Like my dad died with about 800 or 900 grand to his name and he should have spent more of it. And that is my dad was so terminally cheap that, well, having said that, I think he got a lot of joy from asking for his frozen margarita to go. Um, he was just so painfully cheap that I don't think he ever really had a chance to enjoy his money. I think the whole point of being as responsible as you've been and working as hard as you've likely worked is that at some point money means nothing from 0 to 18. It kind of means way too much. Sometimes everything kind of 18 to 70 or 80. And then as you get towards the end of your life, it means nothing again.
In today's office hours, we discuss how to build wealth at every stage of life. From saving on a modest income to investing for retirement to managing money with young kids. We're joined by Nick Maggiulli, the chief operating officer for Ritholtz Wealth Management and author of the blog Of Dollars and Data. Welcome, Nick.
Thanks for having me on, Scott. Appreciate it.
All right, question number one. Our first question comes from a listener who texted the office hours hotline. Everyone talks about how to be rich, but no one talks about how to be poor. How would you save for retirement if making under 60,000 a year? How would you structure your debt payments like student loans, credit, and mortgage? Nick, thoughts?
I think the first thing you got to do is make sure you're making the minimum payments. I think if you don't make those, then you start getting late fees, all those types of things. So, as long as your minimum payments are taken care of, you have your emergency fund. So, the first two things. After that, you rank order everything from highest to lowest return, or you could say highest interest rate to lowest interest rate. And then every extra dollar after your minimum payment, you then put into the highest return thing. So, credit cards, 18 to 24% is what you're getting charged on that, right? Every dollar you pay off your credit card debt, you're basically earning an 18 to 24% guaranteed return. There's no place you're going to get a guaranteed return of 18 to 24%. Right? So, you're going to attack your credit cards first. Then, you're probably going to go down the line and you're going to find, oh, my student loans are 8%, my mortgage is, I don't know, 7%. 6 and a half right now, right, in the markets today. So it's like you start going down the list, you pay off your credit card debt, then you attack your student loans, then you attack your mortgage. In terms of retirement savings, I say conservatively a diversified portfolio should get 5% a year. So that's of the ones listed, that's the bottom of the list, right? So if I were going through, I would be attacking all the debt stuff and then I'd do the retirement savings at the end. So that's how I look at it, is like return per dollar invested, and I think you have to attack the higher interest rate things first before you start going down the chain.
Yeah, that just makes a lot of sense. And the only couple wrinkles I would add is also see if there's a way to elegantly refinance some of that debt to lower interest rates. Whether it's, you know, some institutions like SoFi, if you went to a quote-unquote elite institution, will refinance your student debt at a lower interest rate. Are there ways to transfer your credit card balance to lower interest rates, refi your mortgage? Like, how do you bring your interest rate cost down? But Nick's absolutely right that the best investment is getting rid of debt that's at a rate that you probably can't match in the markets. The only thing I would add is once you get your debt under control, there is some good debt. I would argue that a decent mortgage is good debt. It's tax deductible. It's fairly low interest usually. Usually you can do better in the market. But once you get sort of manageable debt and it's mostly just your mortgage payment and maybe an auto loan if it's a decent interest rate, try and figure out a way to have automated savings or automated investing that's tax advantaged. Almost every state and country has some sort of tax advantage savings or investment vehicle you can take advantage of. And the key is never to see it or never touch it, and that is have it taken right out of your paycheck such that you're not tempted, like 98% of it, to spend or increase your standard of living to whatever it is that comes through your hands. But on the whole, I agree the key lesson here, what Nick said, is attack your debt. That's the best investment you can make.
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All right, question number two.
Hi Scott. My name is Scott 2. I'm calling from El Paso, Texas. My wife and I are in our early 60s. We run a micro small business out of our house. We own our house. Our business has almost zero overhead and a small recurring revenue stream that pays our bills and a bit more, and we have about 1 million liquid net worth in addition to our house. For quite some time now, we felt that this market is overvalued at our age and with our concerns about the market. We're wondering how we might deploy a chunk of our net worth to produce more stable regular recurring income plus some reliable appreciation.
Nick, thoughts?
I think they're in a great situation. The fact that they have a business with, as they said, low overhead that basically covers their expenses. All the rest of this is either upside or just planning for the future when they either sell that business or wind it down, etc. I think for them, there's going to be two answers I'm going to give. I'll give the answer I think they want to hear and then I'm going to give the answer which I think is the correct answer. So I think the answer they want to hear, they're looking for, okay, what type of investment should I own, right? I want to own some stable income. I also want some appreciation. For a lot of retirees, they're going to be looking at like dividend stocks or a dividend stock ETF. They're going to be looking at REITs, real estate investment trusts, right? Those are things that pay out a lot of income. You can also maybe add a little bit of short-term debt in there as well. So those three things in like a diversified portfolio of REITs, dividend stocks, and some short-term debt, that's going to do quite well in terms of getting your income and you'll retain their appreciation through the REITs and the dividend stocks. That's the answer they probably want to hear. It's not the answer I would actually give. And I think the problem that a lot of retirees have when they look at like generating income, they overly obsess on things that actually pay income, right? And I think the better answer is you could just buy like an overall stock market fund. I understand they're worried about valuations, but let me just walk through this real quick. You can just buy the overall stock market and it's going to appreciate over time, and over the last at least decade or so, the overall stock market has outperformed a dividend fund. Even when you include total return, right? So even though that dividend fund is paying you income and you look, you see those checks coming and you feel good, the stock market, you just put that in an overall index fund, that would have actually gone up more. And then the best part about that is you can just sell it down when you need to make those payments, right? Like when you need the income, you can sell. So from a tax perspective, it's also a lot better just to have it in a fund that just goes up more and you can sell it as if you're creating the income yourself. So I think a lot of things have changed in terms of corporate strategy, in terms of how companies pay out dividends or don't pay out dividends, etc. So as a result of that, I think overly obsessing on income is not necessarily the right choice, especially from a tax perspective. But if you really want to do that, once again, REITs, dividend stocks, and maybe some short-term debt are the solution here.
So, the key piece of information that was revealed in the question is that they're still net savers. And that is they're creating more income than they're spending and so they don't need income. And when you're in a dividend stock, keep in mind those dividends are being taxed. Whereas when you're in a non-dividend stock, your money is growing tax deferred. So it should compound at a greater rate. So if you don't need income at this point, you want to take advantage of the fact that one of the greatest wealth creation vehicles or loopholes in history is that stocks compound tax deferred. They don't spit out the profits every year. And so you must take this in the form of dividend at which point it gets taxed between 23 and say 35% if you're living in California, New York. So if you don't need the income, you absolutely want to be in stocks that compound tax deferred because they don't lose money out to dividends. Having said that, you're basically coming to the same conclusion a lot of us are, and that is the market is overvalued. Now, nobody knows. Everybody thought the market was overvalued in '97, and they were right if you looked at it at 2000, but by '99, the NASDAQ had tripled. It is very hard to time the market. The one asterisk around all of this is I don't think there's ever been a time where it's more important to understand the power of diversification, and that is people think they're diversified if they just buy low-cost index funds and SPY, but the S&P because of the concentration of market cap around the Magnificent 10 means that if you're in the S&P you may feel diversified but you're not. What I would suggest is you think about diversifying not only by asset class, some bond funds, equity funds, but also geographically, and that is US stocks now comprise over half of total market capitalization globally, and if you added in debt it might be 60 or 70%. And you do see a cyclical rotation between us and call it the rest of the world. And you want to be prepared if there's a major drawdown in the valuation of US stocks because if you just think you're diversified by being in US stocks, you're not. You're actually more concentrated than ever before. I would argue you're basically making a giant bet on AI. So, one, if you don't need the income, let that money compound tax deferred with stocks that aren't dividend stocks as Nick suggests, but also at your age, given that you've already built up a nice nest egg, you're looking to probably take some risk off the table, and you do that through diversification, low-cost index funds. But think about different asset classes, both equities and fixed income. And what people usually miss is diversified geographically. Any thoughts on that, Nick?
No, I completely agree. I think they just need to have a good diversified portfolio for those liquid funds. So, that's going to include, as I said, short-term debt. You're going to want... Yeah. If you want international stocks, you can go into other types of investments as well. If you wanted to get into something like farmland, that's something that produces income. It's obviously very liquid. So, you know, getting into one of those like crowdsource platforms, things like that. But there's a lot of different asset classes out there that can produce some income. And I agree, since you don't need the income now, start planning for that because you still have at least, let's say, 20 to 30 years ahead of you. And when are you going to wind down that business, thinking through how that's going to play out because if those aren't covering your expenses anymore, then your actual liquid assets will need to do that. So, kind of preparing for that transition is the big thing to look at here.
Yeah. And the only, just hearing you speak, the only thing I would add to that is that at some point, like my dad died with about 800 or 900 grand to his name and he should have spent more of it. And that is my dad was so terminally cheap that, well, having said that, I think he got a lot of joy from asking for his frozen margarita to go. He was just so painfully cheap that I don't think he ever really had a chance to enjoy his money. And then at some point, assume you're going to get a 4% return on your money. Assume that at some stage that 4% is more than your burn. What I would suggest is you and your wife maybe at some point think about, okay, could we spend a little bit more money on travel, on maybe fixing up our house, on maybe giving a little bit of money away to things we're passionate about or people who could use some help. I think the whole point of being as responsible as you've been and working as hard as you've likely worked is that at some point, you know, money means nothing from 0 to 18. It kind of means way too much. Sometimes everything kind of 18 to 70 or 80, and then as you get towards the end of your life it means nothing again. And I just wouldn't be afraid at some point to think how could we have a little bit of fun, you know, could we take a really nice cruise, could we give some money away, could we, you know, buy a piece of art that we've just always loved, could we, you know, whatever it might be, take our family for a reunion. And that is what I sense in your question, is that you're very responsible and I don't want to say people can be responsible to a fault, but keep in mind money, I believe money is meant to be at some point spent. So just be mindful at some point you may want to ask yourself could we have a little bit of fun with some of this money.
