Show notes
Sara Gans:I've been speaking with a lot of individuals who have been finding themselves adding some surplus savings with everything going on because they're not out spending money. So, Leon, are you in the black or are you in the red?Leon LaBrecque:Yeah, I'm in black. I've been cooped up at home and my money has been cooped up at home with me, Sara. So, I was looking at our bank accounts and looking at our budget and there's a whole bunch of things that fell off the budget. I was supposed to go to New Zealand this month, I'm not going to New Zealand and that's been canceled, my health club canceled, we can't go to the gym, so I'm not paying my health club memberships. I'm not driving my car. I'm not going out to eat. As a matter of fact, all I'm doing is spending all my money fluttering it away on Amazon and Etsy these days, it appears. But we're clearly ahead. How about you? Are you ahead of the game or behind the game?Sara Gans:Yeah, we're in the same boat. We had to cancel our vacation, unfortunately. I'm not driving anywhere, so I lowered my car insurance to the state minimums and received a refund there. So yeah, we're also building up a surplus and there's some things that we could be doing to be maximizing that surplus in today's world.So I wanted to go over a few things that our viewers can be doing, if they're also in the same boat as us, to put themselves in a good financial position moving forward.Leon LaBrecque:Sounds good. What do you want to talk about?Sara Gans:Keep that surplus in cash. And I know we talked about emergency reserves before, but I truly believe that they're so important. And prior to everything going on, and my recommendation was typically to keep about three months or so of expenses and cash, but with everything going on, what are your thoughts in terms of how much you should be keeping in cash?Leon LaBrecque:I tend to deal with some of our older, more affluent clients and a lot of professional clients. So we have definitely upped that from the three months. And I've been building up cash reserves for clients anywhere from six months to a year, just because no one knows when this is going to end and how it's going to transaction out. So we're building up a cash reserve, we're okay with the low rate of return.I've had people too, who had built up reserves for future expenditures when they put those on hold. So I have a client who was going to buy a car and he had set aside a specific amount of money for the car, And we were talking and I said, "Well, are you still going to buy the car." And I said, "The deals are good and all." And he goes, "I'm not sure. We're not sure whether we're going to buy this thing or not." And I said, "All right, well, if you're not sure, then let's park the money somewhere and make some interest on it, as opposed to just letting it sit around on a checking account, making two tenths of a percent or something."So what are you telling your clients? Yours tend to be more younger and more growing in the affluence.Sara Gans:It truly depends on job security and if there's any type of job security issues that you think could be an issue moving forward, we recommend having more than less. So potentially up to a year of cash reserves, plus any projects coming 12 months or so. If you are a little bit more stable in your job, probably closer to six months.Leon LaBrecque:I think a lot of people going through this wished they had three months expenses sitting in their checking accounts or their bank accounts. I just can't help that. It's always one of those things that a lot of people wish they had healthcare powers of attorney and a lot of people wish they had cash reserves and maybe we can learn some lessons from that. But I think I'm with you, cash reserve, first thing, first and foremost. Okay. So let's suppose I got my cash reserve built up, what's next?Sara Gans:Some would say increasing the allocation to, potentially, your 401(k) or your 403(b). I know with me, personally, if I increase my allocation, I don't necessarily miss the money because I don't see it coming into my checking account every pay day. If you're able to increase your allocation, it certainly could help in the long-term.Leon LaBrecque:So, how much could you put in? Would you just look at your budget and say, I'm up by 200 bucks a month or 200 bucks a week, I'm going to put an extra, $100 of that in my 401k? How would you do it?Sara Gans:You can do it either by dollars or by percentage. The limit to contributing to your 401(k) is $19,500 per year. And if you're 50 or over, you can put in a catch up provision of an additional $6,500 per year. So there's certainly different ways that you can put money into place for that.Leon LaBrecque:Some companies are stopping their 401(k) contributions, they're matching. What do you tell people if they aren't going to get the match? I've had people, "Well, I'm not going to get a match, should I just keep contributing?" What's your attitude on that?Sara Gans:I still recommend contributing because there are so many perks to 401(k). There's longterm growth that you could get out of it. You can dollar cost average into the market, which would mean every payday when you're buying in, you can take advantage of some of the volatility that we've been seeing, which is a great perk. So essentially what you're buying into now, is less than what you were buying in, in February.Leon LaBrecque:So what do you like? Do you like the Roth option or the traditional option? Pre-tax or Roth? I know what I've been telling my clients. What are you thinking? What are you doing?Sara Gans:It ultimately depends on where their income is and what things look like from a tax [inaudible 00:05:41]. Typically, I recommend a mix of the two to take advantage of some tax stability while creating a pool of dollars that would be tax free in retirement. How about you?Leon LaBrecque:I've been talking to clients, and usually a lot of mine are business and they're having a bad year, so their income's down a lot, so they're in a low tax bracket this year. If you're in a low tax bracket, I really liked the Roth because I'm pretty convinced it will be in higher tax brackets in the future. And because of some new laws, including one that passed last year called secure, the tax rates are going up in terms of retirement plans. So I like a Roth for two reasons. It's a downmarket, Roth growth would be all tax-free and it's a down income year, so I'm in a low income tax bracket, so I could do the Roth. So I like that. I know you're keen on Roth IRAs. That's another thing we could do, isn't it?Sara Gans:Yeah, absolutely. If you don't have access to an employer sponsored retirement account, or if you've already maxed that out, there's some ways that you can save with Roth IRAs as well. And you can put up to $6,000 per year, and if you're 50 or over, you can put an additional $1000 per year in them. And they're very easy to open. You can contact us, they can be opened at Schwab or Fidelity and they can link right to your checking account. So it's incredibly easy. And then depending on your risk tolerance, we can go ahead and invest that.Leon LaBrecque:There's a cool rule because during this crisis they extended the due date of the filing of the tax return. You can actually make a 2019 contribution until July 15th, can't you?Sara Gans:Absolutely. And that would allow you to put in more for 2019 and then potentially a 2020 contribution up to April 15th of 2021.Leon LaBrecque:Now, Sara, people don't have to put $6,000 in, right? They can set up a Roth IRA with a few bucks, 20, 30 bucks if they want, can't they? And isn't there an advantage to just having one in the first place?Sara Gans:Yeah, absolutely. You're able to use your principal if you needed it and it can continue to grow tax deferred and then you can take it out tax free as well.Leon LaBrecque:Also, there's a five year rule that we really want to trigger, so the earlier you can start a Roth, the better. Like you said, you can take your contributions out tax or penalty free, but you got to have the Roth IRA for five years. So even if you didn't want to put a whole lot in a Roth, it would make sense to go start one. Even if you just had $1000 or whatever. We should probably do the 2019 contribution first, right?Sara Gans:Absolutely. I would max that out before starting the 2020.Leon LaBrecque:If I'm a married couple, only one of them has to have earned income. The limitation to have a Roth, all you need to do is to have earned some money and you can use that to fund your Roth IRA or your regular IRA for that matter.Sara Gans:Right. That's a great point.Leon LaBrecque:What else could we do with the money?Sara Gans:The last thing that we could do is pay down debt, and I know that there's good debts and there's bad debts. Can you describe what would be a good debt to continue making the payment on and what would be smart to pay down or pay off?Leon LaBrecque:Sure. I call these the wicked debts of the West and the good debts of the North. The wicked debts of the West are debts that you incurred for something you already ate, you already wore, you already did. So that's the vacation you took last year that you paid for on your credit card and you're still paying for it on your credit card balance.Credit cards balances are definitely wicked debts of the West. You can't live in today's society without a credit card, but you certainly can live without a credit card balance. So I'm fond of telling clients with these credit card balances and say, "Look, how would you like to make 14 and a half percent?" They go, "14 and a half percent? Sure I would." "How would you like to make it tax free with no commissions?" "Oh my gosh, that'd be great." Good pay off your credit card.So, getting rid of a debt is just like making an investment. That's our antiacid, Sara. I'm a big fan of... The only debt you ought to have is the debt when you're buying something that goes up in value. So, that would maybe be a debt to support your business or a debt to support your house. So mortgage debts are nice, those are good debts of the North. They're cheap. So if I got a three and a half percent mortgage and I deduct the interest payment, that's maybe only costing me 2.75% or 2.5%. I'm borrowing somebody else's money at 2.5%, and buying something that hopefully is going up three or 4%.Contrast that to a credit card where I'm borrowing money at 14 and a half percent to buy something that disappeared in value. I might have used it to buy clothes from J. Crew, or maybe used it to go on my vacation, and of course I want to go on vacation again, I can't wait to go on vacation and I can't wait to go out to eat again, but I'll use my credit card and pay off the balance.So I would say knock off some of those debts and it's just like making an investment. In fact, it's, riskless, paying off some of the debt. By the way, when you pay down a credit card, do not cancel the card, pay down the card and leave the card. It enhances your balance, it enhances your credit score. Your FICO score goes up when you have less utilization, but if you cancel the card, your FICO score can go down. So, it's important to pay attention to that piece of paying down debt. But, kill the wicked debts of the West.Sara Gans:Sure. And if you do have extra cash and you want to invest in the market, what would you do? Would you do a combination of all three?Leon LaBrecque:This happens all the time, when people get unexpected money and some of us are getting unexpected money now. I mean, I have a couple of clients who I've talked to and their kids are collecting unemployment, making more money on unemployment than they were working because of the special provisions. And I said, "All right, well, let's do something with this money."If you got a bonus, I would say, "Sara, take part of your bonus and make sure you've got a cash reserve, save it for today, take some of it and put it away for the future. Save it for tomorrow. And get rid of some of these debts." And if you did all three, you're being very unscientific, if you did each of those, those would all be good for you. What would be wrong with having more cash, something built up tax free for the long run and having less debt? I like all of those things.Sara Gans:Absolutely. Thank you for joining us, Leon. Thank you for everyone joining us on this podcast for Sequoia Wealth Builders. If you'd like to discuss further or have any additional questions, please email me at [email protected].
