An anonymous caller has typically financed her significant purchases using zero percent APR credit cards, but she’s begun to have some concerns. Is she taking unnecessary risks with this approach?
Von is puzzled by the repeated claims that Roth accounts are superior to traditional ones, despite both leading to the same mathematical outcome. What is he overlooking?
Molly and her husband are making strides toward financial independence, yet they feel dissatisfied with their jobs. Can they handle taking on student debt while accepting a 50 percent decrease in their income?
In today’s episode, former financial planner Joe Saul-Sehy and I address these three inquiries.
Enjoy listening!
P.S. Have a question? Leave it here.
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Anonymous asks (at 01:55 minutes): Is it wise to use a zero percent APR credit card for large expenses? I have been doing this for many years, yet I am starting to question if there are potential risks I haven’t thought about.
For instance, rather than saving money for a vacation and paying for it upfront, I typically open a new credit card with a promotional zero percent APR offer that lasts about 15 or 18 months. I charge all my vacation-related expenses to that card and then gradually pay it off during the promotional period. I prefer to invest my money now and handle expenses later. Since these credit cards provide an interest-free loan, it seems like an obvious choice.
Sometimes I keep the card open; other times, I decide to close it based on aspects like annual fees or the rewards program. This method has worked effectively for me for years, helping boost my credit score to over 800 without significant downsides. While I don’t have a mortgage, I do have a car loan and have otherwise maintained financial responsibility. Are there any risks associated with this approach that I might be overlooking?
Von asks (at 21:27 minutes): I’m grappling with the insinuation I’ve encountered in several episodes that a Roth retirement account is superior to a traditional one if tax rates remain unchanged. Could you clarify your perspective?
I’ve listened to you outline the advantages of Roth accounts, highlighting that withdrawals during retirement are tax-free, including any gains. This suggests that paying taxes upfront (Roth) results in a better outcome compared to paying them later (Traditional).
However, mathematically, this seems incorrect if tax rates at the time of contribution and withdrawal are identical.
For instance:
If I contribute $10,000 to a traditional account, it grows to $174,494 over 30 years assuming a 10 percent annual return. If taxed at 20 percent upon withdrawal, I’d end up with $139,595 in net spendable income.
Conversely, with a Roth account, I would pay 20 percent in taxes upfront, contributing $8,000. After the same 30 years of growth at the same rate, that also results in $139,595, leading to the same spendable income.
As long as the tax rate stays the same, the net result in both cases is equivalent.
Have I misunderstood your point about Roth accounts, or are there additional complexities to this topic that I haven’t considered?
Molly asks (at 33:56 minutes): My husband and I are contemplating significant career transitions that would come with over a 50 percent pay cut. How should we approach this major change while continuing to save for financial independence?
We are both 39 years old and have two young children (ages 2 and 6). I’m thinking about entering nursing while he wants to pursue teaching. We believe these professions will be more satisfying and allow us to spend more time with our family, but both require us to obtain further degrees.
Here’s a brief overview of our finances:
Combined income: $250,000 a year, plus $14,000 in 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 home.
Debts: $165,000 remaining on our primary mortgage (to be paid off in 5 years), and $70,000 on each rental property.
We can manage on $4,000 monthly for essential expenses, with some flexibility for extras like vacations. If we stick to our current trajectory, we would achieve financial independence relatively soon. However, we don’t intend to retire completely; we just want to slow down.
How can we make these decisions while remaining on track for financial independence? What strategies can we implement to maximize our savings and advantages as we transition into these lower-paying jobs?
And should we consider taking on student loans? The costs for the accelerated nursing program are $25,000 and $10,000 for the teaching degree.
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