UW Tacoma Grad, Author and Finance Expert Dan Wickens responds to your Money Matters questions

Money Matters - Ask Dan Anything

Here's your chance to Ask Dan Anything in 100 words or less!

 

Responses to questions do not represent professional financial advice and do not relate to a service engagement of any kind.

Mayra Asks Dan - What should I know before refinancing my home?

Hey Mayra, thanks for the question!

A refinance can be a great option for some situations, but not for all. When considering a refinance the two most important factors are: time until breakeven, and the minimum time you expect to live in the home.

By time until breakeven, I mean the time that it takes for the savings from refinancing to equal the cost of the refinance. If a refi costs $3,600 and lowers your payment $300/month, it would start saving you money after 12 months / 1 year. If it costs $6,000 and lowers your payment $100/month, you’d break even after 60 months / 5 years. Have the lender calculate breakeven for you and make sure you understand the math.

Once you know the breakeven timeline, you can compare that to what you think is realistic for your time in the home, and remember that major life events can change things in a hurry. If you think you’re in your “forever home” or would use it as a rental if you ever moved again, then you’d be more likely to experience a longer period of benefit from a refinance. However, if it would take 5 years to break even and you aren’t certain you’re staying that long, a refi may end up costing you more than you save.

Some other factors to consider:

Are interest rates at their lowest, or are they expected to fall even more? In the early 2020’s, it was a very obvious time for lots of people to refinance, because rates were historically low and approaching 0%. Right now in March 2025, it’s anyone’s guess what will happen with rates, so its hard to say how interest rate environment should affect your plan.

There could be opportunity cost for the money spent on a refinance as well. For example, if the cash used for the refinance would save you $50,000 over the life of the loan, how would that compare to investing the refinance cost (say, in a Roth IRA) for the life of the loan?

You may be given the option to pay the refinance cost up front, or add it to the new loan balance. Remember that if you add to the loan, it will bear compounding interest for the life of the loan.

Closing and opening accounts dings your credit score a little, but likely nothing too prohibitive.

Thanks again for the question, and hope that helps!

Kelsy asks Dan about using a Pledge Loan when buying a car

I am looking to purchase a vehicle. There's an alternative method to finance through a savings-secured loan (Pledge Loan) through Navy Federal. Can you explain the pros/cons of this option and if its worth considering given the high auto interest rates.

_______________________________________________________

Thanks, Kelsy! This is an excellent question.

I looked up the savings-secured loan through Navy Federal, and if I found the right product, I can see why you’re intrigued (link and snip below to confirm). I haven't previously done much research on this specific type of product, so it was fun to learn and think it through.

Quick disclaimer: my reply does not represent professional financial advice, and we are not engaged in a service agreement of any kind. Simply put, I’m here as a friend 😊

 

Savings-secured loan vs. traditional auto loan

Without more specific details of the product, based on Navy Federal's site I generally expect the pledge loan would be both cheaper and more flexible for you compared to a traditional auto loan. Some folks even use pledge loans as a preferred credit building tool. For example, I read about people taking a pledge loan, immediately paying most of it back, and adjusting their installment payment amount to pay tiny amounts for the rest of the term. While any loan will likely decrease credit scores initially (the inquiry and the increase in total debt amount are both negatives) the users mitigated this by paying back most of the debt immediately and then expanded their positive credit history by paying their installment loan timely. That may not be an option with all products, but sharing in case it's helpful to consider.

I think the risks are likely similar between savings-secured and a traditional auto loan, since both are collateralized (pledge loan secured by your cash, auto loan secured by your car). As a conceptual note, I think the reason they can offer a lower rate for a pledge loan is because the cash collateral is better compared to a vehicle, which depreciates with time and usage. However, it would be good to make sure you understand what would happen in the event of missed payment or default, and if there are any penalties for early repayment if you decide to do so. Then you can compare that to what you know about traditional auto loans.

As long as there's nothing too sinister in the savings-secured loan fine print, it seems like a valid alternative to a traditional auto loan and may be cheaper and/or more flexible.

Savings-secured loan vs. cash

It sounds like you already have cash that you'd be using to secure/collateralize the loan, so that leads to the question – why not just use the cash for your purchase? Why pay interest if you don’t have to? Really, that comes down to personal preference and opportunity costs. Full transparency - I've never used a pledge loan, so I don't want to assume I know every nuance, but I think I understand it enough to form a general opinion.

For any given person, I suspect the material opportunity costs of using your existing cash to pay for the vehicle up front instead of using it to secure a loan are:

  1. Lost flexibility. You'd save on the interest costs of the loan, but your cash would be gone-gone. However, make sure you understand when/how your cash would become available to you again as the pledge loan is repaid. Some folks may decide that the cost of the interest is worth the flexibility, compared to the finality of sending all the cash out the door at once. This comes down to personal preference, as well as reasonably projecting other life/cash needs over the term of the loan. Again though - most important is to understand when/how cash becomes available under the savings-secured loan, so that you can reasonably compare your liquidity.
  2. Lost credit-building opportunity. Using a loan of some kind provides credit-building if needed/desired; however, depending on severity of the need or desire to build installment credit, this may not be worthwhile.

Hope that helps, and thanks again!

 

P.S. this is the product I found and was reviewing.

Thanks!

 

Divine asks about starting a business without savings or income
Hey Divine, thanks for the question!
Licensing and costs
The first step in answering your question is to determine if you need a business license for the business you’re interested in starting. Do some research with the Washington Department of Revenue and Washington Secretary of State to see if your business would need a license to legally operate, or if it would meet one of the exemptions. If you can operate without registering and/or obtaining a license, you’ll avoid lots of paperwork as well as start-up and maintenance costs. Here is a link to help start your research.
https://dor.wa.gov/open-business/apply-business-license
If you do need a license to operate legally, that may be a challenge at the moment. Beginning a registered business may not be feasible without current savings or income. There are setup, filing, and maintenance costs that are a barrier to formation, and depending on the business you may also need supplies, equipment etc. To qualify for a small business loan you’d likely need to show personal income of the owner to assure the bank of repayment.
That said, you could also seek alternative funding to cover startup costs, such as the following:
  • Crowdfunding
  • Person to person loan (i.e. borrow from an individual)
  • Bringing in a partner who can finance
What to do in the meantime
No need to give up the business idea forever! You can still draw it up, refine it, define customer base, develop market strategies, and enjoy the dream while you save up.
Minimizing startup costs
There are quite a few businesses out there who will make your business set up as easy as possible. They’ll also ask for lots of money to do so. When I set up my LLC I was very thankful I explored alternatives on some of the services offered, because it probably saved me several hundred dollars. Even still, I wish I’d gone cheaper on certain items, such as selecting a registered agent or choosing a physical mailing address.
Final thoughts
If you’re able to operate without all the paperwork and costs, now might be a good time to get rolling. If you need to register, now may not be feasible. Hope that helps! Whenever you’re able to start the business, I hope you have fun and it does well. Thank you!
Coty asks: What’s the best use of off-schedule cash?

Defense first

First, make sure you have no credit card debt or other high interest debt. If you currently carry high interest debt, the best thing for your financial position is likely to put the funds toward paying those down. If high interest debt isn’t a concern, the next step is to check your emergency savings – do you have a minimum of 1 month of living expenses saved, or more preferably, at least 3 months worth? The reason this is also a priority prior to investing is because if disaster strikes – car trouble, medical bills, income loss – having the emergency savings serves as defense against toxic credit card debt, which often charges 24% or more in interest. Don’t count on any investment performing better than that consistently. And, even if invested funds are in a highly accessible account, you risk having to withdraw them in a market downturn. If you decide to save some or all of your bonus in an emergency savings, it would look pretty in a high yield money market account, earning decent interest without compromising access to funds.

Ok, now that I’ve nagged about proven defensive strategies, let’s look at the fun stuff.

Now build your lead!

You’ve made some money, you’ve set up your defense against disaster, and now you’re ready to go build on what you’ve started. Assuming you’re hoping to invest for long-term purposes (i.e. retirement) my preference is to use a tax-advantaged account and index funds. If you are eligible (and most people are), putting your money in a Roth IRA could be a great choice. I personally prefer this over a brokerage, since it will grow tax free forever while remaining reasonably accessible. If you stuck your bonus into a Roth IRA and earned 8% for 40 years, it would grow tax-free to over 24x its original value. If it earned 10% for the same period, it would be worth nearly 54x. Woohoo!

With long-term investing in a Roth IRA, I prefer to focus on proven equity index funds rather than trying to hit it big with more speculative investing. If you invest early and often enough, you don’t need to hit the jackpot. A lot of folks like choosing a combination of large cap, mid cap, small cap, and international index funds. Or, some just go with large cap, such as a fund built to track the S&P 500.

Here are some links to a reputable site that describes more about index funds and Roth IRAs.

https://www.investopedia.com/terms/i/indexfund.asp

https://www.investopedia.com/roth-ira-4771236

Wrapping up

I’m happy to hear you’re getting a bonus! Well-earned I’m sure. I hope that whatever you decide to do, it feels like a win. And if you carve out some of your funds to treat yourself to something fun, I think that’s great too. Thanks again for the question, and good luck!

Nathan asks: How should I prioritize retirement savings?
Hey Nathan, this is such a great question, thank you! Investing in retirement is an essential piece of any financial plan, and should be prioritized regularly. However, since it’s not always easy (or cheap) to withdraw funds from a qualified retirement plan to cover a financial emergency, it’s good to prioritize two things prior to investing in retirement:
(1) Eliminate high-interest debt
There are essentially two ways to improve your net worth, aka financial position: increase your assets (cash savings, retirement accounts, real estate etc.) and decrease your liabilities (loans, credit card debt, mortgage etc.).  Using free cash to pay off high-interest debt may serve your financial position better than investing in retirement. I don’t think anyone with a credit card balance should invest until that’s paid off, and other loans with interest of 10% or higher would be very useful to get rid of. The urgency to pay off debt fluctuates up and down with the interest rate.
(2) Establish emergency cash fund
Establishing at least 1-3 months worth of essential expenses in a high yield savings account is an important defensive step to protect your financial position (note that you need to have a budget to know what a month of essential expenses looks like). Ideally you’d work up to at least 3-6 months worth of essential expenses, but I think investing can commence once you’ve set aside at least 1 month worth. Why wait to invest until cash savings are built up? If you get in a pinch and don’t have cash funds easily accessible, it probably winds up requiring high interest debt, and you’re knocked back a step in your progress. Medical bills, car trouble, broken electronics, job loss… there are a ton of financially unfriendly things that can happen at any point in time. A high yield savings will give you at least a modest return on your funds, and hopefully you don’t have to touch it very often.
Time to invest!
I heard a saying once: “The best time to plant a tree is twenty years ago. The second best time is now.” As soon as you’ve set up a good defense, retirement savings needs to be prioritized. Time in the market is really what builds wealth. Earning 5% for 40 years is slightly better than earning 10% for 20 years. Earning 8% for 40 years on $100 monthly contributions is almost 3x better than $200 monthly contributions for 20 years, even though the same total amount is invested. Qualified retirement accounts such as 401(k) or IRA (both pretax and Roth) are great options to start retirement investing.
What else is in the mix?
I’m still a believer in the value of home ownership, with a big bold asterisk clarifying that the home purchase needs to be responsible, and somewhere you plan to stay for a while (I’ll set an arbitrary minimum of 5-7 years). So, saving for a down payment, maintenance, and updates for a home may also be a priority in your financial plan. If you’re currently against modern homeownership due to the brutal prices, then retirement investing will need extra attention, since you’d need a much bigger balance to safely cover rent payments for the rest of your life (unless living for free with someone else in retirement).
Also, I’m a big believer in having balance between living it up now and living it up in retirement. Nothing in life is guaranteed, so allocating current funds for experiences and lifestyle perks can be totally healthy, as long as it doesn’t impair your financial position with toxic debt or insufficient assets.
In one sentence…
Once you’ve protected yourself from toxic debt, invest as much as you can while still prioritizing what you value in your current life.
Thanks for the great question, and hope this helps!
John asks: what stocks or index funds do you suggest I invest my Roth or IRA in?
Hey John, great question! I’m not comfortable suggesting specific securities, but can help you think through the variables you mentioned.
The great news is that you’ve already paid income taxes on your Roth balance, which will grow forever tax-free. Woohoo! Since the earnings on these funds won’t be taxed, and you likely wouldn’t touch this money for 30+ years, choosing reputable equity index funds should serve you very well. If you want to balance out your portfolio with debt securities later, those would be great in a pretax 401(k)/IRA, because the taxable earnings would presumably be less than equities that have been in the market for a long time. A common strategy (and one I personally prefer) is to prioritize equity index funds in a Roth account when young and/or in a lower tax bracket, because of the duration and potential for the tax-free earnings. Then, as you age and/or move to a higher tax bracket, prioritizing pretax investing and more balance in the portfolio, because of the shorter duration and lower (but safer) potential for taxable earnings. And there are ways to convert pretax balances into Roth if you ever have a situation that makes sense to do so.
My only other note for now is that if you have major near-term concerns that you may need to access the funds in a pinch (and accept the early withdrawal penalty) choosing a lower risk, lower reward allocation could make sense. That strategy would prioritize cash and debt securities to limit risk of a stock market dive right before a withdrawal. But hopefully you can just let it ride!

Hope that helps! Thanks again for the great question.

Jack asks: If someone had a million dollars, what is the smartest long term strategy beyond index fund averaging?

Hey Jack, thanks for this question! 

It’s a really fun and interesting exercise. Honestly, what you said about dollar cost averaging into an index fund is pretty good, especially when you think things are overpriced. It’s not a perfect metric, but one I like to check when I’m skeptical of market highs is the price-earnings ratio of the S&P 500. At the time of writing, the prices compared to the earnings are higher than typical, which is extra interesting consider interest rates aren’t exceedingly low. This supports your concern that you might be “buying high” if you were to transition all the funds from cash savings into equities all at once. Now, on to your question.

If it were me with that $1,000,000 in high yield savings (hopefully spread out to not exceed any FDIC insurance coverage limits), I’d be looking for the best combination of opportunities among several options:

  • Frequent conversions to index funds (dollar-cost averaging) and making biggest conversions if/when market prices swing lower
  • Investment property
  • Vacation property with rental potential
  • Leave it in high yield savings
  • Fun and fulfillment

None of these ideas are perfect or free of risk, and all have opportunity cost as well. But here are some interesting examples:

  • Your original example of investing index funds over the course of time, with an added note to convert extra when markets are in a downturn. For example, if the S&P 500 loses 20% and you think it’s near the bottom, that may be an awesome time to scoop up a ton of shares at a lower price.
  • Buy rental property for $500,000 cash, invest the rest in index funds over the course of time (buying extra when markets are in a downturn)
  • Buy two rental properties for $500,000 each
  • Buy a vacation property in cash, and allow weekly rentals when not in use to provide extra cash flow. Not for everyone, but if you think you could handle occasional visitors, could be cool! I’m no expert in this, but I’d guess weekly or even monthly rental minimums could help avoid more destructive crowds. Any leftover funds could stay in high yield savings, or maybe some conversions to index funds.
  • You could always just leave the funds in the high yield savings and enjoy the $40,000-ish per year. You could stick to your career and choose a role that let’s you feel healthy and fulfilled, invest as you would if the nest egg wasn’t there, and use high yield savings interest for trips around the world, charity, or anything else you feel like doing.

Some clarifying thoughts on the investment properties… it’s incredibly hard to assess if real estate is overpriced at the moment, and I don’t have a great benchmark or metric to help with that. The reason I chose $500,000 for the home prices is that this appears to be a round median price for 3-bedroom homes in Tacoma/Pierce County. Based on similar research, you could probably rent that home for $2,650/month, but you’d also be on the hook for repairs, maintenance, insurance and property taxes. Rents could be raised occasionally over time, or sometimes quite a bit, and the property should appreciate in value over time if well maintained. That said, being a landlord comes with lots of potential risk and cost, and interestingly enough, Tacoma has legislation that impacts the ability for property owners to collect from renters.

Hope that helps, and thanks for the fun exercise!

When to Refinance a Mortgage Pledge Loans vs Traditional Starting a Business https://youtube.com/shorts/64tU4T59BwM?feature=share
How to invest your Roth Funds How to prioritize your retirement    

Dan Wickens - Ask Dan Anything