IFB61: Personal Finance 102: Building Assets in the Adult World


building assets

Welcome to Investing for Beginners podcast this is episode 61. We’re going to go ahead and talk a little bit about personal finance today. Andrew has a disclaimer he wanted to discuss before we get started so Andrew why don’t you go ahead and chat a little bit.

Andrew: sure so real quick I know there’s like varying degrees of experience level with people who listen to us so I would say we’re going like super into the basics for the next couple of weeks. I would say if it’s stuff that’s going to kind of bore you or if it’s stuff that you already know I go through our archives and we get in swarmed the nitty-gritty in into the stocks and individual stocks and accounting and stuff like that in those.

But Dave and I had a lot of fun last week talking about some of the basics and personal finance and figured we’d turn it into a little bit of a series. So we’re going to do we’re going to call last week’s personal finance 101, and we’ll call this one 102 and make a couple of episodes that way.

There was a lot of fanfare when we did the back to the basics part 1 through 5 series, so this is going to be kind of similar but for personal finance and we’ll try to throw in some more advanced things, but I would say go through the archives. I know when I check out podcasts and some of the other ones there was a big one that I remember I listened through every single episode in the archive, and that helped me out, and I’ve done that for investing entrepreneurship and whenever there’s like a skill I wanted to learn.

I always thought the archives were like a valuable resource and we got stuff on their blogs and stuff like that too if you are dying for content. But for now that’s where we’re going to head and yeah let’s talk about last week we were talking about some things that we would do some things we would say there were five-year-olds and try to give them some concept of money and making money investing money all those sorts of things.

We talked about the importance of building the business building assets. But we didn’t say how to do that specifically, so I was going to say, Dave, what would you say is the first step if we do now want to take our discussion from last week and yep start building assets and how do we do that in the adult world.

Dave: Well I think the easiest thing is to start a savings account that’s probably rule number one is to start saving money. Learning how to save money, and we talked a little bit about that last week with what we’re going to do with our daughters, and I know that I’ve talked to my daughter Sadie about that numerous times and she’s starting to kind of take to it.

Last week when I gave her earnings she took two dollars of it and went ahead and set it aside and I’d even have to tell her that it was kind of cool. I think the first thing is setting up a savings account starting to save money and putting money aside whether you’re 14 years old or 24 years old I think that’s so critical to have extra money.

There was a tweet going around earlier this week where there was a study done that said I think it was seventy-five percent of Americans have less than four hundred dollars in a quote-unquote emergency fund. So if your car breaks tire blows out you have some medical emergency, you break a tooth or something like that that you that the average American doesn’t have any money saved.

And I can tell you from firsthand experience working in the banking world for those years that is right on the money there is lots and lots of people that have nothing they have no money saved that would have paycheck-to-paycheck.

Some of some of it’s their own doing they live above their means but some people they just aren’t earning enough money, and it’s really hard for them to save. And so it’s more of a challenge for them, and depending on which camp you’re in it there are ways to get a go about doing it and learning how to do those things. But I think for me that’s one of the easiest ways to get started with building an asset what are your thoughts, Andrew?

Andrew: yeah I love it you brought up the banking world it reminds me because when I was in high school, I had a couple of different jobs, but I worked as a bank teller. I had some exposure to the banking world as well, and I guess it’s funny in a way because I guess my experience there is more in tune with like everybody else’s regular everyday experience.

But then when I started getting into investing and personal finance and stuff like that kind of opened my eyes to like a different world. But I think a lot of people who maybe didn’t maybe they’re lucky they stumbled on our podcast and we can kind of help them out, but there’s just a lot of different accounts that aren’t talked about.

For example you mentioned savings accounts when I was in the banking world I felt like I don’t know if this is an early 2000s thing. Or if this is just a case of being inside like a consumer bank but a lot of people either have or talk about like money market accounts, they talk about CDs, and this might have something to do with interest rates too in the way they’ve been just rock bottom.

But I always remembered growing up was this idea of well if you do have a savings account it’s a good idea to have like a money market account, and that was seen as like quote-unquote investing because you did get some interest rate. But the thing about like a money market account is there’s risk involved with that, and it’s not investing.

I don’t know so I saw things like money market accounts you have regular checking and savings accounts too, but there are accounts like IRAs and Roth IRAs which I guess doesn’t get talked about too much on the consumer side unless you go to a personal banker and maybe more about that side. But I know like from the teller standpoint it was you have a checking account you have a savings account, and then some people would sometimes have a CD maybe six months nine months 12 months or they would have a money market account.

But nothing that you would want to have like for example for my daughter I have like a 529 account set up for her which is not an only savings account. But you can also buy stocks you can’t buy individual stocks but you buy these mutual funds which I don’t even know if it’s a mutual fund or ETF, but they’re buying stocks for you and then it has like tax benefits as well.

That’s like the those are all huge advantages that come with these specialized accounts and if people aren’t aware that they’re out there. That then you’re missing out on the huge kind of set up for the rest of your financial future and so just like they have a variance and there’s a difference between just having regular savings account having a 529.

Well, there are also differences between a regular savings account and the IRA and the Roth IRA.

Dave: yeah exactly I love it I mean the 529 plan is such a great tool to help save for your daughter’s college education someday and what a lot of people don’t know what’s cool about these accounts. If you’re not familiar with what a 529 is it’s a tax-deferred I guess is an easy way to put it. It’s a tax-deferred account that your child can use when they’re ready to go to school. Then they can use any of those monies for any financial not financial I’m sorry anything that’s related to school whether it’s booked whether it’s dorms whether it’s me feeding themselves just about anything.

And what’s kind of cool about it is is that for example let’s say that grandma grandpa always give you 20 bucks every year for your birthday you can they can make a deposit into your 529 for you like it as their gift. And it doesn’t cost them anything and it doesn’t hurt you, and it’s a great way to save money and earn more than most banks right now as we’re talking about savings accounts.

Savings account to me if you’re in a brick-and-mortar bank is not or not a credit union is not a place where you want to park a lot of money because you’re going to lose money just by the sheer fact of inflation. And so when you’re using a savings account, it’s a great place to learn to save money instead of set money aside for a quote-unquote rainy day and having that kind of cushion if you will or safety net however you want to think about it or put it.

When we’re talking about a 529 that’s more of a separate account that you would use, so it’s only to be used for educational purposes if you want to buy a car with that money you’re going to get taxed on it hard, and so it needs to be part of your plan for sure, and they’re a great tool, but those are things you can set up through your just about any bank.

And they’re super easy to use, and it’s another way of building an asset for you for your kid and because this can help them save money when they go to school whether they go to Harvard or whether they go to the local community school it can be used for any educational purpose, so there is a fantastic tool to use for those things.

Andrew: yeah and I know like I opened one online and it took maybe five minutes, so it’s a super simple thing I guess I did have array everything like an online account with Merrill edge but definitely it’s something that’s worthwhile just even from a tax savings standpoint with the whole tax deferral thing.

I would say another account that’s useful which I kind of alluded to would be the IRAs and the Roth IRAs. Those are going to be they have like limitations as far as where your income is so once you start making too much then you might not qualify for them but and they also have like caps on how much you can put in per year.

But the way that these work we’re always talking about stocks and we’re always talking about dividends and all those sorts of things I feel like we don’t talk about like setting those up properly and I think if you’re an average investor and you’re somebody who’s on the right mentality of wanting to build assets wanting to build a cash flow income stream and wanting to grow your wealth over time and eventually reach financial freedom.

You have to have IRA and Roth IRA if-if you’re in the income brackets that qualify. So there are some differences between those two accounts but the huge basic thing about them is if you’re in the traditional you’re getting tax-deferred, and if you’re in the Roth you’re paying upfront, but they’re not paying taxes on the back end.

Whichever one you’re picking you are getting a huge tax benefit and not only does that apply to like your funds but it’s so it’s what when I say tax benefit what that means is when you buy and sell a stock if you sell a stock and you made a profit on it you’re going to have to pay taxes to the IRS.

It’s like right out the gate you kind of feel like you’re already in a losing proposition because it’s hard enough to make money on stocks as it is right and then when you see the government say well thanks for playing, and then they take some of your money on top of that really doesn’t feel good. But when you have something like a Roth IRA every single cell that you that you’re making every profit you’re picking up you’re not getting taxed on that.

Especially as time accumulates and as your trades accumulate that can make a huge difference at the very end and so that’s a huge thing and the same I don’t know if you because I haven’t done that personally where I would go into like a brick or mortar bank and an open one but for a fact I know they have online brokers same concept same idea.

I bank with Bank of America I have Merrill edge linked up with that, and I don’t remember how I got set up with that that might have been through the brick and mortar, but when I wanted to get some new online accounts I went to Tradeking (Ally Invest), and I opened up an IRA, and again it took maybe five minutes opened up in the Roth IRA linked it up online to my bank of America online banking and within a couple of business days I was able to transfer funds from B of A to two now.

it used to be called Tradeking now it’s Ally because they bought them out but able to just put funds like that just straight on the computer just like you would pay a bill, so it’s very simple very easy and then you can be buying a stock like as soon as that money is in your account, and I think just seen how easy that process is can take some of the like if it’s a kind of a scary thing or if it’s intimidating I think that kind of help take a little bit of the edge off just know how simple of a process it is.

But it’s something that no company’s going to open this for you like even if you have like 401k’s but those are different from IRAs an IRA is just something you need to do on your own, and you want to make sure you’re funding it as much as you can and then after you hit like a contribution limit then maybe you have a regular brokerage account where you pay regular taxes.

But I think definitely if you’re a beginner and you don’t know much about personal finance or investing get yourself an IRA. And link that up and make your investments in there within the contribution limits and it’s going to go far.

And the way I kind of like to see it is it’s just like opening another checking account like it’s not like I like the end-all-be-all where you have to have a checking account a savings account, and that’s it. You can have multiple accounts in all these different places, and everything’s going to be fine so open one and see how simple it is, and then you can start buying stocks from there.

Dave: Yeah well then it’s it is that easy it takes almost no time at all to open an account online and with one of these online brokerages or if your bank offers a brokerage account and that’s something that you feel more comfortable doing it takes very little time to do. And like Andrew said after a few days you could transfer money from your account to your bank into the brokerage account, and you can start buying and selling stuff.

And I agree with what he was saying about whether having a traditional in a Roth and yes you can walk into a bank, and you can open an IRA with your brick-and-mortar bank you can do it in a savings account, or you can do it with a CD.

Although with the interest rates being the way they are I don’t know that that would necessarily be the greatest idea. But you certainly can do it if that’s something that you want to and you’re comfortable with that, and it’s just as easy as opening a checking and savings account. The only issue is that with either account they’re going to want to know what beneficiaries you have so if something happens to you where do you want the money to go.

And that’s so something that you need to think about as well and one thing I wanted to mention too about what we’re talking a little bit about IRAs your 401k off so we’ll offer IRAs as well so you will have the option in your 401k of having your traditional or Roth.

The investments that you make through your business or your employer bakes quote-unquote for you will also have the choice of whether you want to put those in a Roth or traditional and they’re the contribution limits are different in the 401k then they are and the personal accounts.

Just kind of keep that in mind but those are all great things to kind of keep in mind as you’re going along and starting to build your assets. Because it starts with learning how to save money and  it could start as young as six years old and as you get older you’re going to learn you’re going to continue that habit and when you start to get of age where you can actually start investing on your own and start putting that money away that’s a great tool to have in your toolbox is having that habit of being able to save money and take you’re looking at your paycheck and taking part of that and putting it away for your future.

And if that’s something that you can develop at an early age and a young age you’re a thousand miles ahead of just about everybody else out there, and it will pay huge dividends no pun intended. Maybe intended a little bit but they’ll pay huge dividends as you go forward in your life.

And I guess one asset that I wanted to talk about to depending on what your age is if you’re a twenty-two-year-old or an old store like Andrew you’re going to have time is your biggest asset you have so much time, and we’ve talked about compounding and all the power that it has.

the younger you start, the more power you’re going to have and the more ass that is an asset to you when you don’t know fogey like I am at 51 years old then I don’t have as much time I mean yes we are living longer and yes I’m going to probably work longer because of that.

But yeah the point is that Andrew started at a great age, and he’s got those 40 or 50 years to accumulate this massive amount of wealth, and I’m envious that he started this young and that’s a huge asset that you need to leverage as you are going forward life in.

I can’t encourage you enough no matter what your age is to start saving money. There’s a huge crisis looming out there, and people are not talking about this and people do not have money saved for their retirement at all and one of the things that Andrew and I encourage everybody and hope that you guys take this to heart.

Is that this is something that you could set yourself up for life and  Andrews doing it with his e-letter and he’s showing everybody steps by step what he’s doing, and it’s a great tool, and it’s a great habit to start, and I can’t encourage you enough.

Alright, folks well that’s going to wrap up our discussion today on personal finance and building assets. I hope you enjoyed our conversation this is something you guys need to take a heart and I hope you learn something, and if you guys have any questions, please let us know.

Go out there and invest with a margin of safety emphasis on safety you guys have a great week, and we’ll talk to you next week.

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