An anonymous caller has always put her large purchases on zero percent APR credit cards, but something’s been nagging at her. Is she walking on thin ice with this strategy?
Von is confused why he keeps hearing that Roth accounts are better than traditional if they both lead to the same mathematical result. What’s he missing?
Molly and her husband are well on their way to financial independence, but they feel unfulfilled with their careers. Can they afford to plunge into student debt with a 50 percent pay cut?
Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode.
Enjoy!
P.S. Got a question? Leave it here.
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Anonymous asks (at 01:55 minutes): Is using a zero percent APR credit card to cover large expenses a good strategy? I’ve been doing this for years, but I’m starting to wonder if there are risks I haven’t considered.
For example, instead of saving cash for a vacation and paying for it upfront, I open a new credit card with a promotional zero percent APR offer, typically lasting 15 or 18 months.
I charge all my vacation expenses to that card and then pay it off gradually over the promotional period. The way I see it, I’d rather invest my money today and pay for expenses later. Since these credit cards offer an interest-free loan, it seems like a no-brainer.
Sometimes I keep the card open; other times, I close it, depending on factors like annual fees or the rewards program. I’ve used this approach for years, and it’s worked well for me. It’s helped increase my credit score to over 800 without much downside.
I don’t have a mortgage but I do have a car loan. Otherwise, I’ve been financially responsible. Are there any dangers to this strategy that I’m not seeing?
Von asks (at 21:27 minutes): I’m struggling with the implication I’ve heard in several episodes that a Roth retirement account is better than a traditional one if tax rates remain the same. Can you elaborate on your stance?
I’ve heard you discuss the benefits of Roth accounts, emphasizing that withdrawals in retirement are tax-free, including the gains. This seems to imply that paying taxes upfront (Roth) yields a better outcome than paying taxes later (Traditional).
But mathematically, this isn’t true if tax rates are the same at the time of contribution and withdrawal.
Here’s an example:
- A $10,000 contribution to a traditional account grows to $174,494 over 30 years, assuming a 10 percent annual return. If it’s taxed at 20 percent upon withdrawal, you’ll have $139,595 in net spendable income.
- With a Roth, you’d pay the 20 percent tax upfront, contributing $8,000. After 30 years of growth at the same rate, that also grows to $139,595, yielding the same spendable income.
As long as the tax rate remains constant the net result is identical in both scenarios.
Have I misunderstood the point you’re trying to make about Roth accounts, or are there more nuances to this question that I haven’t thought about?
Molly asks (at 33:56 minutes): My husband and I are considering major career changes that come with a 50 percent plus pay cut. How do we approach this huge adjustment and continue saving toward financial independence?
We’re both 39 years old, with two kids (ages 2 and 6). I’m considering a career in nursing and he wants to go into teaching. We believe these careers will be more fulfilling and allow us to spend more time with our family, But we’d both need additional degrees.
Here’s a snapshot of our financial picture:
- Combined income: $250,000 annually, plus $14,000 net rental income from two properties.
- Savings: $750,000 in retirement accounts (mostly pre-tax, some Roth), $20,000 in cash.
- Real estate: $800,000 in equity across all properties, including our primary residence.
- Debts: $165,000 left on our primary mortgage (to be paid off in 5 years), $70,000 remaining on each rental.
We can live off $4,000 monthly for basic expenses, with room for extras like vacations. If we stayed on our current path, we’d reach financial independence relatively soon. However, we don’t plan on fully retiring. We’d just like to slow down.
How do we navigate these decisions while staying on track for financial independence? What are strategies to maximize our savings and benefits as we shift into these lower-paying careers?
And should we take out student loans? The costs are $25,000 for an accelerated nursing program and $10,000 for a teaching degree.
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