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When to Start Investing: 3 Tips for a Beginner Investing in Stocks

The craziness surrounding the stock market is usually what turns beginners away from investing but last week, Reddit investors changed that. They caused chaos and proved that amateur investors can band together and take down richer, older investors. This show of force empowered young people to start investing in huge numbers. 

While I love how invigorated the GameStop battle has gotten people about investing, I’m also worried that newbie investors will fall victim to predatory financial tactics. There is so much misinformation promoting get-rich-quick schemes and risk-free ways to make 1000% returns on platforms like TikTok.

If it were as easy to get rich as they make it seem, we would all be doing it.

If you’re new to investing, I’m going to tell you how to cut through the BS and invest the smart way. Your success with this method won’t happen overnight, but it will happen. If you’re ready to stop reading because I’m not telling you how to get rich fast, let me ask you this. Would you rather take a gamble on getting rich quick or get rich for sure? If you picked the second option, these are my tips for what to do as a beginner investing in stocks and when you should start investing.

When to Start Investing 

A popular phrase in personal finance is ‘time in the market beats timing the market’. Time in the market means that the longer you leave your money invested in the stock market, the more money you’ll make. This is due to compound interest, what Warren Buffett calls the eighth wonder of the world.

He’s probably so fond of it because over 99% of his wealth was made after he turned 54. You read that right. If Warren Buffett had cashed out his investment portfolio to retire at 60, he never would have gotten super-rich and you probably wouldn’t know his name. He’s amassed so much wealth by lengthening the time he was invested in the market and letting compound interest work its magic.

Compound interest is so great because you earn interest on the interest you’ve already earned. This creates exponential growth in your investment portfolio, but it takes a while to see huge gains. That’s where the time in the market comes into play. The longer you leave your money invested, the more money you’ll make from compounding.

You can see the slow growth at the beginning of Warren Buffett’s tenure, and now much faster the growth is now. That’s due to compound interest. Graph from MarketWatch.

Timing the market, on the other hand, is fast-paced and means that you try to buy a stock when the price is at its lowest and sell it when it’s at its highest. This sounds simple, but if it were, the hedge funds would have seen their billion-dollar GameStop losses coming and been able to avoid them. 

The problem with timing the market is that it is a short-term investing approach and it’s nearly impossible to predict what will happen with the stock market in the short-term. If everyone had predicted the 2008 stock market and housing crash, it could have been avoided, and no one would have lost money. The same is true of the huge stock market drop in March 2020 when the novel coronavirus got to the US. And the same is also true of GameStop’s stock price surge. If it were easy to predict these swings, we would all be making lots of money doing it. But it isn’t easy. It’s almost impossible. That’s why time in the market usually beats timing the market.

To get as much time in the market as you can, you need to start investing as early as possible. Before you start, though, you should have an emergency fund saved. Investing is risky, and all of the money you invest can be lost in the blink of an eye. If you lose your job and your investments tank, you’ll still need money to live off of. That’s where your emergency fund comes in handy. So save for an emergency fund first, then invest.

Choose an Investing Approach

Once you have your emergency fund saved and are ready to start investing, there are three investing strategies you can choose from. Trading, value investing, and long term passive investing. Each method has a different level of risk and requires a different level of effort to succeed. To choose the strategy that’s best for you, you’ll need to assess your risk tolerance and the amount of effort you’re willing to put into managing your portfolio.

To assess your risk tolerance, take this quiz.

To determine the amount of effort you’re willing to put into your investments, read more about the 3 investing strategies below and select the one that is best for you.

Trading

Trading is a type of active investing that is all about timing the market. The goal with trading is to buy a stock at its lowest price, hold it until the price increases to a certain amount, and then sell it at a profit. Some traders only hold a stock for minutes or hours before selling. It’s fast-paced and requires a ton of research. 

Like I mentioned before, it is extremely difficult to predict how a stock’s price will move over the short term. That means there is a high potential to lose money with this strategy, so if you want to succeed at it, you’ll need to spend a lot of time researching stocks, market sectors, consumer habits, and more. Unless you thrive under high stress and want to dedicate most of your time to your investment portfolio, I wouldn’t advise trading.

Risk level: Very high

Time commitment: Very high

Value Investing

The second stock market investing approach you can take is value investing. This is the approach Warren Buffett uses. 

Value investing is an investment strategy where you buy stock in a company that you think is undervalued and has unforeseen growth potential. A stock is undervalued when the price it is trading for on the stock market is less than the actual value of the company. Basically, the stock is trading at a discount. It’s just like when you buy something on sale at a store. You feel good about your purchase because you know you paid less for the item than it’s actually worth.

You can make money using this investing approach because at some point, the stock price should adjust to match the company’s true value. When the price rises to the correct level, you make money. It sounds simple enough, but there are a lot of unknown variables involved in valuing a stock.

To determine if a company is undervalued, you first need to do a deep dive into that company’s financial statements. I don’t just mean glance over them. I mean, you need to use them to calculate their price to earnings/book/sales ratios, EBITDA, several other metrics, and to estimate their growth. Then you need to use all of these metrics to determine if the company is undervalued and has good long-term growth potential. If it does, it could be a good investment, but much of your assessment is based on assumptions. Those assumptions may be correct, or they may not.

To get great at value investing like Warren Buffett has, you have to make correct assumptions. Again, if becoming a billionaire were as easy as calculating a few ratios, we would all be doing it. Finding ways to predict the unknown variables correctly is what Warren is fantastic at and why he’s been able to make so much money. Unfortunately, his methods and earnings are hard for most people to replicate.

Risk level: Moderately high

Time commitment: High

Passive Investing

Passive investing is a long-term investing approach where investors try to receive the same return as the market instead of trying to beat it. Passive investors buy index funds and ETFs that track an underlying set of investments and hold them for decades. When a fund tracks an underlying basket of investments, it provides the same return as those underlying investments. For example, if you buy an index fund that tracks the S&P 500, your fund will perform the same way the S&P 500 is performing. No better and no worse. 

The reason passive investors are content receiving the same return as the market is because historically, the stock market has always gone up over the long term. Therefore, if you buy a well-diversified fund that tracks the stock market and hold it for decades, you can expect to make money even if the market drops in the short term.

Because passive investing doesn’t require you to predict market swings, this investing style requires minimal effort. The only time you need to exert any effort is when you select your initial investment and when balancing your portfolio. While there’s never 100% certainty when it comes to investing in stocks, since historically the market has gone up over the long-term, the probability of making money with this strategy is much more certain than with the other two investing strategies we’ve discussed. 

Risk level: Moderate

Time commitment: Low

Don’t Lose Easy Money 

Taxes and fees will eat into your earnings substantially and quickly. Here’s how you can minimize your losses to them.

Avoid Short Term Capital Gains Tax

When you sell a stock, you have to report your earnings as income and pay taxes on those earnings. If you hold your investments for less than a year, your earnings will be taxed at the short-term capital gains tax rate. For most people, this rate is the same as their income tax rate and is around 20-30%. All of the Reddit investors might not know this yet, but they’re going to lose close to a third of their earnings to taxes.

Instead, if you hold your investments for over a year, your earnings will be taxed at the long-term capital gains tax rate, which is around 15%. That’s 5-15% more money in your pocket for holding your investment for a longer period. This is another reason many investors take a long term investing approach over a short-term one.

Invest in Funds with Low Expense Ratios

Fees are another thing that will eat heavily into your earnings. If you’re going to take a short term investing approach, you’ll need to avoid trading fees. Fortunately, many platforms offer low or no trading fees, so these should be easy to avoid.

Long-term investors, on the other hand, need to watch out for high expense ratios. The reason so many people are tricked into investing in funds with high expense ratios is because, by normal standards, high expense ratios don’t seem high. What I mean by this is that a 2% expense ratio seems low to a newbie investor, but it’s actually super high. When deciding what fund to invest in, go for ones with expense ratios less than .5%. This may seem trivial, but high expense ratios can end up costing you hundreds of thousands of dollars.

If a person invests $1,000/month for 30 years into a fund with a .25% expense ratio, they’ll pay a total of about $55,000 in fees and end up with around $1.15 million assuming they receive a 7% annual return. $55k in fees may already seem like a lot, but just wait until you see the dollar amount for investing in a 2% fund. 

Instead, if they had invested their money in a fund with an expense ratio of 2% and received the same return, they would end up paying almost $376,000 in fees! That’s a loss of more than 6 times what the low expense ratio investor paid. Because of that, the high expense ratio investor winds up with less than $1 mill in their pocket. 

When it comes to newbie investors, there’s no shortage of misguided information on the internet. Social media platforms have made spreading misinformation even easier for the financial predators looking to get-rich-quick themselves. The truth is that smart investing isn’t glamorous or quick. It’s about making sure you’re financially secure enough to start, staying invested long enough to let compound interest make you millions, and minimizing the money you lose to taxes and fees. While there’s no guarantee that you’ll make money investing in the stock market, if you do those things, I can [almost] guarantee you will. 

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How Reddit Trolls Got Rich on GameStop and Made Wall Street Tycoons Lose Billions

wallstreetbets and hedge funds gamestop meme

Unless you’ve been living under a rock, you’ve probably heard talk about how Reddit trolls are getting rich investing in GameStop and causing Wall Street fat cats to lose billions. While all of the GameStop drama is riveting, it can also be quite confusing for anyone who isn’t a finance nerd. To help you figure out what’s going on with GameStop so you can enjoy the drama as much as the rest of us, I’m going to simplify the financial concepts that caused Wall Street investors to lose billions, tell you why this battle is such a big deal, and answer the biggest question of all. Should you invest in GameStop?

The GameStop War

If you’re unfamiliar with GameStop, they’re a brick and mortar video game retailer that can be found in shopping centers and malls around the world. But they’ve been on the struggle bus. The pivot toward online shopping, the rise of streaming, and the ease of downloading a video game directly to your console has made GameStop’s future as a brick and mortar retailer look pretty grim. The pandemic didn’t help them out either.

While most investors would avoid buying stock in a failing company like GameStop, these companies can be a gold mine for hedge fund investors. 

What is a Hedge Fund?

A hedge fund is an actively managed fund that uses pooled funds, typically from accredited investors, to try and take advantage of certain identifiable market opportunities. In simpler terms, they take money from rich people and try to find opportunities in the stock market that others don’t see and capitalize on them. One way that they do this is by short selling.

What is Short Selling?

Typically when people invest in a company, they think the stock price will go up and take what’s called a long position. They buy the stock at its current price and expect that they will be able to sell it at a higher price in the future. The difference between the low price they bought the stock for and the high price they sell it for is the investor’s profit. 

Short selling does the opposite of this and bets that a stock’s price will go down. It’s slightly more complicated than a long buy and works like this.

Ruth thinks a stock’s price will go down, so she borrows that stock from Janet and immediately sells it to Donald at its current price of $100. Then Ruth waits for the stock price to drop to $50, buys the stock back from Donald at the new low price, and then gives the borrowed shares back to Janet. Since Ruth sold the shares to Donald for $100 and then bought them back for $50, she makes a $50 profit.

While short selling is only slightly more complicated than the long buy strategy investors typically use, it is much riskier. Unlike regular investing, where you can only lose the amount of money you initially invested, there is no limit to the amount of money you can lose from short selling. 

A short seller loses money when the price of the stock they invested in goes up. Since there is no limit to the height that a stock’s price can rise, there’s also no limit to the amount of money a short seller can lose. This extreme downside risk is what allowed Reddit investors to buy GameStop stock and create billion-dollar losses for hedge funds.

What Went Down: The GameStop Short and WallStreetBets Rise

In 2020, hedge fund managers took notice of GameStop’s grim future and aggressively shorted the stock. If GameStop failed, the hedge funds stood to make a killing.

This aggressive short position didn’t go unnoticed by individual investors on Reddit in a group called WallStreetBets, though. They realized that if they bought up as many shares of GameStop stock as possible, they could drive the stock price up. Hedge fund managers would then be forced to buy back their shares at a higher price to close out their short positions and avoid bigger losses if the stock price continued to rise.

To make problems worse for the hedge funds, the act of them buying back shares to close out their short positions actually pushes the stock price up further. This negative feedback loop is called a short squeeze. As the stock price went up, WallStreetBets investors made a killing, and hedge fund investors closed out their short positions at multi-billion-dollar losses.

Shifting Power from Wall Street to Main Street

As you can imagine, the hedge funds are not taking their billion-dollar losses lying down. They’re now calling for regulators to make it illegal for people to band together to create changes in the stock market like WallStreetBets investors did. But manipulating the market this way is exactly what hedge funds do when they short sell a stock.

When hedge funds take out large short positions on a company’s stock, this usually drives the stock price down further and more quickly. So hedge funds are in the business of exacerbating problems at already struggling companies and causing them to fail more rapidly. The faster they go down, the faster the hedge fund makes money.

So are hedge fund managers just mad that everyday investors found a way to beat them at their own game? Probably. 

That’s because hedge funds are typically only accessible to accredited investors. To become an accredited investor, you must meet certain income and net worth requirements. This prices out most regular investors like the ones on WallStreetBets. 

The benefit of becoming an accredited investor is that you can invest in a wider range of investments. Because of your wealth, the SEC assumes that you’re able to take on the risks associated with investment categories that are less heavily regulated by them. Being accredited also allows investors to take riskier positions like selling a stock short. 

Regular investors, on the other hand, are limited to investing in mutual funds. These funds are more tightly regulated by the SEC, usually only contain stocks and bonds, and investors are only able to take long positions in them. 

So hedge funds are asking the SEC to increase regulations on everyday investors that are already limited to more heavily regulated investments, while the hedge funds benefit from the limited SEC regulation they face by only servicing accredited investors. 

That’s why the GameStop short is getting so much attention. Because the power shifted from the mega-rich Wall Street investor to the everyday investor. 

Should You Invest in GameStop?

I wouldn’t recommend it.

Investing in any singular stock is risky, and while all of the GameStop drama is super exciting, I’m much happier watching from the sidelines rather than being a player in the game. 

There are always new shiny objects that pop up for investors. Right now it’s GameStop, last week it was Tesla, and we can’t forget about the rollercoaster ride Bitcoin has taken us on. But getting shiny object syndrome and investing in the latest hot stock is a great way to lose money in the long run. Not to mention, it’ll elevate your stress to the max.

The easiest and most hassle-free way to invest in the stock market is to invest in passive funds. These include index funds and ETFs that track an underlying set of investments. Their goal is to receive the same return as the market, and since the market has historically gone up over the long term, it’s safe to assume that you’ll make money investing in them.

Passive funds also usually have lower fees than actively managed funds like hedge funds or other mutual funds. That’s because active funds try to find hidden gems like GameStop so you can make sky-high returns. Finding hidden gems takes a lot of work, though, and you pay more for all of that extra work.

Paying more in fees may not seem like a problem since your fund manager says they’ll make you more money, but active funds often don’t actually provide higher returns to their investors. I mean, think about how much money those hedge fund investors just lost. Now they’re stuck with huge losses and high fees. Not a spot I want to be in.

If you’re looking to skip the drama and invest in passive funds, a great way to get started is to invest in one that tracks the S&P 500. The S&P 500 is widely regarded as the best measure of the overall stock market’s performance and tracks the 500 largest US companies. Funds that track the S&P are super common, well-diversified, and have low fees, which make them perfect picks for almost any investor.

Who the victor will be in the battle between the hedge funds and the WallStreetBets investors is still unknown. Will the rich, Wall Street tycoons take back their power and crush the everyday investors? Or will David prevail against Goliath and leave the WallStreetBets investors on top? Who knows. One thing is certain, though, watching the drama continue to unfold will be one hell of a ride. 

Want more investing advice? Get my free finance guide, set up a consulting call with me, or sign up for my Make Yourself a Millionaire program.

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Best Stocks to Buy Now That Joe Biden Is President

joe biden smoking marijuana

Have you ever wondered what weed, Tesla, and TLC have in common with Joe Biden? Probably not, but you’re about to find out.

If you were hoping this article would provide you with some secret stock tips to help you get rich over the next four years, I’m going to disappoint you. And frankly, that’s because anybody who tells you they know which stocks will go up while Joe Biden is president is full of shit.

Nobody has any idea what the stock market is going to do in the short term. I mean, think about all of the people who invested in construction companies when Trump became president thinking they were going to ‘build that wall’. None of those investors got rich because ‘that wall’ didn’t happen.

Instead of giving you garbage stock picks, I’m going to tell you why TLCs song Waterfalls gives great investing advice, how to invest in Tesla the smart way and why it’s a good idea, and why the weed industry could be a moneymaker during Joe Biden’s presidency.

Stick with Your Long Term Investing Strategy

Don’t go chasing short term gains. Please stick to the ETFs and index funds that you’re used to. Those are the lyrics to TLC’s song Waterfalls, right?

If you feel stressed and like you need to switch up your investment strategy because of all the stock market hype that coincides with a new president taking office, I have great news for you. You don’t have to switch up your strategy, and here’s why.

The Federal Reserve (Fed) has indicated that they will be keeping interest rates near zero for the foreseeable future. This is great news for stocks because low interest rates make competing investment options less attractive. Take bonds, for example. Bonds are attractive investments because they are safer than stocks, but when interest rates drop, so do the earnings bonds provide.

Since an investor’s goal is to make money, when bond rates are low, investors seek out other investment options that will provide a higher return. One great alternative for them is investing in the stock market. 

For evidence of this theory, just look back at the stock market’s performance over the last decade. To stimulate the economy in 2008 during the Great Recession, the Fed dropped interest rates to near zero. Since then, rates have remained near zero, and the stock market has boomed. 

So it’s safe to assume that over Biden’s first term, interest rates will remain low, and the stock market will rise. Because of this, investing in an index fund and/or ETF that tracks the S&P 500 is a relatively low-risk investment option that should provide good returns. Since many investors already have these holdings in their portfolios, there’s no need to change their investing strategy now that Joe Biden is president. They can just stick to the index funds and ETFs that they’re used to.

Buy Tesla Stock

Tesla is Added to the S&P 500

If you have serious FOMO because you haven’t started investing in Tesla yet, you’re not alone. I’m not going to tell you to go buy up a bunch of Tesla stock, though. Doing that will make your portfolio very risky. How? Because if much of your portfolio is invested in Tesla and the stock price plummets, you’re going to lose a lot of money.

I have great news, though. There’s a much lower risk way you can invest in Tesla stock. Buy an index fund or ETF that tracks the S&P 500!

Tesla was added to the S&P on December 21, 2020, which means you can now participate in the Tesla hype without going crazy, crazy like KC and JoJo with it. By investing in an index fund or ETF that tracks the S&P 500, you will own a fraction of a share of all 500 companies that make up the S&P 500 index. Since Tesla is now one of those companies, buying the S&P 500 makes you a Tesla investor, but in a much safer way.

The 500 companies that make up the S&P 500 provide diversification to investors. By investing in Tesla via the S&P 500, when (I mean if) Tesla’s stock price falls, you will have 499 other companies’ earnings to help offset your Tesla losses. Investing in Tesla this way allows you to participate in the Elon hype and avoid the potential devastation that a drop in Tesla’s stock price could cause. 

Clean Energy Stocks

Another reason you should buy Tesla stock is because Tesla is a clean energy company. 

On his first day in office, Biden already rejoined the Paris Climate Agreement and issued other environmental policy orders. He’s also proposed making radical changes to emissions standards to become a 100% clean energy economy by 2050. If this is any indication of how his presidency will go, I’d expect a huge push toward clean energy initiatives. With Democrats controlling the House, Senate, and presidency, these initiatives are much more likely to pass. 

Reducing the effects of global warming may not be Biden’s only incentive for adopting clean climate legislation, though. With the impending recession the coronavirus has caused and coal miners still struggling to find work, these initiatives could also be a good opportunity for job growth. Since Tesla is a clean energy company and is already growing and innovating at warp speed, they should be well-positioned to benefit from these changes during the Biden years.

Buy Marijuana Stocks

“Smoke weed every day” isn’t just the lyrics to a Snoop Dogg song, but has also become a motto for many. Over the last decade or so, the number of people reporting that they’ve used marijuana in the last 30 days has increased, as well as the number of people reporting that they use marijuana 20+ days per month. That means there are more people smoking pot, and they’re smoking more of it.

The exact reasons for this are unknown, but the push toward legalization probably has a lot to do with it. Only 6 states remain where Mary Jane hasn’t been decriminalized or legalized medically or recreationally.

On top of states adopting legalization in large numbers, the MORE Act, a federal bill to decriminalize weed, passed in the House on December 4, 2020. The bill has since stalled in the Senate and was expected to fail, but that was before Senate control flipped to the Democrats after they picked up two seats in Georgia during the runoff elections. Getting the bill passed still won’t be a cakewalk, though. Democrats only have a slim majority and may still have a hard time passing the bill.

The MORE Act to federally decriminalize marijuana isn’t the only weed bill currently up for a Senate vote. Another bill called the SAFE Banking Act has also passed in the House and is awaiting a vote in the Senate. Unlike the MORE Act, the Safe Banking Act has bipartisan support and is much more likely to pass. 

The great thing for your portfolio about the SAFE Banking Act passing is that it is intended to make it easier for marijuana businesses to access bank funding. That means cannabis companies will have access to more money to grow their businesses. If their growth efforts are successful, that means high returns for their investors.

With rising marijuana usage and consumption, and broadening legalization efforts, the potential for growth in the weed industry is high. (No pun intended.) Democrats also now control the House, Senate, and presidency, which may make this the perfect time to get a lot of legalization legislation passed.

Investing in marijuana stocks is still a risky bet, though. If you’re up for the risk, investing in a marijuana stock index fund or ETF will provide broader exposure to companies in the industry than investing in a single company stock will. Just like buying the S&P 500 to invest in Tesla provides diversification and reduces your risk, the same is true of buying a marijuana stock index fund or ETF. 

The difference is that companies in the S&P 500 span many industries and are usually much better established. These factors lessen the likelihood of large losses for an investor. Companies in the marijuana industry are relatively new and unpredictable. So if you’re going to invest in the weed industry, I’d recommend doing so in a separate account using your “fun money”.

“Fun money” is money you put toward your stock market gambles and are content with losing. Once you know how much money you need to invest to live your retirement dream and you’re on track to get there before retirement age, you can start a “fun money” investment account. 

In this account, you can take huge gambles with your money. You can invest in marijuana stocks, bitcoin, Tesla company stock, smaller tech companies, whatever you think could be a big winner. Making incredible amounts of money on any of these investments is a definite possibility, but so is losing it all. That’s why I recommend these investments make up no more than 10% of your entire portfolio and that you only use your “fun money” to make them.

So what do weed, Tesla, and TLC have in common with Joe Biden? They’re all investments that should do well during the Biden presidency. Low interest rates should make taking the TLC approach and sticking to your long term investing plan a win, Tesla getting added to the S&P 500 gives you a less risky way to jump on the Tesla bandwagon and take advantage of their position in the clean energy sector, and if you’re looking to have a little more fun with your money over the next 4 years, the Senate makeup and bills currently awaiting votes should position the marijuana industry to grow during the Biden years. 

So don’t stress about changing up your investing strategy now that we have a new president. The best stocks to buy now what Joe Biden is president are the same ones you’ve been buying. You should still invest for the long term, find smart ways to invest in market-leading companies, and make sure to have a little fun money.

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2 Investment Accounts You Need to Retire Early

two women discussing which investment accounts you need to retire early

Oh, early retirement. How fabulous it would be to break away from that 9-5 and live the luxurious life you’ve always dreamed of. To finally have free time, the ability to sleep in as late as you want, and go on vacation for months at a time, all before the ripe old age of 60.

The dream of retiring early is a popular one. I don’t know a single person who doesn’t at least want the ability to retire as early as possible, even if they never plan on actually doing it. Maybe you love your job, or working in general, and can’t imagine ever actually retiring, but you probably still want the freedom of financial independence and the flexibility to say sayonara to your job if you ever change your mind.

Most people are trying to retire one day by investing in retirement accounts like 401Ks or IRAs. Those investment accounts are great to use if you don’t plan to retire early, but not so great if you do. The problem with these accounts is that they penalize you for withdrawing your money before your late 50s, which is exactly what you’ll need to do if you want to retire early.

To avoid losing money to these steep early withdrawal penalties, you’re going to need an investment account that allows you to withdraw your money before you near 60. The two investment accounts you need so you can retire early, penalty-free are a Roth IRA and a taxable brokerage account.

Roth IRA

A Roth IRA is the first type of investment account you should contribute to if dream of an early retirement. The contributions you make to your Roth IRA are after-tax, meaning you already paid income taxes on the money. A huge benefit of Roth IRAs is that any money you earn on your contributions is completely tax-free. Unlike with 401Ks and traditional IRAs whose earnings are taxed upon withdrawal, Roth IRAs allow you to withdraw your earnings in the future and pay absolutely zero taxes. This is a huge benefit whether you retire early or not, which is why it’s the first account I’m recommending.

The reason this one of the best types of investment accounts to use to retire early, in particular, is because you can withdraw your contributions at any time, penalty-free. The issue is that you still have to be 59 ½ before you can withdraw your earnings. With a contribution limit of $6,000 a year, even the most frugal people will have a hard time retiring off of their Roth IRA contributions alone. On top of that, you can’t contribute at all if you make more than $139k a year, so as your income increases and you progress in your career, you may exceed the limit. And that leads us to number two on the list of investment accounts you need if you want to retire early.

Taxable Brokerage Account

The biggest difference between brokerage accounts and all of the other investment accounts we’ve mentioned so far is that brokerage accounts offer no tax benefits. Retirement accounts like 401Ks and traditional IRAs offer tax-deferred contributions, and as we discussed all of your earnings grow tax-free through a Roth IRA. But you won’t find either of these perks when investing through a brokerage account. Any earnings you make on the investments in your brokerage account are taxed at the capital gains tax rate.

While these accounts won’t help you out with your taxes, by not offering any tax benefits, they do allow for much more flexibility with deposits and withdrawals. Unlike retirement accounts, which have contribution limits and restrictive withdrawal policies, taxable brokerage accounts have no limits on how much you can invest or when you can withdraw your money.

Both of these advantages are critical for people looking to become early retirees. Having no contribution limits means that you can invest as much money as you want, no matter what your current salary, and let compound interest start to work its magic. Then once you reach FI, you can take advantage of the second benefit these accounts offer and begin withdrawing your money penalty-free.

Before opening your brokerage account, there are a couple of different account types you should consider. How involved you want to be with managing your investments will determine which type of account is best for you.

Online Brokerage Account

Online brokerage accounts are great if you want to manage your own investments. You can buy and sell stocks, bonds, mutual funds, and many other investment types within these accounts. Remember that as a long-term investor, your goal is to build a well-diversified portfolio that you let grow for several decades, not to buy and sell stocks frequently. The temptation with these accounts will be to start trading “hot” stocks. Don’t fall into this trap! As many studies have shown, traders rarely beat the market, no matter how many of them post on Instagram that they’re up 1000% this year.

An easy way to build a well-diversified portfolio in your online brokerage account is to mimic a target-date fund. To do that, find the target date fund that is appropriate for your age group, and look at what funds make up that target-date fund. Then find similar funds through your brokerage account and invest in each at the same percentage that your target-date fund does. For example, if your target date fund is composed of 90% stocks and 10% bonds, you should find index funds and/or ETFs that mirror those holdings and invest 90% of the money in your brokerage account in the stock fund, and 10% in the bond fund.  

The main thing to consider before opening this type of brokerage account is that your portfolio won’t be managed for you. To maintain your portfolio structure and reduce your risk over time, you will need to manually readjust your own investments.

Managed Brokerage Account

As the name suggests, this type of brokerage account will manage your investments for you. One increasingly popular category within this group is Robo-advising. These “advisors” manage your investments using complex algorithms. They’re a great alternative to a human advisor because they provide portfolio management services for investors who want to be hands-off but at a cheaper rate.

Another option to consider is a managed brokerage account with a human advisor. This is a more expensive option, but a good one for people who aren’t comfortable relying on computer code to manage their money. Before hiring a human advisor, it is important to make sure you understand their fee structure and verify that they are a fiduciary. Fiduciary financial advisors are legally required to make decisions that will be in their client’s best financial interest.

If you aren’t sure which type of account will be best for you, consider how you’re currently managing your retirement accounts. Do you enjoy using target-date funds because you can be hands-off with your investments? Then a managed brokerage account is a great option to consider using to invest for early retirement. On the other hand, maybe you like to regularly update your holdings in your retirement accounts. In that case, an online brokerage account would work wonderfully for you and you’ll save some money by not having to pay an advising fee.

Many people work hard to max out their 401Ks and IRAs so they can reach financial independence and retire. The problem with investing only in retirement accounts is that they have withdrawal restrictions that won’t allow you to access the passive income your investments generate if you want to retire early. To avoid having enough money invested to retire before 60, but not actually being able to do it, make sure to add a brokerage account into your investment portfolio. Investing in a Roth IRA and taxable brokerage account puts you on the fast track to becoming a rich bitch before 60, so you can live out your early retirement dream.

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Why Paying Off Your Loans Early is Dumb

paying off debt vs investing

A whopping 80% of Americans are in debt, and many are working as hard as they can to pay off their loans as quickly as possible. While trying to become debt-free is a popular sentiment in the personal finance community, it’s an incredibly dumb piece of financial advice. To help you understand why paying off your loans early is dumb, I’m going to tell you how debt works, why paying off your loans early isn’t as helpful as you think, and how investing can make you a lot richer.

How Debt Works

Debt is a financial tool that you can use to buy something that you can’t currently afford. You read that right. You can’t actually afford the things you’re buying with debt even though you can afford the payments.

Whether it’s a house, university tuition, or a car, you’re taking out a loan because you don’t have enough cash on hand to make the purchase. To make up the difference between what you have in cash and the price of whatever you’re buying, you take out a loan. To do that, you ask someone, usually a bank, who has enough cash on hand if it will lend it to you.

The bank isn’t going to just give you their money for free though. They also want something out of the deal, so they charge you interest on your loan. Your interest charge is a percentage of the principal or the amount you borrowed and is charged at regular intervals, usually monthly. The longer it takes you to pay back your loan, the more you’ll end up paying in interest. Since you can save some money on interest by paying off your loan faster, people tend to prioritize paying off their loans quickly to maximize their interest savings. But there’s one GIANT problem with this.

Why Paying Off Your Loans Early is Dumb

The problem is the opportunity cost of paying off your debt fast. By putting extra money toward your loans to pay them off early, you forego the opportunity to invest your extra money instead. When you’re evaluating two opportunities, like whether to pay off debt or invest, you want to end up picking the one that will make you the most money. The winner between these two is usually investing.

Before breaking down how much money you’re losing by paying off your loans instead of investing, I have to point out that there is one exception to this rule. Credit card debt. The interest you’re charged on your credit card debt is typically at least several percentage points higher than the return you could expect to receive from investing. Some credit cards actually charge you more in interest than Warren Buffett makes in the stock market, and he’s one of the top-earning investors! So if you have credit card debt, put as much money as you can toward paying that off first, then take the advice in the rest of this post.

Ok, back to why investing is usually a much better opportunity. Let’s say you took out a loan on a $250,000 house at a 3.5% interest rate for 30 years. If you pay an additional $100/month on your loan, you’ll only save about $24,000 in interest and cut down your loan by just 4 years. While $24,000 may seem like a large savings, remember that this savings took 26 years to accumulate. That’s means you saved less than $1,000 each year.

So what would investing that extra $100/month have gotten you? If you’d invested it into the S&P 500 and received a 10% annual return, you would have over $131,000 after 26 years! That’s $111,000 more than you would have saved by making extra loan payments! Even better is that since you won’t be putting that $100 toward your loan, it’ll take you the full 30 years to pay it off, but investing that $100 for that long will give you even higher earnings of $197,000!

You might be thinking, ok but what if I paid an extra $1,000? That would cut my interest down way more, right? It sure would! You would end up saving almost $100,000 in interest and shorten your loan by 17 years! That’s an incredible savings but still pales in comparison to what you could earn by investing instead. The total you would earn from investing $1,000/month for 13 years, assuming a 10% return, is almost $300,000! After 30, over $1.9 MILLION!

So which would you rather have? $197,000 after 30 years or $24,000? $1,900,000 or $100,000? And this, my friends, is the reason why using your extra money to pay off your loans early is dumb.

What to Do with Your Money Instead

While you shouldn’t pay off your debt early, it is incredibly important to make your minimum monthly payments in full on all of your debt. Once you’re making all of your minimum payments, as our examples show, you need to use your extra money to invest and start building your wealth.

An important note is that if you lower your payments to the minimum and don’t invest the difference, you will just be losing more money to interest. For investing vs paying off debt to work, you have to actually invest your extra cash, not spend it.

So how do you do this? My favorite way is to invest in the stock market because historically, it has always gone up and provided positive returns on well-diversified portfolios. Another plus is that it is super simple to do it. Contrary to popular belief, successful stock market investing can be done with little time and effort. If you’re interested in how you can become a lazy investor and eventual rich bitch, check out this post on how to start investing.

It’s time to stop falling for all of the debt-free advice that’s out there. It’s dumb and isn’t increasing your wealth. To truly build your wealth to the tune of hundreds of thousands or millions of dollars, so you can become a rich bitch or simply retire one day, you’re going to need to invest. The earlier you start investing, the more money you’ll make. So go lower your debt payments to their minimums, and start automatically depositing the difference into an investment account, so you can get rich!

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What You Need to Know Before Rolling Over Your 401K

scale representing weighing the pros and cons of rolling over your 401k

With the staggering job losses in 2020, many people are asking what they should do with the 401K they have with their former employer. Brokerage firms will tell you that rolling over your 401K into an IRA is the best option, but what they don’t tell you is that they make A LOT of money from these rollovers. So should you take their advice? Here is everything you need to know before you decide to roll over your 401K.

DO NOT WITHDRAW YOUR MONEY

The absolute worst thing you can do is withdraw your money from your 401K. In the finance world, this is sometimes referred to as an indirect rollover, so watch out for those. The reason it is so important to do a direct rollover and to avoid withdrawing your money is that if you do, you’ll pay income taxes on it and unless you’re 59 ½ or older, you’ll also pay a 10% penalty. That’ll leave you with significantly less money. So, whatever you do, make sure to do a direct rollover and DO NOT WITHDRAW YOUR 401K MONEY!

Your Rollover Options

You have two options as to how you can roll your money over. If you have a new job (first of all, congrats!) and that job offers you a 401K, you can roll your old 401K into your new plan. Not all plans allow transfers, so first, you’ll need to check that your new one allows this. If it does, you’ll also want to check that it offers low fee investing options before transferring your balance. The average 401K investment fund fee is .45%, so if your plan only offers investment options with higher fees than that, you may want to consider option two instead.

Your second option is to roll your 401K into a traditional IRA. Since an IRA is a completely different type of retirement account, you’ll need to take some more things into consideration before switching. To help you decide whether you should switch or not, here are the pros and cons of rolling your 401K into an IRA.

Pros of Rolling Into an IRA

More Investment Options

One of the main arguments you’ll hear for rolling your old 401K into an IRA is that you’ll have more investment options. While this is true, this is also where many people get themselves into trouble. Remember when I said that brokerage firms make a lot of money by getting you to switch to an IRA? Well, offering you access to more or “better” fund options is usually how they do it.

While you will have access to more investment options with an IRA, many of these options will charge much higher fees than your 401K options do. That’s because a lot of the new funds you’ll be able to choose from will be actively managed mutual funds that are notorious for charging exorbitant fees without providing the excessive returns they promise.

If you decide to switch to an IRA to take advantage of having more investment options, make sure you aren’t swindled into investing in high fee funds that will benefit the brokerage and could end up costing you thousands.

No Terminated Participant Fees

Some companies charge former employees a fee for leaving their money invested in their 401K plan with their previous employer. These are sometimes called terminated participant fees. Check your prior employer’s plan info to see if you’ll be charged this fee. If you will be, switching to an IRA will allow you to avoid paying it.

Access to Cheaper Funds 

While many people get misled into investing in high fee mutual funds when they change over to an IRA, you also have the potential to save money on fees if you switch. Depending on which brokerage provides your 401K, you may have access to super low-cost index funds, ETFs, and even target-date funds with your new brokerage. Make sure to evaluate the full fee structure for your old and new plans before you make the switch.

Maintain Full Bankruptcy Protection

One benefit 401Ks have over IRAs is that they are fully protected from creditors if you file for bankruptcy. However, rolling over your 401K into a traditional IRA allows you to retain this protection. The key is that you need to be able to show that the original source of funds was from a 401K. To reduce confusion on the source of funds, make sure to open a separate rollover IRA if you have already been contributing to another traditional IRA.

Cons of Rolling Into an IRA

No Loans or Early Withdrawals 

You should exhaust pretty much all other available options before taking out a loan from your 401K, but you do have the option to do so if you get into really dire financial straits. If you switch to an IRA, this loan option will no longer be available to you.

The minimum age for early withdrawals is also higher for IRAs at 59 ½ than with a 401K where you can begin to withdraw the money at 55, penalty-free.

Huge Tax Bill for Company Stock

Many people who work for large companies receive some of their compensation in the form of stock options. If this is you, it may be a better idea to transfer your company stock into a taxable account and pay income taxes now, so you only have to pay capital gains tax (which is typically much lower) on any future earnings. The rest of your 401K can then be rolled into a deferred tax account like a traditional IRA. If instead all of your stock is rolled out into a traditional IRA, you’ll have to pay income tax on all future earnings, which could land you with a much higher tax bill. Make sure to check with a tax professional to find the best option for you before deciding to switch.  

Required Minimum Distributions 

If you’re a workaholic and planning on working forever, you may want to consider when you will be required to start taking distributions. 401Ks never require you to start withdrawing your money, while IRAs require that you start taking the minimum distribution at 70 ½.

Weighing all of the tax, fee, and distribution options before rolling over your 401K can save you money and heartache in the future. Don’t fall prey to the brokerage firm’s promises about the benefits of switching to an IRA. They’re trying to make money off of you, not help you live your dream retirement. Make sure you do your own research on all of the hidden fees and taxes you could end up paying by blindly rolling your money into an IRA. As the saying goes, the grass isn’t always greener on the other side.

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3 Steps to Recover from a Late Start to Investing in Your 30s

We’ve all heard the advice that you need to start investing as early as possible, but the fact is that many of us are late to the game when it comes to starting to invest.

If you missed getting on the investing train in your early twenties and are now consumed with anxiety every time you see one of those charts about how the 20-year-old investor is going to become a millionaire, while the 30-year-old investor will never be able to catch up, keep on reading, my friend, because there is hope for you.

Here are 3 things you can do as a 30+-year-old investor to start investing, maximize your earnings, and become a millionaire before retirement.

1. Stop Putting Investing Off

Pour one out for the earnings you’ll never receive because you didn’t start investing in your twenties, and then move the fuck on. If you don’t start investing now, 40-year-old you is going to have an even harder time preparing for retirement, so stop wallowing in your sorrows and start investing.

Remember the anxiety-inducing chart about the 20-year-old investor whose earnings blow the 30-year-old investor’s earnings out of the water? Well, the same principle applies to a person who starts to invest as a 30-year-old vs as a 40-year-old. Take a look at the graph below. 

*Graph totals assume a 10% annual return

You can see from this graph just how important it is to start investing right NOW! The person who starts investing $100/month at 30 will have $226k at 60, while the person who starts investing $100/month at 40 ends up with only $76k at 60. That’s a difference of $150k in earnings, and the 30-year-old investor will only contribute $12k more! So yes, the 20-year-old’s earning will be even higher than this, but your options now are to end up like the 30-year-old investor or the 40-year-old investor. You take your pick. 

2. Stop Trying to be Debt Free

Becoming debt-free is a goal for many people and being debt-free is great, but not if you’re foregoing investing to do it. Needing to be debt-free before investing is a myth that is perpetuated by many in the debt-free community, but it’s terrible advice

The problem with this approach is that the opportunity cost of the earnings you could have received from investing your extra cash instead of paying off debt is WAY HIGHER. Let’s break down what this actually means.

Opportunity cost is the loss of a potential gain from other alternatives when one alternative is chosen. In our scenario, you have two options. You can use your extra cash to pay off your debt or use it to invest. If you choose to pay off your debt, the opportunity cost is the earnings you could have received if you had invested that money instead. If you choose to invest, the opportunity cost is the interest you could have saved if you had chosen to pay off your debt instead. 

When evaluating multiple opportunities, you should choose the option with the highest return, and forego the opportunities that would provide lower returns. Otherwise, you’re going to lose money. Let’s make more sense of this by looking at some numbers.

Let’s say you have $100k in debt at an interest rate of 3.5% on a 15-year loan. If you’re only making the minimum payment of about $700/month on that loan, you’ll end up paying almost $29k in interest over those 15 years. Spending $29k on interest sounds like a total waste of money to you, so you decide to instead pay $1,000/month so you’ll only wind up paying $18k in interest and save $11k. 

While a savings of $11k is nothing to scoff at, let’s instead look at the opportunity cost of investing that extra $300/month over 15 years. Let’s assume you invest in the S&P 500 and receive an annual return of 10%. Over those 15 years, you will earn $70k in interest! Earnings of $70k vs a savings of $11k? I’ll take the earnings of $70k, please. Not to mention that you can continue to make even higher returns from the money you’ve invested long after these 15 years have passed.

Since the opportunity cost of investing far exceeds the benefit of paying off your loans faster, you should choose to invest vs pay off your debt earlier. The further and further you keep pushing investing off, the harder it will be to get the earnings you’re looking for by retirement. (Reference the graph above again if you need a reminder.) 

Contrary to a lot of popular financial advice, debt freedom does not build wealth. If you want to make more money, you’re going to have to start investing.

*If you have high-interest debt, like credit card debt, it may make more sense to pay that off before investing, so make sure to evaluate your specific options before choosing a path.

3. Don’t Take on Any More Debt

While you should 100% start investing before becoming debt-free, that doesn’t mean that you can continue taking on debt to finance purchases because you can afford the minimum payments. Debts are financial obligations. That means that you have to make all of your minimum payments each month no matter how much money you have. The more of these obligatory payments you keep stacking up, the more of your money is going to be tied up in debt payments.

This is super important for later investors because you have some catching up to do. If you want to get anywhere close to the earnings 20-year-old investor you would have made, you’re going to have to contribute a lot more money.

We already saw in the earlier example that a 30-year-old starting to invest $100/month will have $226k at 60, but an investor who started at 20 and contributed $100/month is going to have a whopping $632k at 60. That’s $406k more! So if you’re late to the investing game and want to make up that $406k, you’re going to have to up your contributions.

To get to $632k by 60, a 30-year-old investor will need to contribute $280/month. That’s almost 3X what the 20-year-old investor needs to contribute, so you’re going to need to find that extra cash somewhere. A great place to find extra cash is from former loan payments.

Like I said earlier, debt is a financial obligation, so the more payments you are making toward your debt, the more of your money is tied up. As you start paying off your loans, you’ll begin to free up more money that you can then allocate toward your investments. The best way to figure out when you’ll have your loan paid off is to use a loan payoff calculator. Once the loan is paid off, you can use an investment calculator to look at how moving that money into your investments will affect your earnings.

Here is an example.

You have the following loans (assume 3.5% interest on all of the loans).

  • Car – $7k loan balance at $300/month payments
  • Student loans – $16.5k loan balance at $300/month payments

Plug all of the loan info above into a loan payoff calculator and you’ll find that your car will be paid off in about 2 years, and your student loans will be paid off in about 5 years.

Now let’s assume you’re 30 and you start investing $100/month this month. (assume 10% annual return on investments)

Here is your contribution schedule and potential earnings.

  • You contribute $100/month for 2 years before any loans are paid off = $2,644 earnings in year 2
  • Once you’ve paid off your car, then you start investing $400/month (current $100/month contribution + former $300/month car payment.)
  • $400/month contributed for 3 more years = $20,277 earnings in year 5
  • If you continue to contribute $400/month until you’re 60, you’ll earn $775K! Congrats! You’ve now beaten the 20-year-old investor’s earnings!
  • If instead, you increase your contributions to $700/month ($400/month contribution + $300/month former student loan payment) once you’ve paid your student loans off then at 60 you’ll have $1.17 MILLION!!

So you don’t have to start investing as an infant to see huge returns. You just need to be strategic about how you allocate your money. By starting to invest today, paying your minimum monthly debt payments and investing the rest, and increasing your investment contributions as you pay off debt, you’ll be able to out-earn a young investor who starts earlier and is far less strategic about their investments. So what are you waiting for? Go open your investment account so you can become a millionaire and live your dream retirement!

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Creating a Bulletproof Financial Plan for a Recession

As a millennial, I always feel the impending doom of a recession looming in the back of my mind. I turned 18 in 2008, so for the first years of my adulthood, I was away at college studying finance while witnessing the utter devastation that recessions cause families. Fast-forward to January 2020, and I would have told you that I expected another mild recession just like everyone else that follows the economy, but I never expected anything like this.

After years of comparing the economic conditions of the Great Recession to the Great Depression, it was comforting to think that we probably had a long time to wait until we saw another catastrophic jolt to the economy. Sure there would be ups and downs, but nothing like the Great Recession, right?

Well, coronavirus had other plans, and just like that all of the trauma we millennials experienced in 2008 has risen to the surface again. The thought of going through this every decade is anxiety-inducing, to say the least, but if it’s taught us anything it’s how incredibly important it is to build healthy finances so you aren’t devastated every time one of these ‘Great Recessions’ pops up.

If you’re looking to create a financial plan before the next recession, you aren’t alone. These are the 3 steps you should take to make a good financial plan for a recession so you don’t lose all of your money, and can even come out ahead.

1. Build an Emergency Savings

I seriously can’t stress the importance of this enough. It’s probably the least “sexy” thing you can do with your money, but the most critical one if you want to adequately plan for a recession. That’s because recessions = job losses. Maybe your job wasn’t affected this time, but that doesn’t mean you’ll be spared during the next recession.

In 2008, the high rate of mortgage defaults caused jobs at banks and insurance companies to be severely affected. In 2020, social distancing has caused the airline, hospitality, and service industries to be hit hardest. What causes the recession affects which jobs are the first to go, and next time, it could be yours.

If this happens to you, your emergency savings will be a Godsend. It’ll allow you to pay all of your bills, put food on the table, and keep your sanity and Netflix subscription. If you want to focus on getting a new job and getting back on your feet as fast as possible, you can’t be spending all of your time trying to make ends meet. Instead, you’ll need to be focusing on what your next move is and how you can land a new job. Your emergency savings gives you the stability needed to shift your focus from what’s happening right now, to what you can do to build your future.  

As a good rule of thumb, you should have 3-6 months of expenses saved in your emergency savings and keep it in a high-yield savings account. The more responsibilities you have like loans, kids, or a mortgage, the closer you should be to 6 months of savings. A high-yield savings account is the best place to keep your money because they pay you about 20 times more than traditional savings accounts just for keeping your money in them. Who doesn’t want more money for doing the same thing?! If you need more guidance on how to set up your emergency savings, this post has all of the info you’ll need.

2. Invest in the Stock Market

The second step to building a solid financial plan for the next recession is to start investing. The S&P 500 is widely regarded as the best indicator of how the overall stock market is doing. In 2008, the S&P 500 entered a bear market, which means that stock prices were declining. After prices began to fall, it took 5 years for the S&P 500 to reach its pre-recession price of around $1,500 per share.

Since then, the share price for the S&P 500 index has more than doubled. So even if you lost money in the 2008 crash, as long as you held your investments, you made it all back in 5 years and have more than doubled your money since.

The bear market for the Coronavirus Crash began in early March and was the fastest fall of global stock markets in financial history. It was short-lived though, and the drop ended in April. Since then, stock prices have risen to above pre-Coronavirus Crash levels, and investors have made money.

So while crashes are scary and make it seem like you should sell all of your investments, that is the exact opposite of what you should do when we enter a bear market. When prices fall, the value of your investments goes down on paper, but you don’t actually lose money until you cash out your investments at a loss. This is the difference between taking a paper loss (you see the price is lower), and a real loss (selling your investments at a lower price). Unless you absolutely need to use the money you have invested to pay your bills right now, you should ride out the bear market, because as history has shown, the market will rebound. A bull market awaits you just over the horizon and you stand to make even more money if you can be patient.

And that brings up another point about your investments. They can provide additional passive income during tough times. If you invest in a diversified portfolio of stocks, like the S&P 500, a portion of these stocks probably pay dividends. A dividend is a share of a company’s profits that it pays out to its shareholders. When you’re trying to grow your wealth, you usually reinvest all of your dividend payments, but if you find yourself in a financial bind, you can skip reinvesting your dividend payments and instead use them as a passive income source to cover some of your expenses during a tough time. Again, this only works if you remain invested through the lows of the recession, so try to avoid selling your investments in a bear market if possible.

3. Keep Investing When You Get Scared

Market crashes aren’t great for the money you already have invested, but they are fabulous opportunities to make more.

When prices drop and the market crashes, stocks are essentially on sale. It’s like if you bought a dress for $100 full price, and the next day it gets marked down to 50% off. Same dress, half the price. Buying a diversified set of investments like the S&P 500 index when prices drop is basically like getting them at a bargain rate.

Let’s assume you were an investor in 2008. If you had continued investing through the 2008 recession, you would’ve made a lot more money than if you’d gotten cold feet and stopped investing. Before the market crash, S&P 500 shares were trading for around $1,500/share. At their lowest point, these same shares were trading for less than half that price at around $700/share. If you continued investing through the recession and purchased shares at their lowest price, your investments today are worth 5X more than they were when you bought them in 2008! In comparison, all of the shares you had purchased before the 2008 recession have only increased in value by 2.3Xs. While doubling your money is great, quintupling it is even better. By continuing to invest through a recession you can offset your losses on the money you already have invested and make huge gains.

Since recessions affect different companies in different ways, this strategy only works when you invest in diversified instruments like index funds or ETFs. Some companies are bound to fail during the recession, so hand-selecting companies to invest in increases the likelihood that you’ll lose a significant amount of money if one of them goes under. To avoid this, stick to investing in index funds and ETFs during a recession unless you’re willing to lose everything.

The easiest way to stick out your investing strategy through a downturn is to use a method called dollar-cost averaging. This is just a fancy way of saying ‘invest at regular intervals’. The first benefit of using this method is that you’ll be able to buy when prices drop because you’re consistently investing. The second advantage is that you can automate your contributions so you never have to think about making them. Making more money without having to lift a finger sounds like a huge win to me. Whatever type of investment account you’re currently using, it’s a good idea to automate your contributions now because you’ll be more reluctant to do it during the next recession when the market is volatile or you’re struggling financially.

Since many people only invest through their 401K, if you lose your job and therefore your 401K contributions, you’ll need to take some extra steps to keep investing. Opening a Roth IRA is a great option because all of your contributions grow tax-free forever. If you lose your job and have enough financial stability to keep investing, open a Roth IRA and begin making automatic contributions to that.

By taking these 3 steps, you can create a financial plan that will significantly minimize the effect the next recession will have on your finances and avoid losing all of your money. Your emergency savings can save you from financial devastation if you lose your job, your investments can offer a source of passive income, and if you’re able to continue investing you can make significantly higher returns. Taking these steps to create a financial plan for a recession will not only allow you to coast through the next one, but will also help you come out ahead in the long run. Trust me, your future self is going to thank you.

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The Easiest Way to Start Investing in The Stock Market

person walking through a path of money trees grown from investing in the stock market

Starting to invest in the stock market can seem terrifying since most of what is portrayed about investing is dramatic. There are stock market crashes, extreme swings in stock prices, and investors losing fortunes! These highly publicized, dramatic events make entering the world of stock market investing seem more like entering the Wild West.

Based on this coverage, it’s no wonder you feel so stressed about starting to invest in stocks, but if you want to get rich or just simply retire one day, you better start. The good news for you is that becoming a successful investor is actually quite simple. You don’t have to keep track of what the stock market is doing, know anything about the financials of individual companies, or worry about losing everything. With these 3 tips, you’ll be able to open an investment account, develop a super simple and low-stress investment strategy, and feel confident that you can start investing in the stock market today.

Tip 1: Invest in a Retirement Account

Retirement accounts are the simplest way to start investing in stocks. They offer great tax benefits and can be easily automated so you never have to worry about tweaking your investments or tracking how they’re doing. They are the ultimate account to use if you want to utilize a ‘set it and forget it’ investment strategy.

These accounts are perfect for beginner investors because contrary to what you may believe, investing in the stock market is a long game. The difficulty that comes to mind when you think of investing is probably more in line with trading. Trading means that you try to time to market, or buy stocks at their lowest price and sell them at their highest price. To be a successful trader, you need to keep up with a litany of things like what’s happening with the companies you’re invested in, how the market sector they’re in is performing, if there are problems in the country where they perform their operations, what the current economic conditions are, and the list goes on. If this sounds like a lot of work, that’s because it is. Just the thought of keeping up with all of this is daunting and is exactly what turns many people away from investing.

That is why you should ditch the idea of trading and become an investor instead. Investors regularly invest money in a broad range of companies and leave their money invested for years or even decades. They can do this because in general, the stock market goes up over time. That means you can invest in a diversified set of companies, not worry at all about current market fluctuations, and you will still make money. The simplest way to use this strategy to start investing is with a retirement account.

Types of Retirement Accounts

401K

The best option, if it is available to you, is a 401K. That’s because employers will often match a portion of your contributions. That means that if you contribute to you’re 401K, your employer will also contribute to it. Usually, this is written like this, “Employer will contribute 50% up to 5%.” That means that if you contribute up to 5% of your salary to your 401K, your employer will also contribute 50% of what you contribute. To help you understand why this is so amazing, let’s look at some numbers.

  • Employee salary: $50k
  • Employee annual contribution: 5% or $2,500
  • Employer annual contribution: 50% of $2,500 or $1,250

In this example, you can see that contributing to your 401K gave you a $1,250 raise, and you didn’t even have to take on any ‘additional duties as may be assigned’! This is what makes 401Ks so amazing. If your employer offers a 401K and a company match, at a minimum you should set your contribution level to receive the maximum match from your employer. In our example, that was 5%.

IRAs

If you don’t have a 401K as an option, or you want to open another account in addition to your 401K, opening an IRA is your best option. There are two types of IRAs, a traditional IRA and a Roth IRA.

The difference between the two is how they’re taxed. Like a 401K, traditional IRA contributions are pre-tax. That means that the money is deposited into your 401K before payroll taxes are deducted from your paycheck, and instead, you pay the taxes later when you withdraw the money during retirement. Roth IRA contributions on the other hand are after-tax. That means that the payroll taxes are deducted now, and you don’t pay any additional taxes on your earnings when you withdraw the money later in retirement.

One advantage IRAs have over 401Ks is that they offer a wider selection of investment options. Since 401Ks are employer-sponsored, your employer hand selects the funds that you are offered. With IRAs, you aren’t limited to what your employer selects and instead can invest in a much wider array of options.

Each of these types of retirement accounts varies slightly, but unless you’re trying to build a strategic tax advantage by using one account over another, you shouldn’t stress too much about which account is the absolute best option for you. Pick the one that is the easiest for you to open TODAY and open it.

What Funds to Select

Once you choose an account type, then comes the fun part, which stocks you invest your money in. The easiest solution for this is to use a target-date fund.

These are the Holy Grail when it comes to effortless stock market investing because they do all of the work for you, forever. When you invest in a target-date fund, it will allocate your money appropriately for your age. It uses your age to determine your asset allocation because of how you should manage the risk of your portfolio over time.

When you’re younger, you should invest in riskier assets because they typically provide a higher return on investment. Unfortunately, with greater risk also comes a greater chance of losing money. When your retirement is far into the future, any losses you experience now can easily be recovered before you need to start using your money in retirement, so it is worth it to invest in riskier assets to try to maximize your return. However, as you approach retirement, you have less and less time to recoup any losses, so you should shift your money into less risky investments to preserve the higher returns you received when you were younger. I know this sounds like a lot of work, but don’t worry, your target-date fund is going to do all of this work for you.

That is why target-date funds are the easiest way to invest. You can literally buy a target-date fund and never look at it again until you retire, and be confident that you will make money because your target-date fund will be managing your investment strategy for you. It can’t get any easier, or better than that.

Tip 2: Avoid Fees

When opening your account, your provider is probably going to offer you a lot of different account options, so which one should you choose?

When it comes to using a passive investing strategy, like a target-date fund, you do not need anything fancy. Accounts like a full-service brokerage account offer lots of investor perks and advising services, and while that all sounds nice, it’s also expensive. Since your target date fund is going to do all of the hard work for you, there is no need to pay extra for any of these “perks”. Your best bet is to choose the lowest fee account your provider offers.

Even the lowest fee account you can find will most likely charge you an admin fee, or something similar. These are usually only $25 or so a year, but that $25 still eats into your returns! Getting these fees waived is often as simple as signing up for paperless statements. If you don’t see a way to waive this fee when you’re opening your account, give your provider a call and they can help you get your fee waived.

While going to these lengths to get a fee waived may seem petty, fees are an investor’s archenemy. They may seem small at first, but over time fees can lead to significant reductions in your returns. On top of your admin fee, the funds that you choose to invest in will also charge management fees, often called expense ratios. Passively managed funds, like target-date funds, offer much lower expense ratios than actively managed funds. Remember all of the work that goes into trading? Trading is active management, so when you invest in active funds, the fund manager charges you a higher fee for all of their extra work.

To put into perspective how detrimental fees are to your earnings, here is a real-life example. If a millennial invests $10k a year into their retirement account for 30 years and receives a 7% annual return, they will have $1,010,730 after 30 years. If this money is invested in a low fee target-date fund with an expense ratio of .15%, they will only end up paying a total of $28,250 in fees. Instead if they invest their money in a high-cost mutual fund with an expense ratio of 2%, they will end up paying a total of $313,122 in fees. That is almost $300k of earnings that they lost to fees! So make sure to invest in the lowest fee options you can because while it may seem petty right now, lowering your fees will save you A LOT of money in the long run.

Tip 3: Use Dollar Cost Averaging

Dollar-cost averaging is just a fancy way of saying to make regular contributions. 401Ks are automatically set up to do this since you make a contribution to your account every time you get paid. IRAs on the other hand are not automatically set up to do this, so if you’ll be investing using an IRA you’ll need to set up regular contributions manually.

To do this, choose an interval and a contribution amount that you’re comfortable with, and start contributing ASAP. No amount is too small to start with. Contributing $20/month still makes you an investor, and still gets you closer to your retirement goals. Once you get more comfortable with investing or start making more money, you can increase your contributions. For now, the important thing is that you’re starting to invest!!

Dollar-cost averaging is the best way to invest because again, it does all of the work for you. You don’t have to worry about making investing a priority, checking your account every month, or remembering to transfer your money consistently. You just set up your automatic contributions, forget about your account, and go on about your life.

And now you’re an INVESTOR!! While investing in the stock market seems daunting, using target-date funds and automating your contributions makes investing extremely easy. You no longer have to be fearful of the time it will take to learn which stocks you should pick, or worry that your lack of knowledge will cause you to lose it all. You’ve done all of the work upfront to maximize your returns and become a successful investor. Since there’s no work left to be done, it’s time to sit back, relax, and enjoy your newfound investor lifestyle.

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A Beginner’s Guide to Hassle-Free Investing

a beginner's guide to hassle-free investing

When you think of investing, what are the first things that come to mind? Maybe it’s the image of people running around on the trading floor, or a news segment showing a graph of a company’s stock price shooting up or plummeting. No matter what the exact image you picture is, it’s probably something dramatic and panic-inducing.

While investing may be portrayed as a theatrical, anxiety-inducing boy’s club, that couldn’t be further from the truth. Investing is actually quite simple and easy, and requires almost zero effort on your part. If you’re turned off by the thought of researching stock picks, having to keep up with the markets, or just nervous about investing at all, this hassle-free investing guide is for you.

Trading vs Investing

To understand why investing is so easy, you first need to understand the difference between trading and investing. A lot of people who call themselves investors are really traders. Trading is the frequent buying and selling of financial instruments to try to beat the overall return of the market. To be a successful trader, you need to research companies and markets, and predict when their stock prices are going to rise and fall. Predicting when a stock’s price will rise and fall is called timing the market. Unless you want to seriously dedicate time to studying stocks, you won’t be able to accurately time the market. Honestly, many traders who dedicate serious time to this aren’t even able to do it.

Trading also comes with higher fees. Fees are the enemy to any investor because they eat into your returns. Each time you buy and sell a stock, there is a trading fee associated with that transaction that takes a portion of your money and pays it to your broker for executing the transaction for you. The more you buy and sell stocks, the more money you’re paying in trading fees.

Frequent trading can also affect the amount of taxes you pay on your earnings. If you hold a stock for less than a year, you’ll be charged the short-term capital gains tax rate, which is equal to your income tax rate. Earnings on investments held for longer than a year are taxed at the long-term capital gains tax rate, which is lower than your standard income tax rate. Trading stocks frequently could result in an increased tax bill that, like fees, will eat into your overall returns.

Investing, on the other hand, has the goal of building wealth over a long period of time by buying and holding a diversified portfolio of investments. Unlike trading, you’re seeking to receive the same return as the market, not beat it. When investing, you buy stocks, bonds, and other investment instruments and hold them for years or even DECADES! That means almost no transaction fees, or time spent constantly keeping up with your investments. This is the approach I use and what I recommend to everyone looking to get into investing and grow their wealth.

How to Build Your Hassle-Free Investing Portfolio

Now that you know how easy it is to be an investor, here are some easy investment options you can use to quickly set up your hassle-free investing portfolio, and then sit back and allow your investments to do all of the wealth-building work for you.

Index Funds

The S&P 500 is an index that tracks the performance of the largest companies listed on stock exchanges in the U.S. These companies make up 80% of U.S. equities by market cap. A company’s market cap, or market capitalization, is the total value of all of its shares of stock. Because the companies included in the S&P 500 index make up the majority of the stock market’s value and span all industries, the S&P 500 is widely regarded as the best representation of the overall performance of the U.S. stock market.

While there are short-term peaks and valleys in the market’s performance, over the long-term the stock market rises. This gradual increase in the overall stock market is why investing works. Since the S&P 500 is a great gauge of overall market performance, if you want to invest in something that provides the same return as the market, buying shares of an S&P 500 index fund is one way to do that.

Index funds are a type of mutual fund that tracks and matches the performance of an underlying set of investments. When building an index fund, the fund manager seeks to buy and hold a set of investments that will provide the same return as the market or a segment of it. This buy and hold strategy means index funds are passively managed because unlike actively managed funds, the fund manager isn’t consistently executing trades to try and beat the market’s performance. Index funds are great options for investors because they use a buy and hold strategy and have the goal of achieving the same return as the market, which is in alignment with an investor’s strategy and goals.

Pros to Index Funds

  • Passive management means lower fees for investors
  • Composed of a basket of companies in a market sector, or across many sectors which provides diversification

Exchange-Traded Funds

Exchange-Traded Funds (ETFs) are very similar to index funds. The main difference is that you can buy and sell ETFs throughout the day, while index funds can only be bought or sold at the beginning or end of the trading day. Since you’re not concerned about making trades daily, this shouldn’t matter to you.

One advantage ETFs have over index funds is that they typically require a smaller investment, which can be beneficial for early investors. If you’re just starting out and only have a small sum of money to invest, you may not be able to afford an index fund. In this scenario, ETFs are a great alternative. If you aren’t constrained by your investment amount, there are some differences in the fees associated with index funds vs ETFs, so you’ll want to consider that when deciding which to buy.

Pros to ETFs

  • Lower initial investment required
  • Passive management means lower fees for investors
  • Composed of a basket of companies in a market sector, or across many sectors which provides diversification
  • Can be more easily traded than index funds

Target Date Funds

The holy grail of hassle-free investing is a target-date fund. These funds build you a diversified portfolio AND manage it for you over time. While index funds and ETFs are considered diversified stock holdings, a diversified portfolio also contains foreign investments and other investment instruments like bonds. Target date funds combine all of these instruments to construct an entire diversified portfolio for you.

Building your portfolio is the first step, but you’ll also need to maintain it. To do that, you will need to review your portfolio each year and adjust it as necessary to keep your portfolio’s structure. The structure of your portfolio depends on the percentage of it you allocate to each investment type. If you start the year invested 90% in stocks and 10% in bonds, at the end of the year your portfolio structure may be different depending on how each investment performed. To return it to its structure of 90% stocks and 10% bonds, you will need to sell off some stocks and buy some bonds, or vice versa. Target date funds make these adjustments for you.

In addition to structural adjustments, target-date funds also automatically reduce your risk over time. When using a target-date fund, you select the fund with the date closest to when you want to start using the passive income it generates. For most people, this is their retirement date. As time goes on and you near the target date you selected, your portfolio will automatically be reallocated to reduce your risk. With greater risk comes a greater potential for losses. Reducing your risk is important because as you near your target date, you have less time to recover any losses you experience. This management style allows you to receive a higher return when you can take on more risk, and then maintain those earnings by reducing your risk later. While all investors should use this approach to reducing risk, the great thing about target-date funds is that they do all of this work for you.

Pros of Target-Date Funds

  • Include investment instruments other than stocks to build a fully diversified portfolio
  • Automatically manage your risk over time
  • Automatically maintain your portfolio structure over time
  • Passive management means lower fees for investors
  • Composed of a basket of companies in a market sector, or across many sectors which provides diversification

Starting to invest can be intimidating, but using a passive investing approach and tools that do most of the heavy lifting for you make investing hassle-free. Index funds, ETFs, and target-date funds allow you to become an investor without sacrificing a lot of time or applying serious effort, and still make it possible to build substantial wealth and become a rich bitch.