):
and rent it thereafter. I'm pretty confident it would rent well.
We are both on money Gear number seven and are
probably ready to take the next big step with our finances.
I'm thinking that buying from our landlord would be a
great way to get a deal off the market and
skip some realtor fees. Plus we know the house well
because we're living in it. My main hesitation is due
to the inflated Denver real estate market. You can find
(28:12):
the same size house in other cities for three fourths
of the price. Denver is attractive right now, which adds
to my rentability confidence, but the high price may make
it very difficult to cash flow. Our monthly payments will
definitely be more than our monthly rent, so I'm curious
what you guys think about the idea and if there
is something else I should be considering first. I am
(28:32):
also curious how we should bring this up to our
landlord in a way that is both thoughtful and respectful.
He only recently purchased the house for below market value,
and he probably put about fifty K into the house
before renting it out. How do we make sure that
we are offering the right amount for the house? Are
there any other favorable offers we could pitch to him
to increase his chances in selling to us. I'm not
(28:54):
sure if my landlord would even be willing to sell,
but I want to go into this well educated in
Any advice you can provide from the landlord's point of
view would be greatly appreciated.
Speaker 2 (29:04):
Thanks Matt.
Speaker 1 (29:05):
Is this one of your tenants trying to buy it?
Speaker 2 (29:07):
Actually?
Speaker 3 (29:08):
I was going to ask you if you've ever had
tenants ask you, you know, a question like this where
they're like, Hey, would you ever.
Speaker 2 (29:13):
Consider selling to me? I you have?
Speaker 1 (29:15):
I think, right?
Speaker 4 (29:16):
I have you?
Speaker 2 (29:17):
Or have you not?
Speaker 1 (29:17):
Okay, No, I don't think I can remember. I've never
had anyone ask me that question. I'm kind of surprised.
So well, I did have one couple they moved right
around the corner, and so like, they love the neighborhood,
and they kind of mentioned it in passing, but they
didn't seem super serious about it.
Speaker 3 (29:31):
Okay, So I have some tenants that did that did
a very similar thing, like literally you could see from
the front ports of the rental to the house that
they purchased.
Speaker 2 (29:39):
Yes, and they love the neighborhood.
Speaker 3 (29:41):
And even if that's y'all, like, I don't see why
you wouldn't at least try to reach out to your landlord.
Try to have the conversation, see if you can buy it.
You would be a good judge as to whether or
not it would rent. Well, you're you're currently renting it,
you're currently loving it. Enough to want to buy it,
so that's a check mark on the side of actually
going through with it. You mentioned cash flow, keep mind
that that is not the only benefit of owning real estate,
(30:03):
because of course, in higher cost cities you might lose
money every single month but still be making a wise investment, Totael. Matt,
that's thanks to the appreciation of the property that you
will be able to realize over time. So like you
do need to know that you need to have the
mental and you need to have the financial fortitude in
order to be willing to lose money on a consistent basis.
(30:25):
And this is certainly more of a long term approach,
but I think it's one that could make sense for
some folks. And it sounds like in your case, like
you mentioned avoiding capital gain, so you do want to
live in it for at least two years before transitioning
it to a rental, so you're at least looking at
a five year timeframe, which I think.
Speaker 2 (30:42):
Is pretty healthy.
Speaker 3 (30:43):
Yeah, I'm encouraged by the fact that he's not saying
I want to buy and then in a year or
two I want to flip it.
Speaker 1 (30:48):
And basically so what you're saying too, Matt on the
cash flow versus appreciation thing. It's really important to recognize
that because I have a friend who recently texted me
and he's like, Oh, I'm thinking about buying this triplex
in this random location in Texas, and the numbers worked
from a monthly cash flow perspective, it more than exceeded
the one percent rule, which is awesome. The one thing
you have to realize, which means, by the way, that's
(31:09):
going to be profitable regularly and ongoing. The downside of
investing in a property like that is the appreciation is
going to be minimal in kind of backwards Texas. Essentially,
Yeah and sore.
Speaker 2 (31:19):
Two different ways of realizing income.
Speaker 1 (31:21):
It's nice if you can do both, but the truth
is you can't do both in all markets, especially in
market like Denver. Sure anything you said you're in money
gear number seven. That's another point in your favor to
try to pull this off. I think you know, trying
to buy rental real estate early or too early in
your wealth building endeavors. Unless you're doing something crazy like
house hacking, where the numbers just make a whole lot
(31:42):
more sense, it can take away from your ability to
fund those all important tax advantaged accounts. But if you've
been doing that and you've jettisoned all your troublesome debts,
which is where you're at of here in money gear seven,
and you're interested in owning rental properties heading in this
direction at this point in your financial journey, I think
it can make a whole lot of sense. I think
you have the financial wherewithal, you have the history of
(32:05):
handling your money properly, where you're trying to jump in
with both feet into owning a rental property at this
point in your you know, with the financial progress you've made,
I think it makes a whole.
Speaker 2 (32:15):
Lot of sense.
Speaker 3 (32:16):
Yeah, And I think the best way to broach the
subject is just to tell your landlord that you'd like
the house. In fact, we like it so much that
I want to own it. Would you consider selling it
to us? Because that's I don't know, you kind of
stroke his ego a little bit, like it's flattering to him.
Speaker 2 (32:30):
It's like, hey, you've you've got yourself such a beautiful
home here. We would love to own it ourselves.
Speaker 3 (32:34):
And it sounds like that y'all have a good relationship
with him, and so I think just putting the cards
out there on the table is a smart move, Like,
I don't think that there is any sort of sneaky
angle per se that you need to try to find
a way to weave in there. It puts the ball
there in his court. But then i'd make sure that
you've got the liquidity on hand to actually proceed and
move forward if he does express any interest. I'd also
(32:56):
make sure that I knew what the market value of
the home current is based on comps of recent comps
there in the area, based on what Zillo is saying
that it's worth.
Speaker 1 (33:05):
Let's say, not just the zestament, but looking up to see, okay,
similar size, similar kind of homes he sent sales in
the past three months.
Speaker 3 (33:11):
Yeah, it does a pretty accurate job at predicting that.
But let's say, for instance, and this is in Denver,
so home values are pretty sky high. That's a Denver
reference for folks out there. But let's say this home
is worth eight hundred thousand dollars. Well, no matter what
your landlord bought it for, no matter what he sunk
into it, it's likely what he's going to want to
sell it for. Now, I guess don't don't necessarily expect
(33:33):
him because he got such a great deal on it
that he's willing to say, oh, I got such a
good deal on it, maybe I offer these guys a
deal because then, like you said, it sounds like like
he is an investor himself, and so it doesn't hurt
to ask. But I think there's honestly probably a slim
chance of him actually giving this up because he's this
is something that is doing.
Speaker 2 (33:52):
Well for him and his networth. But you never know.
But you never know, so go for it.
Speaker 1 (33:55):
You never know what the landlord. Maybe he's saying, Man,
these are great tenants, but I did have to do
a lot of improvements, and man, I am lacking liquidity,
and you know, I guess this rental property game. Maybe
it's not I'm not cut out for it like I
thought I was going to. Maybe this is his first
endeavor and he's realized that it's more of a headache
than he thought it was going to be. You just
don't know, right what the landlord is going through, where
(34:16):
their head is at, and the other kind of what
you were just saying there at the end, Matt, If
you're going to pay roughly market rate anyway, why would
they want to buy this house, and I would say
because of the reduction in fees involved in buying and
selling a home, because of your familiarity with the home already.
I think the way you're going to be able to
negotiate is by telling your landlord that you'll split the
savings of you know, reduced agent costs with him. He
(34:39):
makes market rate or close to it when during on
the sale, and he saves a few extra percentage points
as well. You too, right, you also save on that front, right,
And so if we're talking about a home, let's say
it's worth eight hundred thousand dollars, that's twenty thousand dollars
worth of savings, which is substantial. I think that's why
it's at least worth feeling this out right, especially since
(35:00):
you like the place, you have long term goals for it,
you are in the financial position to likely pull this
off without being over your head too.
Speaker 3 (35:07):
Yeah, Basically, you're appealing to the financial side of the
decision making matrix.
Speaker 5 (35:11):
Here.
Speaker 3 (35:11):
It's like, Okay, like I've realized some profit from those property,
Let's go ahead pull that profit out of that house.
I get to do something else with my money. But
on the other side, like there's so that's like the
financial lens to look through, but also like look through
the psychological or the emotional lens as well, and try
to figure out any potential pain points that he might
have as a landlord himself. Like you kind of mentioned
(35:33):
this sho like maybe this is his first rental property
and maybe he hates it. Maybe you can ethan it
sounds like y'all have a great relationship. Maybe you can say, hey,
we're great tenants. Not all tenants are great, or maybe
the tenants that were in here before, maybe you realize
that's not always the case. And if it's basically if
it's going to be a hassle for him to continue
to service and to essentially have a part time job
(35:54):
managing this property, that might not be something that he
wants to continue to do.
Speaker 1 (35:57):
And maybe he's thought about selling it and he's like, oh,
that's kind of a yeah, right, And so if I'm
gonna sell it, I have to get the house ready,
I gotta do I gotta pay landscape blah blah blah
blah blah all this other stuff to it. And like
that sounds like a big giant thorn in my side
as well. And so you're saying, hey, we want to
buy it, we want to take it as is. You
don't have to do any of those things to get
to get this listing ready. You don't have to spend
the money to get the pictures taken. And now, guess what,
(36:19):
at a certain price point, videos are a necessity too.
Now to mention the agencies, there's all these different things
where if it's even crossed his mind, he's going to
entertain if you're in the range of a market offer,
because like we talked about the reduction of fees, the
reduction in hassle, So yeah, I think this is definitely
worth pursuing. I want to mention too, I'd still get
an inspection if I were you. Yeah, you live in
(36:40):
the house. Sure you're familiar with the minor issues that
it might have, but you might not know about something
that's lurking beneath the surface. And I think it's worth,
that's true, the five hundred bucks or so to get
that inspection.
Speaker 3 (36:50):
There are still some professional services that are worth getting,
like even like, yeah, you're going to see a ton
by avoiding a realtor, but I think it would even
still pay to hire a real estate attorney as well.
Which is required only in something like half of all
states in the country. I'm not sure what it is,
Ethan there for you in Colorado, but that's not a
cost that I would skimp on just to make sure
(37:11):
everything is buttoned up well, especially if you're dealing with
somebody you know, you all have a great relationship, but
you just want to make sure that all the tea's
are crossed, all the eyes are dotted, and so even
if he's not willing he or she is not willing
to split that cost with you, that would be something
I would be more than happy. I guess not more
than happy, but I would be willing to pay out
of pocket one hundred percent myself. One thing I want
(37:32):
you to consider, Ethan, is to consider that you're saying
that it's going to be difficult for you to make
this work.
Speaker 2 (37:37):
There in Denver.
Speaker 3 (37:39):
If it was me, knowing what I know about rental properties,
I would want to make sure that you are doing
this because this is something that you want to pursue,
not just because it makes sense financially, because it is
harder to do these days, given where home prices are.
It is harder to do giving financing costs, mortgage rates,
and if that is all you're looking at, I think
you might be better served taking that money investing it
in the market like you've done. Y'all are in on
(38:02):
money gear number seven. But make sure you're doing this
for you, Like if you and your fiance are seeing
this as a way to put down roots and actually
we just love this house so much, we're actually not
going to sell it. We're going to end up renovating
this home. I think that that's a totally great reason
to purchase that home and to do all that you
can to purchase that home, because more than ever, it's
(38:22):
harder to get a great deal, especially on something like this,
given the market conditions that we're in.
Speaker 1 (38:27):
Last thing I think i'd want to say, I would
want to make sure that Denver was going to be
where I called home for a long time to come.
Speaker 3 (38:34):
Yes, that was a part of the renovation, like we're
going to live here forever, because it's kind of mindset
if you're thinking, oh, it is kind of expensive and
we're going to buy this, it'll be a rental property,
but then we might move to I don't know, Minnesota
because it's cheaper or something like that, or we've got
family there.
Speaker 1 (38:47):
Well, then you're talking about it being even less profitable
because you're hiring a property manager and just you're adding
a whole bunch of stress to that decision. So if
you decide, hey, this is a good rental property, we
want to buy it, living it for a while, then
we'll r it out, but we're just going to move
down the street and will self manage, I think that
adds credence to this idea. But I think if if
in the back of your mind you're saying, three years
(39:08):
from now, we might not be around, then I would
just keep renting and I would save up that cash
for a rental property in the next place I was
planning to move to.
Speaker 3 (39:17):
Totally Okay, I just thought of one other thing, which
is don't forget about the endowment effect, which is like
this behavioral psychological term that applies when something that you own.
In this case, you don't own it yet, Ethan, but
you're living there, you're renting it, so it kind of
feels like it's yours. But you might be valuing where
you are a little bit higher than maybe the next
rental property that you and your fiance are renting. Maybe
(39:39):
this is the first maybe up until now, you've always
lived in apartments and this is the first home that
y'all have rented together, and you're like, oh my gosh,
we're in a great stage of life. I want to
do this. How can I do this? Times five or whatever?
Just already like this property, maybe why not just ask?
But there are also other properties out there, So just
keep that in the back of your mind. I'm not
saying that that's completely driving your decision to once buy
(40:00):
that particular to play.
Speaker 2 (40:01):
The field in particular help, but yeah, keep your eyes open,
and there could be other great properties out.
Speaker 3 (40:05):
There, and you might find better deals by looking at
and better opportunities by waiting. Given again, the conditions of
the market that we're currently in. Point yeah, we hope
that gets you pointed in the right direction. And Joel,
we've got more to get to. We're going to take
a question from a listener who's asking about a foundational
personal finance metric.
Speaker 2 (40:21):
We'll get to that right after this.
Speaker 1 (40:30):
All right, we're back. This asks how the money episode continues.
Now it's time to get to the Facebook question of
the week. This one comes from Calvin, who says should
additional mortgage payments be considered when determining my savings rate, Matt,
the savings rate conversation continues, Oh, that's it.
Speaker 2 (40:46):
That's a short question the question.
Speaker 1 (40:47):
Yeah, And I like how short and to the point
this is. And it's a good question. And you and
I we have been talking more about savings rates and
it's more complex of an answer then. I don't know,
maybe I thought it was on the face, and then
you and I started kind of like having conversations about
what is included in your savings rate, and it started
to get a little nerdy, and it's gotten nerdy on
(41:09):
on the podcast, on this show. The short answer for
Calvin here, though I don't know, I'm curious to hear
if you see if you agree with me, Matt, I
think is yes. Many of the how to Money commenters,
interestingly enough, didn't seem to agree with my take on this,
and so I think, you know, while making an additional
payment or adding more to your monthly payment doesn't add
more money to your high yield savings account, so it's
(41:30):
not going to your savings. It's we consider paying down
debt as money that isn't being consumed, which means I
think of it as impacting your savings rate. So paying
off your credit card debt, it's another money move that
would also be included in your savings rate, even though
it's not boosting your cash on hand. Matt, does that
make sense to you? Agree with that totally makes sense. Okay, yes,
(41:51):
you're not increasing savings, but it does count as your
savings rate exactly.
Speaker 3 (41:54):
And this is this is taking the more zoomed out,
high level view of what it is that you can
do with your money, which is that your your net worth.
It's either growing or shrinking. Like makes me think of
like squirrels. They're either like eating an acorn or they're
burying it in the ground like slocking aside, setting it aside.
And so I think that's the best sort of filter
(42:16):
that you can run some of these questions through. Is
this making me wealthier or is this making me poorer?
But that doesn't mean that you don't need liquidity. By
the way, that this doesn't mean that you don't need
access to cash at all, because we don't want you
to start paying off your mortgage until you have some
solid savings on hand. Just because we include debt payoff
in your savings rate, that doesn't let you off the
(42:37):
hook or it doesn't mean that it's not incredibly important
to have cash on hand, cash in the bank that
you have access easy access to because you can't eat
your house because you know, someone would say, hey.
Speaker 2 (42:47):
Actually your bread houses right time. What about the heelock
you can actually eat your house.
Speaker 3 (42:52):
It's not very easy to do that, and it's not
cost effective or efficient.
Speaker 1 (42:55):
To do that. And if you're buying groceries with helock
money like you're doing it wrong.
Speaker 2 (42:59):
You're doing it folks.
Speaker 3 (43:00):
Paying off your home, while it is an incredible accomplishment,
it will take some time and it's just too risky
to put all your eggs in that basket, to the
exclusion of having a solid.
Speaker 2 (43:11):
Cash backup as well. So yes, it's part.
Speaker 3 (43:13):
Of your savings rate because it is money that you
could have otherwise consumed. But if your cash on hand
is tiny, if it's mini school, well you could still
be in a big mind if you don't appropriate your
funds properly.
Speaker 1 (43:25):
Yeah, I feel like that's a good answer. Yes, yeah, yeah,
council savings rate doesn't count a savings You still need savings,
you still need liquid cash.
Speaker 2 (43:32):
No matter what you're saving. It's just how do you
want to save it, right, Yeah.
Speaker 1 (43:34):
And you'd be remiss if you started paying off your
mortgage before you had proper savings on hand. But yeah,
once you do, that's a reasonable choice to make. But
as you know, also, Calvin, like, we're not fans of
early mortgage payoff. If you've got a locked in low rate, Like,
why would you want to get rid of it? Because
there are so many better things you could do with
that money, and especially with where savings rates are now
(43:57):
if you've taken out a mortgage more recently though, right,
And I think Calvin actually mentioned in the comments on Facebook,
Matt that his rate is six point twenty five percent.
The calculations change, okay, right, and it might make more change, right,
It's a higher priority if that's the case than it
is if you're one of those folks you took out
a three percent loan five years ago. The goals here, though,
(44:18):
are to make sure you aren't getting too risky, which
means not having enough liquidity while building your net worth,
which means debt payoff and investing both those things at
the same time. And one great way to pay off
your mortgage early without feeling like you're going overboard because Matt.
Some people are like, they are so averse to debt,
even low interest mortgage rate debt. They're saying, I've got
to pay off my home early. I think my favorite
(44:39):
way for people to think about doing that is making
bi weekly payments, because you're not really sacrificing other financial goals.
You end up making one extra payment a year thirteen
instead of twelve. If you make bi weekly payments and
so on a traditional thirty year mortgage, that can RaSE
roughly six years off the back end of your loan.
So I like that as kind of a way to
(45:01):
do it, a small behavioral tweak that does allow you
to accelerate mortgage payoff without feeling like you're shoveling cold
into a steam engine. You're trying to go as hard
as you can.
Speaker 2 (45:09):
That's true.
Speaker 3 (45:10):
I will say, though, as we're sitting here and you
mentioned six and a quarter percent mortgage rate, it doesn't
make me think, well, whatever where rate's going to be
in the future, and imagine if we are living in
a world five years from now where rates are even higher. Yep,
Like that's when the paying down the low mortgage, and
right now six point twenty five does not sound like
it's low, but it could be low. And that's when
(45:31):
paying extra on a mortgage like this, where you're locking
the money up. Personally, I have a hard time feeling
one hundred percent comfortable with that, even just making that
moderate additional payment, Like it's not like you're going balls
of the wall, going hardcore extreme by doing them bi
weekly payment thing, but even still, you're locking that money,
you're setting it aside, and it's not money that you can.
Speaker 2 (45:52):
Pull back out.
Speaker 3 (45:53):
And that's the part that makes me a little bit uncomfortable,
especially like when you consider the fact that how often
do Americans move. Yes, you will see the benefit of
eliminating that mortgage six years early.
Speaker 2 (46:04):
Is that what it is?
Speaker 3 (46:05):
Yeah, so twenty four years are you going to be
in that home twenty four years from now when the
average American moves.
Speaker 1 (46:10):
You'd still come out ahead if you sold, though, too,
because you would have paid down some of the principles.
Speaker 2 (46:13):
That is true.
Speaker 3 (46:14):
That's another tip, by the way, if you're doing this,
make sure that those additional payments are being applied towards
the balance, the principal balance, not as additional or prepaid
interest payments essentially, But even still, that's money that's just
sitting there in equity in that home, as opposed to
even just if it was socked set aside in a
highield savings account. Think about again the liquidity the options
(46:35):
that that gives you versus making these additional payments and
not even seeing your monthly mortgage amount go down unless
you get your mortgage recasted or something like that, which
costs money though. And so that's the thing I just like,
I really like the idea of if you're disciplined, sitting
on that money, having that money grow. And you know what,
at a certain point, if you feel that you know what, no,
(46:55):
I really do want to be done with this mortgage, man,
go ahead, pull the trigger, eliminate that mortgage completely. But
I think you might find in a couple of years,
like we're constantly changing and we're dynamic individuals, and you
might have different goals in a couple of years. You
might want to buy a different house, you might want
to fully fund your kids college savings. You might want
to start a new business, and these are all things
(47:17):
that having options in cash on hand afford you off
mortgage doesn't. You can't you can't start a business with
a paidoff house that's all you have. You have the
payoff and that's fantastic, and then you might need to
borrow against it at worst at a higher term exactly.
Speaker 2 (47:29):
So, yeah, you're right, I put you to have optionality.
Speaker 1 (47:31):
Liquidity is under is underrated, and I think especially with
higher savings rates these days, if you're if we're talking
about an eight and a quarter percent mortgage, different story, right,
but we're talking about six in a quarter, and it's
not ideal, but it could be worse. And you're you're
also right to point out, Matt that just because we've
recently seen rates in the three percent range in recent memory,
that doesn't mean like that we're likely to see those
(47:53):
rates again. Some people think we're heading back to those rates,
not before too long. I wouldn't bank on it, Like, yeah,
I don't know if that's the case, and what if
savings rates continue to go up, because yeah, I don't
want to get into all that, but like, it's you're right,
there's the bird in the hand, and I think the
bird in the hand is liquidity.
Speaker 3 (48:10):
And so the fact that you're able to get a
pretty dissent rate right now in savings let alone, actually
if you were to actually invest it in the market
over then you know, if you knew you were.
Speaker 1 (48:17):
Going to touch it for three four years, go ahead
and stick it in the market. But you mentioned one keyword, discipline.
You gotta have a discipline. If you don't have the
discipline to do the money, pay off the house yep,
and make those extra payments. Yeah, totally agree. But either way, yes,
it counts as your savings. Right, that was the beginning
of the question. All right, Matt, let's get back to
the beer that we had on this episode. This one
is called hammer Red. It's an amber ale by Sweetwater
(48:40):
Brewing Company in collaboration with the Georgia Aquarium right down
the road from US.
Speaker 3 (48:45):
Now, now, folks understand the naming convention. It's not a
hammer head. It's a hammer red. Yes, it's got a
hammerhead on the logo.
Speaker 2 (48:53):
Yeah, yeah, but.
Speaker 3 (48:54):
People can see that unless they're looking at her show
right right now. But yeah, which, I thought this was
pretty good. Had that nice kind of bready mouth feels
got that amber. I don't know, just the kind of
viscosity and thickness that you expect to enjoy when you're
drinking enjoying red, when you're enjoying an amber ale.
Speaker 1 (49:10):
I think those first red I ever had was Killions
Irish red. Oh dude, that's like not good, No, this
is I think that's the first red ever. You know,
one of my best memories with Killians is when I
was first getting into craft beer and I remember thinking, oh,
that's that sounds like something that's more interesting than Core's Light,
right or whatever. Macro pills was being made that I
(49:30):
was skipping over. But Kate and I were at the beach,
and I remember thinking, yeah, Killian's red, take that out.
Speaker 2 (49:37):
To the beach. It's rough.
Speaker 4 (49:39):
I think.
Speaker 2 (49:40):
I think that's what I.
Speaker 3 (49:40):
Learned, that, Oh there's the right place and time for
different types of beers. And for me, yeah, red Ale
out on the beach wasn't wasn't hitting the spot for me.
Speaker 1 (49:48):
The other beer people confused with craft beer far too
often is blue Moon. Sorry, guys, not craft beer, not.
Speaker 3 (49:55):
Even taste, which again, back in the day you're probably like, oh, yeah,
this isn't bud Light. But at the same time, it's
not the most interesting of Belgian wits.
Speaker 2 (50:03):
Out there either.
Speaker 1 (50:04):
No, it's not all right, Matt, that's gonna do it.
For this episode, we'll put links to some of the
resources we mentioned up in the show notes on our
website at howtmoney dot com.
Speaker 3 (50:12):
That's right, and we will see you back here on
Wednesday with our conversation with Dan Otter.
Speaker 2 (50:16):
And here's a little teaser. Dan's a man after own heart.
If it was a different year, different location, I could
see him being like a even almost like a third
co host. He's a good guy. All right.
Speaker 3 (50:26):
That's gonna be it for this episode until next time.
Best friends are best friends out.
Speaker 2 (50:42):
This is like a fundraising beer or something like that.
Speaker 1 (50:44):
I'm sure it is, ye
Hosts And Creators
Joel Larsgaard
Matthew Altmix
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