Hey guys! Sorry these show notes are so late. My website is not uploading photos right now (not sure why?) and we’ve had a rough day with Lily. I’m going to go ahead and publish these as they are, and then hopefully I can go back and add the show artwork later when my site is fixed :)
Welcome to Episode 18 of the Grapefruit & Granola podcast. If you are enjoying this episode, I would be super appreciative if you left me a review on iTunes. Thank you so, so much!
I’m really excited about today’s episode because I had the chance to interview my husband, Rich, about the topic of financial health. He is a CPA and works in finance, and he is just a wealth of knowledge when it comes to managing your money.
You may be asking yourself why I’m talking about financial health on a wellness podcast, and it’s because financial problems can be a major life stressor for people. And stress is a huge area of health and wellness that often gets placed on the back burner; I really want to use this podcast to bring these types of topics to the forefront, and if you are someone who feels stressed out about your finances, I hope this episode helps you and gives you a starting point to find some sort of stress relief.
Episode 18: Financial Health with Rich
What does it mean to live within your means?
It entails setting your goals for what you want to accomplish and aligning your financial position with that. If you enjoy things such as eating out or traveling, it’s okay, and beneficial even to do the things you enjoy. You have to do them within your means though, whether it be adjusting the frequency and/or the quantity or quality of what you do.
- Try to see where you may have trade-offs to support other things that you enjoy.
- It’s also understanding what your longer term goals are related to savings, retirement and any big expenditures.
- Prioritize where to spend your money.
Tips on Making a Budget
It is key to start by understanding your income and then understanding what your fixed costs are.
Fixed costs are those that you will incur no matter what each month:
- car payments
- car insurance
The amount of those costs can vary but there are certain staples that you need to have to live.
If you take your income less those fixed costs then you see how much money you have left to either save or spend on variable costs like travel, entertainment, eating out.
Basics of Taxes
Gross taxable income is the total of all income you earn… whether it be from a W-2 from an employer, a 1099 if you are a contractor, self-employment income or other forms of investment income.
Your adjusted gross income is essentially your total gross income adjusted for certain items you are allowed to deduct (common examples include HSA contributions, certain retirement account contributions, student loan interest). Adjusted gross income matters largely because it serves as the basis for when you may have to phase out certain exemptions. For example, you make not be able to adjust your student loan interest if you make too much AGI because the deduction phases out at certain income levels.
What you ultimately pay in taxes is based on your adjusted gross income less certain deductions and credits. For deductions, many people deduct their mortgage interest, state/local/property taxes, charitable contributions, etc. When you choose to aggregate these deductions this is known as itemizing your deductions. You can also take a standard deduction which is common for all people depending on your filing status (single, married head of household). If you use a common tax preparation software they will help you determine whether you should itemize your deductions or take the standard deduction.
Once you account for all income and adjustments you have reached your taxable income amount and it is time to determine how much you should pay in taxes. We use a graduated tax rate in this country meaning the more income you earn, the higher the rate of taxes you pay. The IRS publishes these tables annually. For example, in 2018 for a married couple the first $19,050 of your taxable income is taxed at 10%, once you make, $19,051 up to $77,400 you are taxed at 15% on those earnings.
Renting vs. Buying a Home
Houses can be great investments but owning a house comes with costs that people don’t always think about that should be considered in the total cost of home ownership:
- Down payment: this is an amount of money that you will have invested in your property that you can’t otherwise invest in something else
- property taxes
- homeowners insurance
- HOA fees
These really need to be considered when you are looking at the total cost. Home ownership can really be the right decision for many people but it doesn’t have to be.
“Renting is Throwing Away Money” <– this isn’t always true
If all the collective costs of owning a home are less than what you pay in rent then it could be good to invest in a home, but it certainly isn’t always the case. It is also important to really think about what you think will happen to the value of your home and whether or not it will go up in value or not.
There are really many ways to invest but these are the traditional investments: savings accounts/CDs, stocks, bonds, mutual funds, and ETFs. There are many other types but these are the most foundational.
Choosing what’s right for you really depends on a few things:
- how much risk you want to take on
- how active you want to be in investing
- how much knowledge you have about these instruments
- what are your long term needs for the money being invested
Savings accounts and CDs
These are products traditionally offered by banks that pay you interest on your money. If the money is at an FDIC insured bank, then your deposits are insured up to $250K per person. These are fairly risk-free investments.
Stocks and Bonds
These are generally issued by corporations and in the case of bonds sometimes by governments. Stock is an ownership interest in the firm while a bond investment is buying the debt of a firm. Bonds pay a coupon interest rate over the life of the bond. Stocks on the other hand may fluctuate as the underlying company makes more or less money and the stock price changes. Stocks may also pay dividends that are not generally guaranteed but do serve as a source of return on the stock in addition to what is hopefully stock price appreciation.
Mutual Funds & ETFs
Mutual Funds are generally funds that buy a pool of stocks and/or bonds to generate a return. These are usually actively managed by someone (a fund manager who usually works for a fund company) and they intend to beat the market using their particular strategy. This differs versus an ETF, which is essentially tied to a specific index or some other metric. For example an S&P 500 index fund essentially would be designed to create a return on your investment that aligns to how the S&P 500 performs. There is no real active management of it.
If you can manage it though, investing has generally yielded good returns for people historically. The S&P 500 has made on average about 10% per year over the last 90 years, but beware there have been down years and up years so it isn’t a guaranteed 10% per year. In summary though, it all depends on the person and the risk they want to take, their knowledge and their desire to actively manage their investments. If you open accounts at many of the big name companies though you can have all these options, such as Schwab, etrade or fidelity.
Most people either invest through some form of an IRA or 401(k) anymore.
A 401(K) is a retirement account that many employers offer where you can contribute and your company can also make a matching contribution. An IRA is an individual retirement account, which is an account where you can invest money towards your future retirement.
The other nuance you will sometimes here is related to a roth IRA or roth 401(k). If you have a roth account, you pay taxes on the income now and it can grow tax free. If you don’t have a roth account, your money goes in tax free today up to certain eligible limits but it will be taxed when you withdraw it. If you are wondering why you would use a roth account versus a non-roth account it really comes down to the tax rate you pay now versus what you expect to pay in the future. If you believe your tax rate will be lower in retirement than it is right now then you would not want to pay more taxes at your current rate and a roth wouldn’t be right for you. If you believe your rate will be lower in the future then now though, a roth may be right for you.
What to think about in a job offer
It really is important for people to look at all the benefits their employers may offer. Often one of the most important is a 401(k) matching program.
Generally, these work by the employee choosing to contribute and the employer matching up to a certain amount. For example, they may match the first 3% of your contributions. This is free money, and if you have the means to put money into your retirement account to maximize your match you really should try to do it. Also, I think its important to remember that if you are struggling to save for retirement, you aren’t alone. 25% of people surveyed by the Federal Reserve for 2017 have no retirement savings or pension at all.
What Helps and Hurts Your Credit
Credit is important for any instances where you will need to get a loan in the future – Banks and other lenders use your credit scores to determine whether you will get a loan and the rates you will pay
I would focus on a few things:
1) watch your balances on credit cards compared to the limits – when these are too high it will negatively impact your credit score (you should definitely stay below 50% of your limits and ideally 30%)
2) watch your debt to income ratio as this will impact whether or not you can get extended new credit (the lower the better) and
3) be sure to always pay on time, even if it is just the minimum amount you need to make the payments on time