We haven’t done a five questions episode for awhile. Here are five awesome questions from you.
Your questions about 401k loans, side hustles, student loan interest rates, buying a home, and early retirement are answered today.
Subscribe to the Show:
Looking for some advice around the 401k loan. I went back and listened to your show around this and still not quite sure what to do. Is it smart to take a significant loan from my 401K for any of the following:
1) Buying first rental property?
2) Making updates on a current home that I live in?
3) Using it to buy conservative individual stocks that have good returns/dividends historically.
Thanks for the help. I really appreciate it.
401k loans are taboo in the personal finance world. There’s lots of scare mongering around the subject but under the right circumstances, it can be a beneficial move. We devoted a whole podcast to the subject.
To make it worth the risk, the loan should be short term. If you’re using it to buy a rental property that you’ve done all of your due diligence on, go for it. If you’re using it to do renovations that will increase the value of your home before you sell or turn it into a rental property, go for it. Here is a list of the renovations that will earn back your money and then some.
So that’s a yes on #1 and a yes on #2 if you are doing the renovations with the intention of selling your home. #3 is a hard no. Investing is not a short term proposition. And because you have to pay the loan back within 60 days, only borrow from your 401k if you are 90% sure you will not lose or quit your job before the loan can be paid back.
My question today is about saving vs debt reduction vs side hustle money.
My partner and I live in Brooklyn. I make about $53,000 a year and my Partner makes about $75,000 a year. We keep separate accounts and have a shared account for rent and living expenses. I put in $1400 a month into that account. Out of our joint account is were we pull money for our joint Betterment house savings account.
I also have student debt totaling $42,537.13 I pay my monthly minimum payments automatically.
I am 39 years old and have only the small amount of money that is in my Betterment account. If I hadn’t started listening to you I might not have a budget, still be in credit card debt and have no savings. So its a start but I feel behind the eight ball here.
I need to make more money, I am an intelligent college educated man living in NYC and make shit money. So I want to start a side hustle.
So my question is, should I spend some money to start a side hustle?
Just hit my debt with the avalanche?
Throw it all into Betterment because my student loan interest rates are fairly low?
Or is it a combination of all three?
There is no guarantee that my side hustle will make any money though.
A side hustle should cost you time, not money, at least at first. If your enterprise starts to make some money, than you can think about spending some money to make more money. There are plenty of side hustles that don’t have any start up costs at all; babysitting, tutoring, mowing lawns (if you have your own lawn and therefore the mower).
Debt is an emergency so having a plan to pay it back like the stacking or snowball method is always better than just throwing extra money at it randomly. But if you want to invest, there should be at least a 2% spread between the interest on your debt and the expected return on an investment.
So if your student loan debt is 4% and you can expect an average return by investing with Betterment of 7%, invest your extra money while paying the minimum on the debt.
Here’s a bonus tip. If you’re making shit money in NYC, move somewhere with a much lower cost of living and make shit money there. You may make less money but if you choose carefully, the lower cost of living can mean you have more money than you did in NYC.
Get our best stuff in your inbox:
Hi Andrew and Thomas,
I am currently working my way up listening to your episodes so I am not sure if you guys talked more on the two-step process of a Roth IRA – re-characterization and conversion, but I was unaware that this was a loophole. Can I suggest an episode on loopholes that are legal and why anyone would do it?
I also have one question, I currently have $70,000 in student loans with interest rates ranging from 5.15-6.16% and I am currently making $3500 monthly payments to it. If I refinance with Sofi, I would get 4.99% which didn’t seem to be too big of a difference to me. Should I not refinance my student loans or do you think 4.99% is still worth it. Thanks and keep the episodes coming!
We did an epic episode on Roth conversions with The Mad Fientist.
Because even a .5% lower rate of interest can save thousands of dollars over the life of the loan, we always advocate for refinancing. With one caveat when we’re talking about student loan debt. If your student loans are federal loans, they come with certain protections.
There are various repayment options like income based repayment, pay as you earn, revised pay as you earn, and for certain segments of public service, debt forgiveness programs at least until the vile, evil, religious lunatic Betsy DeVos rips them away from you in her ongoing battle with her brother to be the worst person ever hatched.
SoFi is a great student loan refinance company and they provide some of the protections you lose when you refinance federal loans. The company does have strict standards though so not everyone can qualify.
There are other refinancing companies but beware. Not only do many not offer many or any protections, some have origination fees that can end up making your new payment higher than your current one.
My name is Rich and I’m a 26-year old guy currently renting an apartment in Northern Illinois. My question pertains to buying a first home and what the smartest way to go about it is.
Traditionally, everyone knows the 20% down threshold, but what if I could afford to pay more, or even all of the home ($120k or less) in cash? All of the home would be a stretch, but I could financially do it. On the other end, I understand the value in having cash on hand for other investments (I am not counting my IRA’s), and if things come up in the future.
A few other important notes to get a bigger picture: I live with my girlfriend, but she doesn’t have money now to put into a home. She’s a PhD student and I would rather do this solo for the time being. Because of this, we will be living in our area a minimum of 3 more years. After that, I would like to rent it out to start on my first investment property when we do plan on moving out. No plans for kids in the immediate future.
Thanks in advance for your input, and for all the hard work everyone puts into the podcasts. I love the show and have sent many friends your way!
All the best,
What is your “debt tolerance?” If the though of having even low interest mortgage debt keeps you up at night, pay cash. But it’s really not the best decision from a personal finance standpoint. Mortgage interest is low. And as we discussed above, you should have at least a 2% spread between the interest on your debt and your expected return on an investment.
Current mortgage interest rates are 4.13%. That beats the 2% spread if you want to invest in the market. Since you are planning to turn the home into a rental property in a few years, that could be another argument for having a mortgage. If you choose the right property, your tenants are covering your mortgage payment and some profit on top of that.
Another reason to have a mortgage is your age. You’re very young and the younger you are the more risk tolerance you have. If you have a mortgage, you can plow that money you have saved into the market at a 100/0% ratio of stocks to bonds.
I just started listening to your show about a week ago so I’m still back in the 2015 episodes I just want you to know you guys have opened my eyes to so much and I’m finally having my money work for me.
My situation is this I am 25 and my wife is 23 we just bought our first house out here in California about 3 months ago we put $60,000 down and we have $8,000 in student loans no credit card debt. We also have one car that we owe $13,000 on.
Our monthly expenses are about $2,700. And after the down payment we still have about $55,000 saved. I guess my question is; what steps do I start making to reach my goal of wanting to retire at 45. How do I start making my money make me the most money while still being safe. Would love to hear your opinion. I value it a lot.
We did a whole episode last week that will answer this question. If you want to retire early, you have to know your savings rate. There’s even a calculator that will spit out the number for you. If you want to retire 20 years from now, you need to save 42% of your income for example.
If saving that much sounds impossible, you can do two things, spend less or make more. This sounds simple and it is, even if it’s not exactly easy. We interviewed Mr Money Mustache who has turned early retirement into an art form.
Keep Them Coming
Thanks guys! We love answering your money questions. You keep sending them and we’ll keep answering them.
LMM Pro: Research and evaluate rental properties.