9/15/26 Bonds, Billionaires & Borrowing: What's Fair?

The Moneywise Radio Show and Podcast Tuesday, September 15th BE MONEYWISE. Moneywise Wealth Management I "The Moneywise Radio Show & Podcast" call: 661-847-1000 text in anytime: 661-396-1000 website: www. MoneywiseGuys.com https://www.moneywiseguys.com/ facebook: Moneywise_Wealth_Management https://www.facebook.com/moneywiseguys/ LinkedIn: Moneywise_Wealth_Management https://www.linkedin.com/company/moneywise-wealth-management-bakersfield/ Guest: John Duffield, CPA/MST website: https://www.bakersfieldaccountants.com/ The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision. John Duffield & Integra Accountants are not affiliated with nor endorsed by LPL Financial or Moneywise Wealth Management

• 0:00Speaker 00

  Live from the basement inside the historic Woolworths Building in downtown Bakersfield. Call or text in at 661-396-1000.

• 0:29Speaker 01

  Securities offered through LPL Financial, member FINRA, SIPC. Investment advisory services offered through LPL Financial. LPL Financial and MoneyWise Wealth Management are independently owned and operated.

• 0:37Speaker 00

  Now, let's start the MoneyWise Show.

• 0:40Speaker 02

  Welcome to the MoneyWise Show. We are live from the basement of the historic Woolworths Building in downtown Bakersfield. For the next hour, you are on News Talk 96.1 and 1230 AM, KERN, streaming live at MoneyWiseGuys.com. You can call or text into the show 24 hours a day at 661-396-1000. Today, we are your hosts. I'm Sammy Abiyawi with...

• 1:04Speaker 03

  Frank Lee.

• 1:06Speaker 02

  Frank.

• 1:07Speaker 03

  Sammy.

• 1:07Speaker 02

  Good day to you.

• 1:08Speaker 03

  Good day to you. We're back.

• 1:10Speaker 02

  Excited for today. We have John Duffield, friend of the show, local CPA.

• 1:16Speaker 04

  Yeah, good afternoon.

• 1:17Speaker 02

  Tax, tax experts with us today. I want to introduce you as early as possible because we have a couple of questions from the listeners and I would love for you to hear from, from you.

• 1:28Speaker 04

  I appreciate that. How is the market doing today, Frank?

• 1:32Speaker 03

  Yeah, yeah, let's do a quick market update. So, again, we are still in the later half of the markets, about, about an hour left until the market closes. Bit of a right across the sea, Dow Jones down about 69 basis points, S and P down about 47, NASDAQ down about 80, and Russell 2K down about 73. So, continuation off of yesterday as far as, you know, bond markets and things like that. So, we'll, we'll talk about that later.

• 2:06Speaker 02

  Yeah, definitely. During the show, we have, we're going to have a chance to talk about the bond market. We're going to talk about interest rates, the ramification of these two. And in our eyes, also John, and hopefully some listener, listeners' questions coming in to ask for just clarifications on what's going on in the markets. I'll start with this first question. Hey, guys, and good afternoon. I'm sure you guys answer this one all the time. But at what point does a person really need to hire an advisor? Is there a certain amount of income or enough saved where it starts making more sense than trying to manage everything yourself? My wife and I will be 57 at the end of the year and starting to feel a bit pressured to sit down and put a plan together. Very good question.

• 2:51Speaker 03

  Yeah, great question indeed. So, I'll answer that the best I can, but I, I think it depends. And not a lot of people like hearing that answer, but in terms of hiring an advisor, you know, different firms will have different set minimums on what, you know, you need to bring in in order to hire them, but consulting is free. I think the best course of action is always getting some type of consultation to see, you know, what the plan is, getting that together and, and sticking to it. If you are nearing retirement, I would always highly suggest, you know, sitting down with an advisor, getting their opinion if you're on track

• 3:33Speaker 03

  or if you're not, you know, setting those plans together and, you know, talking with them, you know, because it's, it's never too late and it's always never too early to start that type of conversation with an advisor.

• 3:47Speaker 02

  Definitely agree. John, what do you think?

• 3:48Speaker 04

  Yeah, I, you know, listen, that, that listener's 57 now is the time, right? If you haven't, if you haven't already, in my opinion, because what, what they're thinking about, if I'm, if I could mind read, is, is retirement, right? And so, you know, that person's got, you know, anywhere from, you know, five years from the first time that they're eligible for Social Security to 65, that typical retirement age or, or, or full retirement age of 67. So, you know, now, now is definitely the time to be going and looking at that and, and, you know, either getting confirmation that they're okay, or, or if they learn that they're off track for whatever reason, then they've got, you know, they've got seven, eight, 10 years to really step it up and try to make a difference before they kind of, kind of glide into that retirement stage, if you will, so.

• 4:32Speaker 03

  Yeah, yeah, that's, that's the first step there because you kind of want to know from a professional, it's like, hey, are you really on track or are you not? So, it's, it's not a matter of do we have enough to hire? It's like, no, get, get that conversation started first.

• 4:45Speaker 02

  Yeah, and to your point, you said consultation is free. I mean, we do, we do those at MoneyWise for instance, for, for, for free. You just need to call, make an appointment with Michelle and come and see one of our advisors for, for, to talk retirement.

• 5:00Speaker 04

  Yeah, I got to tell you a funny, funny story, funny, not funny story. So, you know, when I was a roommate with you guys at MoneyWise over on Stockdale Highway, I happened to be standing up front one time with Michelle and, and a guy walked in off the street and, and said, hey, you know, I need to talk to you guys and ultimately about a pension plan. And, and so, there was a little bit of kind of questioning going back and forth. And it turned out the guy didn't have any retirement assets at all. And, and what he said was, is I, I need to get one of those pension plans so that I can retire in a few years, right? And so, he thought, he, he kind of literally thought it was a product or something that, you know, that you could go get at some stage of your life that then gave you retirement income for the rest of your life or whatever that is, right?

• 5:43Speaker 02

  Yeah.

• 5:43Speaker 04

  So, you know, not, not, not a good spot to be in. And so...

• 5:47Speaker 02

  Definitely not.

• 5:48Speaker 04

  Yeah, definitely not, right? And so, you know, I, I had a client in this last week and, and had that conversation with him about retirement assets and, and, you know, it turns out this young man has quite a bit of money in his, inside of his 401K plan. And so, it was one of those things that, you know, where he was at, he didn't need to necessarily be looking at that every single day or year or whatever because he was really on track, but then meeting with an advisor periodically to kind of go through those things and revisit the target, revisit what his obligation is really important, so.

• 6:21Speaker 02

  Yes, definitely. At 57, highly encourage to meet with a financial advisor.

• 6:25Speaker 04

  Absolutely.

• 6:26Speaker 02

  Most of the time, it's free. At MoneyWise, it is free. So, I encourage you to call a financial advisor firm and make an appointment to start discussing your retirement. Great. We have a second question, Frank.

• 6:39Speaker 03

  Yep.

• 6:39Speaker 02

  If you, if you don't mind.

• 6:40Speaker 03

  So, second question is, it's getting too expensive for us to keep two cars these days, so we're discussing trading in our second to pay off our first. And just share it until we can get back on our feet, but when it comes to getting rid of one car, will that hurt our credit score, dropping the second vehicle?

• 7:00Speaker 02

  The short answer is no.

• 7:01Speaker 03

  Yeah.

• 7:02Speaker 02

  A, an installment loan does not hurt your credit score the way a credit card closer, closure does. Okay, so it might, on, on the short term, you might see a couple of points down, but in fact, it shows your response, your responsible borrower and you are able to pay off your, your debt, okay? It might hurt you in those points that I talked about in the credit mix, okay? So, the credit mix matters when calculating the credit score, meaning you have a mortgage, you have a car loan, you have credit cards. So, you have revolving debt and you have installment debt. So, that mixture helps the credit score. That's the only thing I can, I can think of.

• 7:43Speaker 02

  To me, the, the, the bigger thing here, and I don't know the circumstances of this specific individual, is getting rid of a car. And the, the analysis in my mind that I would do is, how is that going to help us? Not just financially, but am I getting rid of the car, but now I'm spending more on fuel or, or missing shifts or dropping off kids to school because we only have one car now and life becomes a little bit more difficult, right? Now, if they are just, one of them is staying home, like with the kids, that's a different story. But if they're both working at two ends of the, of, of the town.

• 8:19Speaker 03

  Yeah.

• 8:19Speaker 02

  It makes it a little bit more challenging. So, before you, you just trade in first, in my mind, consider selling, not trading. Because selling the car will get you a little bit higher value than trading. Remember, when you trade your car, the dealership has to make money on the sale of that car. So, they're going to give you a trade-in value.

• 8:44Speaker 03

  I see. Yeah, yeah.

• 8:45Speaker 02

  So, you, you want to consider a couple of the options you, you might have. CarMax has always been good to me as far as giving me a little bit, couple of thousands more than me going and trading my car in into any dealership in town. Carvana is good and it's, you can do that online via an app. Carvana and CarMax, in my experience, are very close whenever they give you a value for, for, for, for your car. But I would highly, highly recommend selling versus trading your, your, your car. And also take into consideration the changes to the lifestyle that's going to, might affect your finances anyways.

• 9:21Speaker 03

  Sure.

• 9:22Speaker 02

  At the end of the day.

• 9:23Speaker 04

  Yeah, Sammy, I got to tell you, I heard, I was listening to a podcast the other day and, and really interesting perspective because they were talking about autonomous cars, right, with the new Tesla Robo Taxi and, and, you know, autonomous, you know, autonomous cars or, or autonomous driving is, is, is here, but going to become pervasive over the next five to 10 years. And so, you know, one of, one of the, the podcast moderators was talking about getting rid of all of his cars. And so, you know, because he had the ability to summon, you know, some other driverless taxi.

• 9:55Speaker 02

  Yeah.

• 9:56Speaker 04

  You know, at will. And, and at that point, why have, why have a second car or, or any, any car in your driveway for that matter?

• 10:03Speaker 03

  Why have a driver's license?

• 10:04Speaker 04

  Right.

• 10:05Speaker 02

  Yeah, I, I'm a doomsday prepper, so I definitely need my car and a truck at that, not just any car. A diesel truck at that, on the top of it. So, that's just, just, just me. We produce diesel in this country, so I'm definitely going to... Of course, we create, I mean, we produce electricity, but I, I like my big truck, diesel, diesel. Now, a couple of things that came to my mind when I'm reading this, this, because, look, the reality is people are, you know, suffering. Things are getting expensive and sometimes a little bit out of hand even, right? So, like I said earlier, before you trade in or sell...

• 10:43Speaker 02

  A lot of the time, we're able to refinance our cars. Or right now, you talked about bond market earlier, interest rates. I mean, if you're gonna go and refinance your car today, you're probably not gonna get

• 10:52Speaker 03

  Nope.

• 10:53Speaker 02

  A lower interest rate. So that's out the door, right? Other things to do is shop insurance. Maybe there's ways for you to save still on just shopping. A lot of the time when we buy insurance, right? And John, you have, you know, connection to insurance here, right?

• 11:11Speaker 04

  Correct.

• 11:11Speaker 02

  Shop, you book the insurance, you pay for it, and then you forget it. That's one of the things you want to audit on an ongoing basis, at least annually, to see if you're overpaying or underpaying, overinsured, underinsured. Is that, would you say that, John?

• 11:28Speaker 04

  Sammy, I have a little bit of a different approach. My, you know, one or actually, two of the insurance agents that I do, actually, three of the insurance agents that I do work with all the time are all clients of mine. And so I'm not shopping that relationship, okay? There is a relationship, they're doing business with me, and so, you know, I'm not shopping that relationship with them. And so, might I be paying more than I need to be? I could. I don't think I'm paying, you know, paying too much substantially over what I might be able to get it somewhere else, but it's just a fact of life, right? Something I'm willing to deal with, you know, in circumstances, so.

• 12:07Speaker 02

  The other thing I can think of, Frank, too, is instead of selling, is there a way for us, for this person to downgrade? I mean, if you have a car that's a Lexus, for instance, right? Do you need a Lexus? Or can you go into a 10-year-old Honda Civic and save some money? Even if it saves $6,000, $8,000. So, I would advise just to look a little bit more into the ramifications of just getting rid of the car first.

• 12:34Speaker 03

  Right, right. You do bring up a good point, because if both partners are working, you know, what is that gonna do to the both of them? Yes, you will save on the monthly expenses for having that car, but what else are you giving up on?

• 12:49Speaker 02

  Yes.

• 12:50Speaker 03

  Versus, we also don't know how much they're paying into both cars.

• 12:54Speaker 02

  Or if one of them is working from home.

• 12:56Speaker 03

  Right. And again, to that point, it's like, okay, then does it make sense to sell or downgrade? Or, you know, options and options and options.

• 13:04Speaker 02

  The good thing about this question is this person is thinking about, hey, what can I do? Things that I have within my control to adjust my budget.

• 13:12Speaker 03

  Yeah.

• 13:12Speaker 02

  And that's something we stress here at the show, because it's an educational show. So, yes, continue doing what you're doing. Look at all avenues to reduce your monthly expenses. You know, we always talk about those redundant expenses that sometimes we don't need. The other day, I discovered that I had six subscriptions.

• 13:33Speaker 03

  Wow, just only six?

• 13:34Speaker 02

  Six, right?

• 13:36Speaker 03

  Yeah.

• 13:37Speaker 02

  Well, two of them are my wife, so I'm not gonna deal with that. But the others, I figured out that, hey, you know what? I can pay for these through my American Express, just being a member of American Express. So, there is a bunch of things that we sometimes just have to take the time

• 13:51Speaker 03

  Yeah.

• 13:51Speaker 02

  into looking to adjust.

• 13:53Speaker 03

  Yeah. And another thing I wanted to point out, too, is like, the type of cars that they have, like you were saying, could have been a Lexus, downgrade that. If you have like a truck, you know, do you need the truck? Or do you need something that's more family-friendly?

• 14:06Speaker 02

  Well, we'll go into our first break, since this guy's talking about trucks. Do we need a truck? Yes, we do need a truck, Frank. What's wrong with you?

• 14:13Speaker 03

  No, I like my truck, right? I like my truck.

• 14:17Speaker 02

  Yeah. No, definitely, definitely, you're completely correct. I would agree with you. It's always, it takes a look at that. Let's take a look at the mirror and see what we are spending our money on. A lot of the times, we can make some adjustments to, you know, here and there, to make the budget a little bit more friendly. Great stuff. We'll take our first break. When we come back, we're gonna go over bond market, interest rates, and who pays the most in federal taxes? We'll be right back.

• 14:54Speaker 02

  Welcome back to the Money Wise Show. Some ethnic music for you guys.

• 15:00Speaker 02

  Thanks, Stephen.

• 15:03Speaker 02

  Welcome back to the Money Wise Show. Frank, we got John Duffield here on the house today.

• 15:07Speaker 03

  Yes, we do.

• 15:07Speaker 02

  John, you brought some, this little printout, and it's intriguing, some statistics here. The top 1% pays nearly as much as almost everyone else combined. We're talking about federal income tax.

• 15:20Speaker 04

  Yeah.

• 15:21Speaker 02

  Is that correct?

• 15:21Speaker 04

  Yeah, that's correct. You know, Sammy, I gotta tell you, you know, I've been in this profession a long time, and, you know, of course, everybody's always complains about taxes and paying too much in taxes, right? That's been going on since the day I started this profession, you know, decades ago. And so, it's always been one of those things in my mind. I'm like, oh, okay, are we paying enough tax, right? I've always said that, and, you know, thinking about my own situation, I'm like, no, I don't wanna pay more in taxes. And so, nobody does, right?

• 15:51Speaker 02

  That's right.

• 15:52Speaker 04

  And then the question becomes up, well, like, okay, who should be paying? What's their fair share? So, it made me think about this topic for, you know, for today. Get this. This is an interesting, you know, statistic, in my opinion. The 1.5 million that is the top 1%, so 1.5 million taxpayers, that is the 1.5%, is the same as 145 million of the bottom 95, right? So, you got 1.5 million people versus 145 million people, and they're paying, you know, they're paying that, the majority of those taxes, right?

• 16:35Speaker 04

  The top 1%, this is for the year 2023, the top 1% of taxpayers paid roughly $823 billion in federal income taxes, nearly as much as the entire bottom 95% of taxpayers combined. And so, you know, I know there's a lot of stuff going on in politics right now, and we've got the midterms coming up, and, you know, there are some candidates that argue that we, you know, tax the rich more, right? California's got a new proposition to tax billionaires who'll move out of there. I don't know what the answer is. You know, I will tell you that, you know, we keep running deficits, you know, nationally, and so, there's something we're not doing right, you know?

• 17:14Speaker 02

  Yeah, we're not balancing our budget.

• 17:16Speaker 04

  We're not balancing our budget, correct. And so, then, you know, if you're not balancing your budget, well, how do you do that? Well, you either raise income taxes or decrease spending, and what's that answer? And I don't know that I'm, you know, paid enough or qualified enough to answer that question, right? But when you see it like this, you know, you start to go, well, is that fair, right? Does that make sense?

• 17:35Speaker 02

  And I think that's the biggest question. Is it fair? What's fair, John? I mean, you see what, 3,000 tax returns a year, maybe?

• 17:45Speaker 04

  No, our, yeah, we, our office is around 1,500, something in that effect.

• 17:49Speaker 02

  1,500 tax return? So, what's fair? Like, in your mind, just?

• 17:53Speaker 04

  Listen, I don't know that I'm, again, I don't know that I'm qualified, it's above my pay grade, but, but, you know, Sam, one of the things that I've always done is I've thought, well, okay, you know, we're provided services, right? In other words, you know, government keeps up the road system, right? And they provide education, they, you know, they provide

• 18:12Speaker 02

  Yes.

• 18:12Speaker 04

  social services and things like that. And, you know, I pay a decent amount of income taxes every year, and I know I don't use the road system any more than anybody else does, right? And so, you know, my kids had the, you know, they were fortunate enough to go to, you know, private school for part of their life, and so, you know, I paid for school on top of the fact that I'm paying income taxes. And so, you know, you start going, okay, well, what's fair? And what's fair? And I don't know, I don't know the answer to that, right? And so, I definitely believe we should all be paying. I will say this, I am of the opinion that we should all be paying something, right? One thing that we, you know, need to consider is, we're talking about federal income tax Correct.

• 18:56Speaker 04

  as opposed to just taxes.

• 18:58Speaker 02

  In general.

• 18:59Speaker 04

  Yeah, taxes in general, right? Because there are fuel taxes, we pay property taxes, we're paying sales taxes, and so, there's all these different things. And so, everybody is paying something, right? There's just no doubt about that. But from a federal income tax perspective, I'm not sure I know the answer as to what's fair. I will just say, from the little old lady to the pastors and preachers, and the, you know, and the wealthiest clients I have, you know, everybody is cussing about their taxes or their tax bill.

• 19:26Speaker 02

  So, you said 1%ers, right? Like, that's the top. So, what's, when do you make it to that? What's that magic number to be considered a 1%er?

• 19:36Speaker 04

  Yeah, I don't know what, I don't know those numbers. I suspect it's somebody that probably has an income that's, you know, up over 5 million, 10 million or something. I'll look that up, we're having a conversation. But, you know, it's not somebody making 50 grand, right?

• 19:51Speaker 02

  Correct.

• 19:51Speaker 04

  It's somebody that's making millions.

• 19:54Speaker 03

  Yeah, there was another interesting statistic here, is the latter. The bottom 50% of all taxpayers paid just about 3.3% in taxes. Yeah.

• 20:06Speaker 02

  3.3%.

• 20:07Speaker 03

  In federal, yeah.

• 20:08Speaker 02

  And that's, that's, that's an income of less than what? Under about $54,000, I would say, right? And that's, that's, it's an eye-opener, seriously, when you just, 1% pays this much versus the 95.

• 20:24Speaker 04

  Yeah. And so, by the way, though, that income of, you know, that income of $54,000 that you're talking about, that could be somebody that's working, that gets a W-2, and then, oh, by the way, they're paying in Social Security, right? And so, they're still paying taxes, they're just not paying federal income taxes from that perspective.

• 20:44Speaker 02

  I see.

• 20:45Speaker 04

  You know what I mean?

• 20:46Speaker 02

  Yeah.

• 20:47Speaker 04

  So, by the way, the household income to crack the top 1%, this is a lot lower than I thought it was, $731,000.

• 20:57Speaker 02

  $731,000. I'm not there, Frank.

• 21:01Speaker 03

  I'm not there.

• 21:01Speaker 04

  Household, that's, household income adjusted gross income, so total household income, your adjusted gross income, 731.

• 21:09Speaker 02

  Great statistics. There's a lot more of this when we come back. John, with John Duffield, we'll take our second break. When we come back, there's a lot more with John.

• 21:40Speaker 04

  Yay. Welcome back to the Money Wise Show. I'm Sammy Abia. We're here with Frank Lee, joined with John Duffield, CPA, friend of the show, tax expert. Welcome back, John.

• 21:50Speaker 02

  Thank you.

• 21:51Speaker 04

  Frank, we have some listener comments, questions?

• 21:54Speaker 03

  Yeah, yeah, yeah. First one, Sammy, I think you'll like this. First comment is, I was so happy to finally get my diesel pickup after 20 years, and it's nice, but now I wish I didn't get it. Eight dollars adds up quickly.

• 22:07Speaker 02

  This is my clone, or I'm his clone.

• 22:09Speaker 03

  You're his clone.

• 22:09Speaker 02

  I like the same thing for me. I've waited for that long to get my diesel truck, and at eight dollars, frankly, I'm still, I love my truck. It hurts. I don't drive with it as much as I want to. We use my wife's hybrid for that, but I love my truck.

• 22:26Speaker 00

  And just don't eat on those days.

• 22:28Speaker 03

  Yeah, yeah, yeah, just don't eat. Yeah, yeah.

• 22:30Speaker 02

  I use my discount at the luncheonette.

• 22:33Speaker 00

  That helps.

• 22:37Speaker 03

  Oh, good stuff, good stuff.

• 22:39Speaker 00

  I'm waiting for that call for Sammy to say, hey, you owe me some Costco hot dogs.

• 22:43Speaker 02

  I had some this weekend, man. Same great stuff.

• 22:47Speaker 03

  See, that's my wife and I's budget right there. Costco hot dogs.

• 22:50Speaker 00

  That's a good budget to have.

• 22:52Speaker 02

  That's a good budget to have. It's filling.

• 22:54Speaker 03

  Yeah, yeah, we get two and then one slice of cheese pizza for Theo and boom.

• 22:59Speaker 02

  Ooh, there you go.

• 23:00Speaker 04

  That's why, Stephen, that's why Sammy's wearing that fitness bracelet, because you gotta keep an eye on his heart.

• 23:06Speaker 03

  It's wrapped around his truck.

• 23:08Speaker 04

  Because I got those Costco hot dogs.

• 23:09Speaker 02

  I got this advanced thing on my wrist, and people ask me, hey, that's cool. I'm like, yeah, I'm fat. I need to monitor it. I eat Costco hot dogs a lot.

• 23:21Speaker 03

  Next question. What is the difference between, say, someone who makes 500K compared to someone who breaks 1 million?

• 23:28Speaker 04

  Very good, John, question. Yeah, I actually, I actually ran that math on that, by the way, while we were, while we were on break, because we knew we had that question. So, and I did this calculation based on a household that's married filing joint, no, a couple, and I said taxable income of 500,000 versus taxable income of a million. 500,000 taxable income, married filing joint, that's $114,000 of federal income tax. The million is 294. And so, the, about 180,000, about $180,000 difference. The biggest thing you gotta remember is, once you start climbing up over that, you know, those, those tax, you start going into the higher federal marginal

• 24:13Speaker 04

  tax brackets, right? And you can get into the 37% federal marginal tax bracket. That is taxable income for married filing joint of over 751,600. So if you have taxable income over that 751,600, everything over that, you're gonna pay 37 cents on the dollar in income tax on that portion, right? And so, as your, as your income goes up, you're taxed at a higher rate.

• 24:36Speaker 03

  Well, there you go.

• 24:37Speaker 02

  Yeah, good answer. Well, we have one more. Maybe hopefully John can help with this one, too.

• 24:42Speaker 03

  Yep.

• 24:43Speaker 02

  Can you or your guest explain why the Fed's cutting interest rates is such a big deal to normal people, or is it not that important? Like, what does it change since my mortgage credit and things like that are locked in?

• 24:56Speaker 04

  Yeah, I know that. I'm gonna give you my answer, Sammy, and you're from the banking industry, and so I want to hear your comment after mine. So, one of the things, when you have the Fed funds rate, what they're doing is, that, that's the rate that affects overnight borrowing between different banking, banking institutions in the Fed. Credit lines, so, you know, business credit lines or consumer credit lines are typically tied to that rate. And what banking will do is, they will price, they will price a line of credit as some amount of spread over and above that rate. So this is really the cost of what I would call short-term money. For somebody that has, you know, a 30-year mortgage, or somebody that might be locked in on a car loan, it might ultimately not make a whole lot of difference.

• 25:38Speaker 04

  But, but from a general overall economic environment and a business environment, it makes a lot of difference, because as that rate goes up, or as that rate goes down, those short-term rates are affected by that. And ultimately, ultimately, that finds itself, or that finds its way into the overall financial system because of that. And so, it's a very, very important rate. Watch, watch very closely. It does have a, a, a direct effect on the rest of the bond market that has the longer yields, right? That Fed funds rate isn't what they call an overnight rate, but it does have a, a relative immediate impact on something that might be of a longer maturity, whether it might be a two-year, five-year, 10-year, 30-year mortgage, so.

• 26:19Speaker 02

  Yeah, no, you're completely correct. And the only thing I would add is, it affects your credit card. So if you are carrying a credit card, which is considered a short-term debt, to, to your point earlier, as a line of credit, but it's in the form of a credit card.

• 26:35Speaker 04

  Yep.

• 26:35Speaker 02

  Your credit interest expense, or your interest expense on that credit card, is gonna be affected.

• 26:41Speaker 04

  Sure.

• 26:41Speaker 02

  If interest rates go, go up. Or if you have a HELOC, Home Equity Line of Credit.

• 26:47Speaker 04

  Right.

• 26:47Speaker 02

  That will be affected as well, unless you have a HELOC, and eventually you advance it, and then there are banks that offer you a fixed interest rate, once you fully advance the, the Home Equity Line of Credit. The large banks typically have a product that are, that's similar to that. So, in, in my mind, what it affects, it affects the values of real estate when interest rates are going up. So it might not affect your, your mortgage, your car, because they are fixed, but it might, might affect the value of your home. Think about this. You're a newcomer to the market. All of a sudden, all of a sudden, interest rates are in the 7, 7 and 1/2. Now, it makes some people think twice before going and buying that home,

• 27:32Speaker 02

  because they don't wanna get locked in for 15, 30 years at 7 and 1/2%. Guess what? A lot of the houses on the market remain on the market.

• 27:42Speaker 04

  Sure.

• 27:42Speaker 02

  Offer, demand. We're in a capitalistic system, so that's just offer and demand.

• 27:47Speaker 04

  Yeah.

• 27:48Speaker 02

  All of a sudden, you have too many houses on the market, because people are not buying because of interest rates.

• 27:52Speaker 04

  Yeah.

• 27:53Speaker 02

  Might affect your house. Maybe not you, but maybe your kid that's wanting to buy a house.

• 27:58Speaker 03

  There was, there's a house in, in my neighborhood that's been on sale for five months, six months? Yeah, it's been a long time. I've always drive by and see the for sale signs. Still nothing, still nothing. But my, I think, other neighbor across, like two houses down, instantly sold their house, but they had to severely cut what the value of their home originally was.

• 28:25Speaker 02

  Yeah, so, other things that get affected by interest rates is the job market. So to John's point from earlier, a lot of businesses are relying on lines of credit. When your line of credit is at 9%, 10%, now we're talking almost hard money loan, John.

• 28:40Speaker 04

  Sure.

• 28:41Speaker 02

  You know, fees of almost a hard money loan. So people are starting to think twice. As a business owner, you're thinking twice. Do I really need that inventory? Do I really need to hire that person? Right?

• 28:52Speaker 04

  Yeah, or, or, you know, am I willing to pay that cost of borrowing to grow?

• 28:57Speaker 02

  Correct.

• 28:57Speaker 04

  Yeah, yeah, to expand, right? I'm not willing to do it if that rate is high enough, right?

• 29:01Speaker 03

  Yeah, that's, that's the other side of this, too, is that the interest rates, the reason why we pay so close attention to is that if interest rates are low, it's a borrowing act for a lot of these companies to borrow money to grow their business, therefore growing the economy, therefore reducing unemployment.

• 29:19Speaker 02

  And that's why, again, we're not a political show, but that's why for a long time, President Trump wanted these rates reduced, because he sees that as fuel to the economy.

• 29:28Speaker 03

  Yeah.

• 29:29Speaker 02

  He sees that as people having low-cost capital, so they can expand and grow their businesses.

• 29:34Speaker 03

  Yeah.

• 29:35Speaker 02

  Unfortunately, the market dynamics does not allow for that. And that's what we're gonna see tomorrow, the impact of the war in Iran and Ukraine.

• 29:44Speaker 03

  Well, also, too, because, again, Fed has what they call dual mandate. So if you lower interest rates, what is that gonna do to inflation?

• 29:54Speaker 02

  Correct.

• 29:55Speaker 03

  If all of a sudden, everyone has money to spend, that's gonna increase inflation. What that means for the normal people is that cost of food, cost of gas, cost of everything is gonna go up. So, that's how the trickle-down effect works.

• 30:08Speaker 04

  Yeah. You know, me being the math nerd that I am, you know, my wife and I have owned our home for about 15 years or something to that effect. But when we bought it, I ran through a lot of scenarios to try to understand, you know, how much house to buy, what I'd qualify for, all these different things. And, and I did a spreadsheet, Sammy, that I think was pretty, pretty fascinating. But what I learned is, is that, you know, when you go qualify for a house, you go, you go to your mortgage broker, banker, whatever, and you're gonna say, hey, I wanna qualify, get qualified for a home loan. They, they, they look at your household income and then they calculate, you know, what that mortgage might be with your interest, principal, property taxes and insurance.

• 30:50Speaker 04

  And there's ratios, right? They have certain ratios that they have to comply with. And so what I learned in, in, in doing that spreadsheet was, is that for every half a percent change in interest rates, for that same individual to be able to qualify for that home, that, that property would, would go up or down by 5%. Well, we've just experienced a period where mortgage rates recently have risen somewhere between 75 basis points to almost 1%. If, if rates go up by 1%, that same person can no longer qualify. And in fact, that house would have to drop 10% in value for that same person to be able to qualify for that, right? And so you start thinking about that, you know, we're talking about houses

• 31:35Speaker 04

  that are out there that are for sale on the market. And now that price, somebody that, that seller's got to decrease the price of that house by 5% or 10%. So, you know, a, a, a medium family home might be 350 or $400,000 times 5% is 20 grand. That seller's got to drop the price of that house 20 grand for that same borrower, that same buyer to be able to afford that same house.

• 31:59Speaker 02

  And, and I think this is where it's, I mean, it takes me to too, is how about if that person that's selling that house, the house is part of their retirement planning? And all of a sudden they were counting on this value to be at X and now it's $20,000 less than, than, than the X. How is that going to affect their retirement? How is that going to affect their life after retirement if they sell the house? Coupled with in, in a high interest rate, what does that do to the stock market, which is their retirement and bond market, right? So it does affect us, maybe sometimes not directly in the mortgage and car loans, but it does affect us indirectly if we're carrying some credit card balances, values of our

• 32:44Speaker 02

  homes and other assets. So good questions. Keep these questions coming. We're having a great show with John Duffield. We'll take our last break. When we come back, there is a lot more from the statistics that John brought today. We'll be right back.

• 33:02Speaker 02

  Stephen is on today, man. Loving this. Welcome back to the Money Wise Show. I'm Sammy Abiau with Frank Lee, joined here with John Duffield, CPA, tax expert. We talked about a lot of things today. One of the things that John brought as part of his statistics pages is the amount or the number of people that do not pay taxes. Roughly 40% owe no tax income or no income tax. Roughly 40% of US households, John, about 76 million are projected to owe no federal individual income tax.

• 33:42Speaker 04

  Yeah. And Sam, that's, that's obviously either a household that, that has low or no income, right? And so then, you know, they could be using standard deduction. You know, think about it. Social Security is not taxable at all for federal income tax purposes until you have like 32, five of other income sources. So you could have, you could have a husband, a wife that had no other retirement income source. And so all they have is social security at which, and that could be 50, 60, you know, 60 grand. There are no, there's no federal income tax or even, even more than that, as long as

• 34:22Speaker 04

  they, they could have a pension or some other source of income that's not very substantial that would, the standard deduction would shield that, right? And so then all of a sudden you've got somebody that might have 60, 80 grand in, in household income and still yet not pay any federal income taxes because that other income source, pension income, whatever it happens to be, isn't enough to make the social security be taxable and the standard deduction eliminates any income that they have, right?

• 34:52Speaker 02

  Yes.

• 34:52Speaker 04

  And so, and this is, this is by design, candidly, it's by design that it's that way by, by, you know, by Congress and right in the tax committee that it would be that way. So, you know, when you say that 40% of our population, right? You know, roughly 76 million households, and it seems kind of weird from that perspective. That's a, that's a large segment, but, but it's the truth.

• 35:14Speaker 02

  But this, this segment, John, still, I mean, off air, we were talking about what's fair, right? To pay. And, and you said, well, I use the roads, but this, this 76 million households are using the roads as well. They're using the parks. They're using national parks.

• 35:29Speaker 04

  For sure. So. I'm, I'm, I'm open to conversation about it. You know what I mean? And like, I don't get to make the final decision, but it, you know, it is a question that I've ran in my own head, you know, repeatedly for, for a long time because this is what I do for a living, right? What, what's, what's, what's fair? You know, my job, by the way, you know, my job as a, as a tax advisor is to, you know, help people become, you know, be successful, right? And, and, you know, what that frequently means is that I'm doing things that, and advising them on transactions that will help to put them in a lower tax bracket because now they're going to save money on income taxes that they can put in their pension plan or put in investment portfolio or whatever it is. And so, you know, in some respects,

• 36:13Speaker 04

  I'm part of the problem where I'm trying to, you know, I'm trying to help people reduce their tax obligation, but you know, but so you're sitting there and going, well, what's fair? And, and I don't know the answer to that, right? And so, you know, I, I feel like everybody should be paying something and, and we are all paying something either through a sales tax or fuel tax or property tax or something, but you know, but, but anyways.

• 36:36Speaker 02

  Well, I'm, I'm, I want to take the, the, the last remaining time with you, John. It sounds, it sounds like from our listeners' questions, just for me personally, there is some uncertainty happening in the market. There's some uncertainty in people's minds about, hey, what's going on in the Middle East? What's going on in Ukraine? And it creates a little bit of just, just some feeling inside. I don't know. And in situations like this, and you've gone through economic cycles in the past, what's some of advice that we can give people?

• 37:07Speaker 04

  Yeah. Yeah. What's, Sammy, what's, what's really interesting about it, when you see what the market is doing, like, like interest rates are going up, right? The, the, the yield on a 10-year bond treasury has hit the highest level that it's been in, you know, 10 or 15 years, whatever, whatever it is, right? And, and so what the market, you know, this thing that the market is, the market is saying, well, hey, if you want me to, to loan you money and buy that, that treasury, you're going to have to compensate me at a higher rate than I was willing to do that a few months ago or a year ago, whatever, right? And so I, I'm now demanding that you pay me a higher rate of interest for taking on that risk. Okay. The market is, is, I think, if I'm reading it right, is seeing

• 37:50Speaker 04

  inflation risk. You know, oil prices are now creeping back up to some of the highest level that they've been since the Iran war started. And so the question is, is, is inflation going to creep back into the environment? And if, and, and if we do have more inflation, then the bond market demands compensation for that, right? For that increased level of, that increased level of risk. You know, what, when these things, we get in these environments, what you're seeing happen in the market is you're seeing investors de-risk, okay? They're taking money out of the stock market and, and converting it to cash potentially or potentially putting it in the bond market. You, you, you're seeing people, you know,

• 38:33Speaker 04

  say, okay, enough's enough. And, and I've got so much money in the stock market that I'm going to take some out and de-risk and put myself in a, in a, a better situation, maybe a more conservative situation. And that's really what, really what it comes down to. What, what I always find fascinating, and I, I have, certainly have been in business through a number of different cycles. You know, what I don't see people doing is when the market is going up like crazy, up and up and up and up and up. I don't, I, I rarely see people de-risk at that time, right? Everybody wants to ride that train and ride the good time and let it go and let it go and let it go as long as they possibly can, as opposed to, you know, when things kind of get to be questionable and they get to be a little

• 39:18Speaker 04

  bit iffy, then they want to de-risk, but that might be closer to the bottom than it was the top by the time.

• 39:24Speaker 02

  That's what something Sherrod says this all the time. It's like, don't time the market. It's about the time in the market.

• 39:29Speaker 04

  Sure.

• 39:29Speaker 02

  And, and, and, and it took me some time to understand that, but I do agree with that.

• 39:34Speaker 04

  Yeah. The one thing that I like about what Money Wise does with their asset allocation models is just by its nature, they're, they're, they're not timing the market, but, but in, in effect, they are timing the market because they're sell, naturally selling some of those things that have outperformed to then rebalance or, or go buy things that have underperformed, right? And so it's not as though somebody's sitting there visually picking the top and the bottom and tried to time it per se. It's just that the, the mere nature of the model, you know, requires adjustments. And so, you know, you're, you're going to reallocate things that if things are, you know, doing very, very well, you're going to be selling those and buying things that have not done well. So.

• 40:13Speaker 03

  Right, right. As, as to some advisors would say, we take a more academic approach and lean on the professionals when it comes to these rebalancing's because they're, they're sitting there. They're not, oh, like this is, this is the top. This is the bottom. You know, this is a more systematic approach to, to all of this because the end goal, the, the objective of this account is for that long-term investment. You know, there's, there's certain standards that they have to uphold versus someone who's looking at their portfolio. And fear drives in, emotions drive in. And if it's as easy as just pressing that sell button, then, you know, you've, you've locked in those, those sell, you know?

• 40:52Speaker 02

  Yeah, I agree. What comes to my mind is multiple things. I, I, I do this for me is, is what the market is the market to your point, John, right? And a lot of the time we don't have, you know, control of it. But what I have control of is my own market, like my own budget, what comes in, what comes out, what goes out, and let's balance that as much as possible. Let's create a little bit of savings that can maintain us three to six months. I mean, the rule for cities, for instance, is hey, as long as you have three months of operating cash flow, you're good, right? Well, I'd like to push that a little bit further. Have six months of operating cash flow, just, just in case.

• 41:36Speaker 02

  God forbid things, things change. And, and, and don't let the headline worry you. Okay? A lot of the time we don't have control, like I said earlier, we don't have control of what the market gives or takes.

• 41:48Speaker 03

  Warren Buffett says it the best, I think. And I explained this to a client too, is that most of the noise that you hear, or most of the news that you hear from these outlets is just noise. He says, I think about 80 to 90% of it is just noise.

• 42:04Speaker 02

  Yeah.

• 42:05Speaker 03

  You know?

• 42:06Speaker 02

  I would agree. I would agree with that. And, and, and then if you have, if you're carrying some debt, I'm talking about revolving debt in the form of credit cards, lines of, lines of credit. With interest rates going down, you're definitely going to get affected. John gave us some numbers earlier. I mean, as far as prime plus a spread, we're looking at nine, 10% now if rates keep going, keep going up. So, so that's something you're in control of. So let's try to minimize that as much as, as possible. Again, the emergency fund, you know, worry about that as much, more than, than with the market. And talk to a professional. We have a lot of comments from listeners. Talk to a professional.

• 42:43Speaker 03

  Yeah, yeah. Get your insight, get your outlook on your retirement, see where you're at. If you're ready to retire within five years or eight, or if that pushed it back even further, you know, consultations are free.

• 42:53Speaker 02

  That's right. That's right. Well, great show. Thank you very much, guys. Thank you, John. Thanks for being with us today.

• 42:58Speaker 04

  Thank you for having me today.

• 43:00Speaker 02

  Who do we have tomorrow, Stephen?

• 43:01Speaker 04

  Tomorrow we'll have you and Seth sitting down with local Realtor, Merv Raj.

• 43:07Speaker 02

  All right. Until tomorrow.

• 43:08Speaker 04

  Until then, be smart, be safe, be Money Wise.

• 43:26Speaker 01

  Securities offered through LPL Financial, member FINRA, SIPC. Investment advisory services offered through LPL Financial. LPL Financial and Money Wise Wealth Management are independently owned and operated.