Grant Sabatier (author, Financial Freedom) share some of the steps that led him from $2.26 in the bank to over a million bucks in just 5 years, and the myth that he believes is the #1 barrier keeping the rest of us from achieving the same thing. Plus, a conversation about Senator Elizabeth Warren’s wealth tax proposal, Joe and Big Al answer a question about keeping taxes in mind as part of an investing strategy, and a look at the complete disaster that was the Fyre Festival.
- (00:48) How Grant Sabatier Reached Financial Freedom
- (14:45) Grant Sabatier on How You Can Reach Financial Freedom, Too
- (29:42) I Make Too Much to Deduct Traditional IRA Contributions. Why Not Just Pay Capital Gains on a Regular Investment Account?
- (35:44) Joe and Big Al’s Take on “The Wealth Tax“
- (42:53) The Disastrous Fyre Festival
“Money is infinite. You can always go out and make more money, but you can never get back your time. This moment is literally all there is. And so what are you willing to trade it for?” – Grant Sabatier, author, Financial Freedom
That is Grant Sabatier, millennial millionaire and author of the new book, Financial Freedom: A Proven Path to All the Money You Will Ever Need. Grant will share some of the steps that led him from $2.26 in the bank to over a million bucks in just 5 years, and the myth that he believes is the #1 barrier keeping the rest of us from achieving the same thing. Plus, a conversation about Senator Elizabeth Warren’s wealth tax proposal, Joe and Big Al answer a question about keeping taxes in mind as part of an investing strategy, and a look at the complete disaster that was the Fyre Festival. I’m producer Andi Last with Big Al Clopine, CPA and Joe Anderson CFP®.
:48 – How Grant Sabatier Reached Financial Freedom
Joe: Andi, I’m fired up.
Andi: I know, this is so cool. It’s been a year, I actually think it’s been more than a year since we had Grant Sabatier (pronounced sa-BA-tee-YAY) on the show.
Joe: Grant Sabatier. I like to call him Sabatier (pronounced SABA-teer) but you busted my you know what.
Andi: Grant, I’m right, right Grant? It’s Sabatier?
Grant: It is Sabatier, but either works for me.
Joe: How many people call you Sabatier?
Grant: Probably less than 5%.
Joe (laughs) All right. So I’m right in the ballpark there. Less than 5% is the class moron.
Andi: You may remember that last year when he was on the show, Grant is the millennial that became a millionaire in five years through side hustling – started with $2.26 in his bank account and then became over a millionaire by doing some extreme side hustling and investing that money. And last time he was on YMYW he actually said that he has never laughed so much in an interview. So Joe, you have to achieve that once again.
Joe: Well no, he was laughing at me because I’m a complete idiot.
Grant: That’s true, you still hold that record. The bar is still high.
Joe: I got to tell you though. You’ve changed my life. I’ve been a CERTIFIED FINANCIAL PLANNER™, I’m a president one of the largest fee-only financial planning firms. And I’m gonna tell you, Grant, you have changed my financial life since our last conversation.
Grant: Wow. That’s… first, thank you for sharing that. But how?
Joe: Because here’s – I’ve been stuck with the traditional view of retirement. I help my clients, most of our clients are in their 60s. So they’ve saved their 30, 40, sometimes 50 years, 5% of their income, 10% of their income if they’re lucky, maybe 20% of the income, they spent less, hopefully, than what they’ve made. And it was this traditional track of retirement. But when you were on last year, it was like, “This guy has something special He’s doing something completely different.” And it’s like, I’m making some decent money, but I’m also having a really good time with my life, but I’m saving a hell of a lot of money. And at first, I was like, “This guy is absolutely crazy. I mean he’s saving 85% of his income,” I’m like, that’s almost impossible, what the hell are you doing? But then I took a lot closer look at my finances. And then you said, you know what, just save 1% more per month. Or if you can do 2% more per month, or if he can do 3% more per month, and then you take these little hacks at it, by the end of 12 months, now you’re saving 24% or more than what you were. I was an I considered myself a saver. I consider myself that I was saving a heck of a lot more than most. But you were able to show me a new light. So I really appreciate that.
Grant: Wow. That means… that means a lot to me. That’s that’s the best thing that I’ve heard all week. So thank you so much, so much for sharing. Man, I can’t wait. I can’t wait for you to read the book.
Joe: Yeah well I got a head start on it. I’ve read the first few chapters, and I like how you’re you’re framing this, man. It’s like, get rid of the old view, and you’ve got to start fresh. You’ve got to start, like, what’s important to you? And this whole FIRE movement, I like quite a bit, but I’m like, “How the hell are you going to do that?” If you use a simple like 4% rule. And if you’re spending $100,000 a year if you’re 35 years old you need a ton of money. But then it’s like, do you need to spend $100,000 to have a good time? But also it’s just looking at what money means. So tell our listeners a little bit about the book, because you had this long quest – or maybe just give a recap a little bit of your story, and now how you formed your story into, I guess, a passion to help other people.
Grant: Yeah, so the book is Financial Freedom: A Proven Path to All the Money You Will Ever Need, Penguin Random House, it’s out now, available worldwide, and the book is really my journey from, basically, the book opens up with me waking up in August 2010 with my mom yelling up the stairs at me because I’d slept in again. I was 24, literally sleeping in the same bed that I slept in as a 7-year-old kid. And I ended up there because I’d bounced around a number of different jobs after college and never quite found the right fit. So I was completely broke and didn’t have enough money to pay my rent. So I had to leave my lease and move back home with my parents – and the really sad thing is that I’d send out over 200 resumes into the abyss without a single reply back and was really starting from scratch. I’d always done when I was supposed to do. And back home at my parents, spending more time with them, I started to look at them and their lives and their friends’ lives. And my parents were in their mid-50s, mid to late 50s at the time, and they were saving for retirement, all their friends were. But retirement was really all anyone talked about. All they talked about, all their friends talked about, and I was like, “gosh, I can’t imagine literally working for the next 40 years of my life, bouncing around jobs like I did.” I’d never liked any of the jobs that I had. And I was like, “could there be another way?”
And so, being the philosophy major that I am I, kind of step back and realize that money was just a human invention that we embed with so much emotion and power and meaning, and what if I could kind of take money and deconstruct it and look at it for what it is and really study it intensely? And so I started doing that, and I read one book, Your Money or Your Life in 2010 that, it completely rocked my world, and the central premise is that whenever you’re working, you’re trading your life for money. Money is infinite. You can always go out and make more money, but you can never get back your time. This moment is literally all there is. And so what are you willing to trade it for? And that just completely blew my mind, and I was like, “I need to find a way to make as much money as possible for my time.” And I went out and looked around and 99% of what I found was just completely scammy. There’s a lot of greed in the money world. And I was like, “this seems just like, I don’t even know where to begin.” But I started and developed a new skill set and ended up getting a job at a digital marketing agency, based on getting certified for free on Google. And was really off to the races, and with that first job after leaving my parents, I was making $50,000, saving about 60% of my income. And so by this time, I realized that it wasn’t, to your point about saving early and often, it was early, often, and as much as you can. So I did the simple math and I was like, even 10% of my $50,000 salary, I’m probably never going to be able to retire. And I’ve optimized what I’m spending. And I realized pretty quickly there was a limit to how much I could cut back. There wasn’t a limit to how much money I could make. I was like, “oh, what if I increased my savings to 50%?” And then I did the math and I was like, “whoa, I could retire and 20 years or less!” And then I was like, “OK, at the same time if I can make a ton more money and save as much as I can, how fast can I save a million dollars?” And that was my goal. I had two seemingly unrealistic goals: save a million dollars and then retire, meaning retire that I just didn’t have to work for money. I would no longer have to be on the grind. I didn’t know what I was going to do, or what I wanted to do. I didn’t have any passion, and I set out to do it.
Fast forward five years, three months, and six days, and I made it. I’d saved $1.25 million and reached financial independence at the age of 30. And the entire time, I was working 70-80 hours a week. I took off – I actually calculated it recently – I took off less than 20 Sundays the entire five years. The rest of the time I was either working or reading about money. I read over 300 books during this period too. So I was either reading about money, or I was trying to make money. And it’s like anything in life, it was all I did. And a lot of people were like, “oh gosh, it’s so crazy, how do you do it?” And it’s like, I’m bad at 98% of things in life, there’s like a huge mound of clean clothes that I need to fold and have been sitting there for five days. But money is something that I figured out. And so once I became financially independent I started writing about it on my blog MillennialMoney.com. And just the first reader emails that I got filled me with a level of joy that was so far beyond any amount of money. And I realized that I hadn’t been chasing my purpose, kind of my purpose in life showed up. It just arrived. And so since 2015, I’ve been writing about money, and then since 2016, I’ve been writing about money full-time. And so Financial Freedom is my first book. It took me 2,800 hours to write, and so 77 hours a week over a nine and a half month period. And so I put my all into this book, and I wanted it to be the highest ROI money book out there – meaning most money books are just one idea and a bunch of fluff. And I wanted this to be like a non-stop, step-by-step process that’s even better than the path that I took because I find anyone else who was doing this. Now there’s the FIRE movement and there are other people who are doing this. But 2010, it was just me alone, kind of in the forest of money. And then two and a half years in, I discovered someone else who was doing this and was writing about money. But at that time 2012, 2013, there was only a small group of people -very, very, small group of us, but that helped accelerate my path.
And now it’s amazing to see these ideas starting to spread. But even with this spread of the ideas, I see a lot of sort of judgment and challenges, and people just naming the FIRE movement and then dismissing it because it’s too extreme for them. And yeah, I’m very extreme, my case is an extreme example, but the principles still stand. I mean, you get your savings rate, as you talked about, from 0% to 25%? Most people can retire in 15 years or less. If you can get that 50%, and just realize at the end of the day, I’m not here to tell you what to buy or not to buy, but everything in life is a trade-off. And so you have to just decide whether it’s worth trading your time for. And then the biggest thing I found through the whole process is that I think the number one thing holding people back is they think that money is time and time is money. We hear that all the time, and that’s one of the biggest myths in the entire world, and in fact, I think it’s one of the biggest barriers, and so I go right at that. I go right at why you don’t need a budget. I talk about side hustling and how to invest your money. And I wanted it to be the book that I wish I had at the age of 24. It would have saved me thousands of hours. And it’s my life in addition to a scalable strategy that anyone can use, no matter where they’re at in their own financial journey, whether they’re just starting, or whether they’ve been at this for a couple of years, it’s designed to help you make more money in less time. And I hadn’t found, and still haven’t found a book like it. And so that’s why I wrote it, even though the publishing industry didn’t really want me to write it, because they wanted the book to be easy to classify. They wanted me to write either an investing book, an entrepreneurship book, or money management book. And I wrote all three wrapped up in one because it’s all three of those things that made the journey possible – you can’t have one without the other in my mind. And I call it the Enterprise Mindset, which is taking every advantage to make money and make the most of your time as possible. And then the sum is much greater than the parts. And so there are over 800 steps in the book. And if you want to be as crazy as I am, you can do it all kind of by the same blueprint.
But the simple idea is, you don’t even need millions of dollars or to be financially independent to have freedom and more time and money and space and control in your life. Because really, I figured out that money only matters if it helps you live a life that you love. And clearly, the more that you spend, the more that you’re going to need. And then the last point: once I actually looked at what made me happiest, I realized that eight of the ten things that made me happiest in life cost less than $20 or were free. So things like walking my dog, having a glass of wine with my wife, sitting in a hammock reading a book, playing guitar with my friends, all those things that I really, really enjoy. I started building my life to maximize the opportunity to do those and realized that I needed a lot less money than the finance industry was telling me. And the finance industry really sells a level of precision that’s unrealistic. It’s like how do you even begin to figure out how much money you’re going to need for the rest of your life when who you are this year is different than who you were two years ago, and is definitely going to be different than who you’re gonna be in five years? And so how do you form a relationship with money that ultimately helps you live a life that you really like, as opposed to trying to fit your life into how much money you’re making? And I think the flip-flop of the most important question is what kind of life do I want to live, and then how much money does it actually take to live that life, as opposed to the other way around. We’re typically asked or told here’s how much money you need. And so yeah, it’s a lot of counterintuitive mindsets and approaches. And yeah, this is my life story as well as, I hope it helps people because life’s really too short to be stressed out about money.
Andi: That passion is palpable.
Joe: Grant, that was a mouthful there – we gotta unwrap some of this here.
And we will do that momentarily, as soon as Grant takes a moment to breathe! In the meantime, read the transcript of this interview, and find the link to Grant Sabatier’s hilarious first appearance on Your Money, Your Wealth, as well as the link to purchase Grant’s book, Financial Freedom, in the show notes for today’s episode at the brand-new YourMoneyYourWealth.com. And if you’re getting as much value from Grant’s wisdom as we are, don’t keep it to your self – share this podcast episode with your friends – email ‘em a link to the show notes or post this episode on Facebook, Twitter or LinkedIn!
14:45 – Grant Sabatier on How You Can Reach Financial Freedom, Too
Joe: So step by step, first thing here is that you have to, what, just to identify what makes you happy and what that actually costs so then you can be passionate about…? Because I think a lot of times people don’t necessarily do that. And then second, all right, I gotta make as much money as I possibly can. How do you stay disciplined? How do you not your lifestyle creep come into effect? And how many hours did it take you to write the book?
Andi: He’s really quantified everything.
Grant. Yeah, I did, I tracked it in Google Chrome.
Joe: (laughs) Did you have a little stopwatch? Every time you worked on it?
Grant: I did.
Joe: So, I guess if we could make your 800 steps maybe some very high-level five steps. Is the first step, hey, let’s just really identify what makes me happy, second how much money can I save, third what other side hustles can I do, and then fourth how do I invest it? I mean, if I try to dumb it down in a quick couple minute chat?
Grant: Yeah. No, that’s pretty good. I think the first thing is to figure out where you’re at. I call it getting clarity on where you are, and the most important thing to do is to stop – you can do this after you listen to this or tomorrow, or whenever – just stop and look around at your life and see what you already do have. And there are so many people that have a partner that they love, and kids they love, and a job that’s probably more stressful and they work more than they want to, but they like it enough. And then they’ve got friends that they like and a house and a community that they like. And then I encourage people to think about the life they currently have because you might have already won the game. And that’s one of those things where it’s always so easy to chase the next thing than it is to realize what you already have. And so clarity is looking at your life and what you already have, as well as, with your money, making sure you understand what you owe, who you owe, that credit card bill that you just let pile up on the table – open it and put it into a spreadsheet and figure out what you actually owe. Even though it’s really really hard and it might be negative. And then the first thing from that is to calculate your net worth, which is just your assets minus your liabilities. And your net worth is going to be your scorecard through this whole journey. And it’s so easy to track that with apps like Mint and Personal Capital. You should always kind of start there. You have to figure out where you’re at before you can get to where you want to go.
And then the second thing you do is, after you get clarity on where you are, that’s when you start looking at what you’ve been spending and run it through “the happiness filter,” and say, “is this really, this stuff that I’m buying and how I spend my money, is it really making me happy?” And really to hone in on, “OK, I don’t need this, I want to keep buying this,” and the point is, you can spend however much money you want to spend, just realize what you’re trading for it and the tradeoff that you’re making. And I figured out pretty early on that every $100 that I was saving, I was buying six days of freedom in the future. and I actually have a calculator at FinancialFreedomBook.com/tools. You can use it for free, you don’t even have to buy the book. And I call it the Freedom Calculator. You can put in your own numbers – it doesn’t save any of this information, and it’s not personally identifiable, you can use it on your phone – you can put in all your numbers, how much money you have, how much money you make, and then the cost of something you want to buy, and it’s going to tell you how much freedom you’re trading for it. And just realize that if you buy that new $50,000 car that you probably are going to have traded a year of your life to work to buy it, and then the lost opportunity cost, meaning the amount of money that, if you took that and invested it instead, you’re gonna have traded a year of your life and you’re going to have to work five or six years longer in the future for that car. And if it’s worth it to you…
Joe: You know, when you put it that way, Grant, It’s like I’m going to sell everything I own.
Grant: You should do it. Well I mean it’s all about freedom, man.
Joe: I’m just gonna get a little Boone’s Farm. That’s my wine, so that’s pretty cheap. But I love your passion around this.
Grant: It’s just a trade-off, man.
Joe: Yeah, it’s a trade-off, you know what? $100 or that’s six days, bro.
Grant: Yeah, the thing is, if you’re really happy with your life and you love the way things are going, great. Start saving 1% more every 30 days like we talked about, and you’re going to be able to retire faster than you ever thought possible. Great. If that’s your take away from this, perfect. For someone else, if you’re unhappy with your life and you feel really stuck and you don’t really like your job and you’re like, “I don’t really want to do this for the next 30 or 40 years,” money is the path to freedom. And that’s what the tradeoffs are here, where you’re like, “oh, I’m gonna live differently than most people.” Whereas a vast majority of Americans, they’re making a right turn, and they’re in debt, and they have less than $1,000 saved, you’re like, “I’m not going to do what everyone else does, I’m going to take a left turn and choose to live life on my own terms,” and that’s all it is. It’s defining success for yourself, realizing that no matter how your friends are living, or your family, or your parents, or where you grew up, that one thing that you can control – we can control so little in our life, it’s the illusion of control – but the one you can control is how you spend your money and your relationship with money.
And you can use that in a way that buys you more time to do those things that you love. Doesn’t matter how much money you’re making if you don’t have the time to enjoy it. Or it doesn’t matter how much money you have if you don’t feel free. I meet people all the time who make six figures and above, and they’re super stressed out and don’t like their life, and they come to me and I chat with them and they feel so stuck in all areas of their life. When in reality, they’re like, two or three steps away from a life they’d really love. And often, because they’re so stressed out, they can’t see those steps. And those steps are like, hey, you’re making six figures but you’re putting 55% of your paycheck into your home. You’ve gotta move to a smaller apartment or a smaller house and start saving that money instead. You don’t have to do it forever. Here, just do it for three years and then all of a sudden you’re going to have $70,000 saved, and then that boss that you don’t like, it doesn’t matter if he fires you or you get fed up. You can leave that job because you have $70,000 – you have an entire year of expenses saved, and then that’s your pathway to freedom. Yes, you have to make trade-offs for the next three years. But we’re talking about two or three years of sacrifices for literally a lifetime of opportunity. And so when you’re stuck in your life, often looking at money, I would say that money is a reflection of who you are. Look at your money and how you’re spending money if you feel stuck in your life, and then use that money as a way to buy yourself some space and time. Because when your life is constricted and you’re stressed out every day, and we’re all connected 24/7 365, very, very, hard to get perspective on your life – even in 10 vacation days a year. But if you can buy yourself three months or six months of freedom and then get some air to breathe, that’s when life starts showing up. And there are so many ways that you can do this that I outline in the book.
And back to your simple question, it’s like, yeah, once you realize what you’re trading for it, then realize that there’s a limit to how much you can cut back, but not a limit to how much you can make. I mean, a vast majority of Americans think they deserve a raise. And then they never go and ask for one. Or they don’t know how much to ask for. That’s why I’ve focused so much on, before you launch a side hustle or become an entrepreneur, optimize the moneymaking opportunity that’s right in front of you. Try to make as much money as you can in your full-time job. And if you can’t, if you don’t see a ceiling there, at least then you have that data point and you’re like, “I probably shouldn’t stay at this job because there’s no potential here.” And that’s another form of clarity. And then launching a side hustle, making money on the side. I go through it step by step process for how to pick and grow a profitable side hustle. And then what to do with all the money that you’re making. Once you start saving this money, how do you invest it? How do you invest it in the most tax efficient way that gives you more options and more freedom? And so obviously I have a systematic sort of index fund and stock investing strategy, it’s very simple. And then a real estate investing strategy, and then I outline, OK, now that you’ve done these things, how do you keep all this going?
And the biggest thing for me is, most people only look at their money every couple weeks, or once a month, or even when tax season is happening. I strongly encourage everyone to look at their money every day. I call it the Money Meditation. I didn’t call it that then, but now I do, and I still do it. I did it this morning when I’m having my coffee – I open my Mint personal finance tracking app, I look at what my net worth is. I look at payments that have come through. I spend five minutes a day with my money, and then I end up the rest of the day because I’ve already spent time with it, I spend less. I see new opportunities to make money. And all of a sudden, money is like this friend that I’m excited to engage with and save and focus on, as opposed to something that I’m just fearing and hiding from. The more time that you spend with anything, the more comfortable you’re gonna get. You’re going to start seeing things that you’ve never seen before. And so I encourage people. Money is something that you can control or let it control you. And by spending a couple of minutes, 5-10 minutes a day with it, you’re going to get so much further than just hiding and looking at it once a month when you check your budget. And then that’s the final thing. Like, budgeting is almost always a complete waste of time. I mean, I know it works for some people, but to me, budgets – they suck. They’re like the biggest barrier to saving money because often budgeting we’re told to cut those small purchases, the lattes, the glass of wine, the Netflix subscription. But it’s those small things that actually give you the most joy in life. And we’re told to cut those out to save for the future. But really, that might help get your savings rate from 3% to 6%, but it doesn’t actually move the needle long-term.
The way you save money as you save it on your three biggest expense categories: housing, transportation, and then food. But housing is by far the biggest one. We spend 70% of our income on those three things. So just moving to a smaller apartment or getting a roommate or AirBnB-ing your guest room or getting into house hacking – I break down that whole process in the book – and doing these things systematically, if just for a little while. You might move to a smaller apartment like I did. All I did, I moved from a $1,500 a month apartment to a $700 a month apartment. I save the $800 extra dollars per month. I just did that for three years. The net impact of that just $800 savings a month over the past nine years, now I’m over $300,000 wealthier because I invested that money instead. So I made a short-term sacrifice for literally a much, much, larger opportunity. And then I was able to buy the nice apartment that I wanted to because I’d already built that foundation. And so it’s just, especially early in life, making some of these trade-offs or even if you’re a little later in life, realize that if you’re just starting from today, money is a pathway to freedom. This isn’t rocket science. It’s not complicated. The emotional part is kind of the hardest part, but the way you get over that is by just spending more time with your money and learning all that you can, because then it’s something that you’re really comfortable with and you see as a tool, as opposed to something to fear.
Grant: Yeah, campervans, that’s one of my side hustles is flipping Volkswagen camper vans. And I’m actually doing my entire book tour, and I’m going to be in San Diego this spring. I’ll be in one of my Volkswagen vans.
Joe: Are you living in that? Did you sell everything and now you’re just living in the van?
Grant: No. No, not at all. I actually since we last chatted, I moved to New York City. And so I moved from Chicago, which is an average cost of living city, to one of the most expensive cities in the world. And I’m actually on pace to spend less money this year than last year. And I talk a little bit about that in the book. But no, I couldn’t live in my van full-time. Even on the road I’m gonna be doing a little bit of camping, but I have so many friends all across the country, and so I’m going to be crashing with them, and it’s gonna be a lot of fun.
Joe: Well I guess I want to thank you for hitting rock bottom and having to sleep back at your parent, to kind of get you the passion and the motivation to really understand, study money, and coming out with some phenomenal resources that we all can benefit from
Grant: Hey, yeah. Thank you for appreciating. it’s one of those things, so many people struggle with money and it holds so many people back, and I really believe that financial literacy is a human right and everyone should have access to this type of information, and I’m just doing what I can to level the playing field a little bit. And for those people who are interested, show them a way out.
Joe: Yeah. No, it’s awesome. I’m a huge fan and I’m really excited about the book and I encourage all of you out there to get a copy of it – FinancialFreedomBook.com. It’s Grant Sabatier. I really appreciate it. And you’ll be in San Diego what…?
Grant: Yeah I’ll be there. There’s gonna be a huge event, so yeah you can sign up for alerts at FinancialFreedomBook.com, or if you buy the book on Amazon, sign up for the email list, you can get those alerts. But yeah, I’m going to be spending at least two or three days in San Diego. Got a lot of fun stuff planned.
Joe: Awesome. Well, hopefully we can hook up when you get in town in the next month and a half or so.
Joe: All right brother. We’re talking once again to Grant Sabatier, check him on at FinancialFreedomBook.com.
See Grant’s book tour schedule here. You can find the transcript of this interview, the link to Grant Sabatier’s hilarious first appearance on Your Money, Your Wealth, and the link to purchase Grant’s book, Financial Freedom in the show notes for today’s episode at the brand-new YourMoneyYourWealth.com.
Now it’s time to answer your money questions. We’ve had a slew of them and we can only get to so many per show so Carrie, Tom, Bob, J, Judi, and Anna, check your inbox for an email from me with your answers – and they will be in the podcast soon too, I promise! In the meantime, if you’ve got a question and a microphone on your computer, visit the all-new YourMoneyYourWealth.com and scroll down until you see the “Ask Joe and Al On Air” button – click that and you can record a question for Joe and Big Al to answer on the podcast. And since Joe really digs this new feature you can bet those questions will take precedence! But even if you don’t have a mic, you can submit your question on a text form too. Let’s hear one of those recorded questions from YourMoneyYourWealth.com now:
29:42 – I Make Too Much to Deduct Traditional IRA Contributions. Why Not Just Pay Capital Gains on a Regular Investment Account?
Sarah: Hey there, I’m Sarah from Chicago and I have a quick tax question. I make too much to deduct any of the contributions to a traditional IRA. And my question is if I have to pay regular income tax on deductions in the future, how does that benefit me rather than paying capital gains in a regular investment account? Thank you guys and love the show.
Joe: Well thank you, Sarah. Love that you love the show.
Alan: Yeah, me too.
Joe: All right. So she’s making too much money to deduct any contribution from an IRA. So she’s saying, hey, if I have to pay regular income tax on the future growth, if she doesn’t take the deduction going in an IRA, what’s the difference? Why don’t I just go after-tax and pay capital gains tax? That’s a really good question, and I’ll take a first stab at this. Sarah, what I would like you to do, if you have too much money that you cannot take a deduction from a traditional IRA, maybe you have income that you can contribute to a Roth IRA. Because the income limitations for traditional IRA, well it depends on if she has an account, if she’s married and the spouse has a retirement account at work.
Al: Yes. So let me help you out, and then we’ll come back to you. So if you’re single, by the time you make $64,000 of income it starts phasing out – it starts phasing out, and by the time you get to $74,000, it’s fully phased out. That’s if you’re subject to or included in an employee retirement plan. If you don’t have an employee retirement plan, there’s no limit on the deduction, in terms of income. Now, if you’re married…
Joe: …and if the spouse has one, it’s the same as the Roth.
Al: Yeah that’s right. It’s $193,000-$203,000. So in other words, that’s where you can take the deduction.
Joe: So I guess it depends on your income. So if you’re in those income ranges, if you’re, I guess, married under $203,000, you can still make a Roth IRA contribution.
Al: Yes. And if you’re under $193,000 you can do a full Roth IRA contribution.
Joe: So I guess that’s where I would start. If you’re still over that, it still might make sense to do a non-deductible IRA contribution, but then convert it into a Roth IRA. Because there is no income limitations on Roth conversions. The only problem with that strategy is the pro-rata and aggregation rules, and what that means is this, is that you have to take a look at the aggregation of all of your IRAs together. So if I make a $6,000 IRA contribution and convert it, that’s fine, as long as that’s the only IRA that you own. But if you have another IRA that’s worth let’s say $93,000 – or $94,000 is a better number, because you have $6,000, $94,000, so that’s $100,000 total in IRAs. So 6% of your contribution is $6,000 of $100,000 would be roughly 6%. And if you did that conversion, only 6% of it would be tax-free, because they take a look at the aggregation of all, and then they pro-rata it. So it’s a tough question. If that’s the case, if you have a lot of other IRAs, then yeah, maybe probably going into a non-qualified accountant and be a very tax-efficient investment, and just pay capital gains rates.
Al: Yeah. I would agree with that, and so one other thing, if you have a bunch of money in an IRA and you have an employer that has a 401(k) that allows you to roll IRA money into the 401(k), there is a strategy where you can take that IRA money, the pre-tax money, and roll that into the 401(k), and then you’re left with the after-tax money with what you just said, Joe. And then you can convert that. So that is a potential workaround on that one.
Joe: So first things first is you have to identify what is your adjusted gross income? Do you qualify for a Roth IRA contribution? If you do not qualify for a Roth IRA contribution, the second step would be to make a non-deductible IRA contribution and convert it, only if you have no other IRAs. If you have other IRAs, then you would want to calculate, what is the total balance of all my other IRAs? And if I were to guess, if it’s more than $50,000, $100,000, then maybe you make your savings into a non-qualified account.
Al: Yeah, which means non-retirement. And the reason is because, in your non-retirement account, you get special capital gains treatment which is a lower tax than any gains in an IRA.
Joe: And today you can be very tax-efficient in that account. You can go into, let’s say, a total U.S. stock market index fund. Those are very tax-efficient because there’s not a ton of turnover there. Or an S&P 500 fund, you can go into just a large cap, small cap, whatever that you want to do. But I would do an ETF index fund, a passively-managed institutional-type fund, something like that that has very little turnover. Be careful with the investments that you choose outside of retirement accounts if you have more of an active strategy where someone’s trying to time markets and pick stocks with inside the mutual fund? Or a money manager? You’re going to see a lot more turnover within that because they’re getting in and out of the market or they’re getting out of individual securities at certain timeframes throughout the year that could kick out short term capital gains which would be taxed at ordinary income. They could kick out long term capital gains that you’d pay tax on, even though you’re not necessarily enjoying the income from it. So just be careful on the investments that you choose outside of a retirement account to make sure that it’s tax-efficient because it’s not necessarily what you earn, it is what you keep. It’s what you keep, Alan.
Al: Yes. I agree with all of that.
Joe: That’s good. Thank you.
35:44 – Joe and Big Al’s Take on “The Wealth Tax“
Joe: Hey, we got an email, Alan, from a client of ours. He was asking about a podcast or discussion on “the advantages of disadvantages of what I believe is being called the wealth tax. It is difficult to believe this type of tax would ever see the light of day. I guess we are already feeling the effect of this type of tax. It’s called property tax.”
Al: Right. Because the more expensive your property, the higher the property tax.
Joe: So the wealth tax. This came out last week from Elizabeth Warren. Alan, I think you’re a big fan of Senator Warren. (laughs) And she is pushing a novel tax idea as one of the first proposals of her presidential campaign. She’s running for president. She wants to tax the wealth of the super-rich. And so she says the super-rich is at the tip- only wants the tippy-top. First of all, that’s one of my biggest pet peeves, that word. Tippy-top.
Al: (laughs) Why is that?
Joe: I don’t know it just drives me nuts.
Al: It does sound kinda lame.
Joe: Yeah right, lame. Right on, bro. (laughs)
Al: (laughs) It’s not what a surfer dude would say. I’m feeling tippy-top.
Joe: “How you doing today?” “Tippy top!” (laughs)
Al: I guess I would probably never say that. I can’t think of it.
Joe: “Hey, did you go to the top of the mountain?” “Yeah, I went to the tippy top!” I would be like… (laughs) I mean, no cool person I think ever says tippy top. Anyway. So specifically, she wants to impose a 2% annual tax on household wealth between $50 million and a billion. So this is totally affecting you, Al.
Al: (laughs) I don’t think so.
Joe: And an additional 1% annual billionaire’s surtax for a net worth above $1 billion. And then she tweeted this: “after making a killing on the economy they rigged, they don’t pay taxes on that accumulated wealth,” “Warren said of the super-rich in a video posted on her Twitter account last week.” I mean, rigged. Really?
Al: Rigged, huh? The system’s rigged? (laughs) So, well, I will first comment by saying, although it has not been done in the United States, it’s not unprecedented, because there are European countries that have a wealth tax. In other words, they have an income tax and a wealth tax. And it’s in part why tax rates are very high in many European countries is because this wealth tax, along with higher income taxes. So it has been done. It has not been done in the United States.
Joe: Michael Bloomberg, I don’t know if he’s running yet or announced it, but I think he’s thinking about it.
Al: Yeah. Considering a run I think for Democratic nomination.
Joe: Yeah, he was saying, “hey, we need a healthy economy, we shouldn’t be embarrassed about our system.” He said to reporters, “if you want to look at a system that’s non-capitalistic, just take a look at once perhaps the wealthiest country in the world, and today people are starving to death. It’s called Venezuela.” So the wealth tax got Venezuela I guess.
Al: So at any rate…
Joe: Are you a believer in the wealth tax?
Al: No, I don’t think it’s a good idea. And I’ll tell you why. I have…
Joe: A lot of wealth and I don’t want to get taxed. (laughs)
Al: That’s right. (laughs) You can see right through me. No, not exactly. So I’m gonna just make a comment, in my CPA tax preparation consulting days, when I had a practice, I had one of my larger software clients was two guys that came from Sweden. And they specifically came to the United States from Sweden because they didn’t have a wealth tax here, and they didn’t have as high, the U.S. didn’t have as high income taxes. So they felt like, if we’re gonna be true entrepreneurs and make something of ourselves, we want to go to a country that rewards us for doing good. And so what they did, they came to the United States. They ended up building a company that was a couple hundred people, so they employed 200 people and created a lot of great products, I guess for the end users, and by the way, a lot of tax revenue for our government, because they came here instead of doing it in Sweden. And to me, and I’m not going to talk about political parties and this and that, but to me, that’s a real risk of doing something like that, you’re going to take perhaps some of the best minds in our country and say, “We don’t really want you here.” And then what’s going to happen is they’re going to go somewhere else where it’s better.
Joe: Yeah. I don’t know. It takes a lot of work and effort and brilliance, I think, to be able to amass a billion dollars, and I don’t know. Should they be taxed a little bit more? Sure. I don’t know, they probably got a little bit of money. I think more people need help than ever before and there are people that are living paycheck to paycheck, and yeah, I’m all for making sure everyone’s okay. And I think the separation of wealth, or the wealth gap, is a problem. if you’ve got the 1% that’s making 98% of the income, you got to have a little… because if you don’t have anyone to buy your goods and services, the whole system will blow up. So there’s gotta be a little bit more equality. I don’t know. I’m not a big fan.
Al: Yeah, I don’t think this is the way to do it. I think that we have an estate tax, meaning that when you pass away, if your estate is over, what, about $11.2 million, give or take, in that range, then you have to pay an estate tax it’s 40% of the excess.
Joe: We’ve already got something.
Al: It’s already in place, it’s been in place for my entire career. And it used to be 55% and now it’s 40%, but the point is, I guess family legacies can’t necessarily go on generation after generation. The government keeps getting their cut on that, and you could argue whether that’s a good idea or not. And that’s not the question, the question is the wealth tax. I personally don’t think it’s going to happen.
Joe: No way.
Al: I think it’s a headline grabber, I guess.
Joe: I agree.
If you’d like to share your thoughts or questions on Elizabeth Warren’s wealth tax proposal, or any other money issue for that matter, click “Ask Joe and Al On Air” at YourMoneyYourWealth.com. And as a thank you for listening and participating, you’ll find our FREE Retirement Readiness Guide available for download from the show notes for today’s episode at YourMoneyYourWealth.com. Learn how to control your taxes in retirement, how to create income to last a lifetime, and 7 plays to help you get retirement ready, despite the uncertainties we may face with market volatility and the volatile political landscape. Download your copy of the Retirement Readiness Guide in the show notes at YourMoneyYourWealth.com.
42:53 – The Disastrous Fyre Festival
Joe: Have you seen the Fyre Festival?
Al: I have not seen it.
Joe: Have you ever heard of it?
Joe: Do you know who Jay Rule is?
Andi: Ja Rule.
Joe: Jay Rule is what I call him. (laughs)
Al: I’m guessing a rapper?
Joe: He’s kind of an entertainer, I guess. So there was this app. So it’s a documentary. And I remember when, not the app, but this whole incident came out a couple of years ago. And so they made this app on how to hook up entertainers. Let’s say if you wanted to book Ja Rule for your 65th birthday party, okay?
Andi: That is going to be one heck of a party!
Al: I’ve been thinking about that. Even though I don’t know him.
Joe: Yeah. Or if you want maybe the Rolling Stones to play.
Al: Yeah that’d be more like it.
Joe: So then you go to this app called Fyre and then you look and then you can scroll and then you can say, “yes, I would like to book this person,” and then you talk to the right people and then they kind of do some background stuff or whatever. So this app – and they have all these really super-smart people working on this app and this app is gonna be phenomenal. But this crook kind of gets involved. Billy McFarland’s his name. And what he wanted to do is like, let’s promote this app, let’s do this, but let’s do it right. Let’s throw a big festival. Let’s go to the Bahamas, and we will have a music festival, and it’s going to be top shelf, top class, and everything else and then we’ll have all these great acts, and then people will get the buzz out, get the word out, Fyre, plus the app, plus the festival, it’s going to be awesome. The thing was a total disaster.
Al: Okay. What happened?
Joe: Well, it was all kind of B.S. So first they said they bought Pablo Escobar’s island. And then they said, “yes, you can use the island, but you cannot use Pablo Escobar’s name.” So of course, the first kind of commercial they put out or did something – Pablo Escobar. They got booted off the island. So then they’re in the Bahamas on this other island. And everyone thought it was gonna be this exclusive resort, you’re on a private island. No. Didn’t happen. But they did film the commercial, or they filmed the whole hype-thing. They got all these super-hot supermodels. So they’re on their yachts. They’re on jet skis, or playing on the beach. They’re like, “this is what this party is going to be. You’re going to hang out with supermodels, drinking champagne, having five star meals, and sleeping in these bungalows that are phenomenal, right on the ocean. And it’s all private. And then by the way, all these super-cool celebrities are going to be singing there too.” So the thing sold out in, what – did you watch it.
Andi: I have not.
Joe: Oh my God. That thing sold out in like I don’t know. Couple days? But then it just snowballed. They were interviewing these people, they’re like, “the guy’s a really good salesperson.” The party was great, the commercial was great. They were like, this is actually going to be pretty cool.
Andi: And realize, tickets went for anywhere from $5,000 to $250,000 to attend.
Joe: For like a private bungalow.
Al: Oh my. You went to that, right?
Joe: No. So what ended up happening is that – it would take years to put this thing together. And they’re talking to these promoters and they’re like, O”K well, I’ve done this stuff before, but it’s not on a remote island, first of all, in the Bahamas. We’ve done things in New York, where you have full electricity…” He goes, “it would probably take a year to put this thing together. And they tried to patch it up in like a few months. And the bungalows, the super high end resorts, were like flea tents. People got there and they diverted everyone to have cocktails at this bar because they’re like…
Andi: They had nothing. The bands all pulled out.
Joe: Yeah. And then it was just the first group, and they couldn’t even fill the first group. They were like, “We got to cancel this thing.” And then there’s all these people at the airport from Miami waiting to get to the Bahamas on the next flight, they canceled that.
Andi: They have no water. They had porta-potties. They had cheese sandwiches instead of the fancy catering they were supposed to have. It was a disaster.
Joe: But it’s good – this guy went to jail, just a total like Bernie Madoff kind of guy.
Al: He’s got to repay a bunch of money, I guess, back to everybody.
Joe: Yep. The Fyre Festival, it’s on Netflix – I guess Hulu did something too. I don’t have Hulu.
Al: Oh, it’s a documentary I guess.
Andi: There was two, Hulu and Netflix each released documentaries two weeks ago.
Joe: This guy is such a jackass that he wanted it to be filmed 24/7. “Oh this is gonna be great.” He goes to jail, he gets indicted, and then he starts another Ponzi scheme about like selling tickets to these exclusive events that he never had tickets for. You want floor seats to a certain concert?
Al: Wow. Okay.
Joe: So yeah, he’s sick. But anyway, that’s that’s my recommendation for the week is the Fyre Festival.
Andi: And you’re recommending the Netflix version since you haven’t even seen the Hulu documentary.
Joe: True. Very true.
Al: All right I’ll watch it.
Joe: Oh and then another good one is Get Jay Stone.
Andi: Get Roger Stone.
Joe: Yeah. Have you seen it?
Joe: That guy is a total j… complete… something or whatever.
Al: Yeah I heard I heard you talking about that one. I gotta see that one.
Andi: Get me Roger Stone.
Joe: Get Me Roger Stone. All right. That’s it for us today. Want to thank Andi Last for producing a wonderful show, Alan Clopine, you did a phenomenal job. My name’s Joe Anderson. We’ll see you next week.
As an aside, I just learned that our friends Rich and Marcus from the Paychecks and Balances podcast interviewed someone who went to the ill-fated Fyre Festival – that episode released today as well. If you want to hear it, you’ll find the link in the show notes for today’s episode at YourMoneyYourWealth.com.
Special thanks to today’s guest, Grant Sabatier. Get his brand-new book, Financial Freedom: A Proven Path to All the Money You Will Ever Need, that link is in the show notes too. And of course while you’re there, you can also subscribe to this podcast on any and all of your favorite podcast apps, or you can listen on YouTube.
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